Unrestricted cash vs reserves

Question

Can a budget ever be approved where the unrestricted and available cash balances are less than the sum of the EMR and General Reserve? The budget set out planned expenditure which is roughly equal to the precept. But the available cash (assuming all of the budget is spent) will not cover both the EMR and General Reserve. Is this right?

Answer 1

When you say unrestricted I assume you refer to annual budget spending as specified in the precept application (ex reserves)

EMRs must be held for genuine and intended purposes of expenditure which the council considers likely to be required in the future and greater than that which can be funded from a single year’s budget. Their level should be subject to annual review and justification. They should be separately identified to prevent query from internal and external auditors and to track closely the use and movement of such amounts. The use of the reserves is by council vote and can include transfer or reduction of held amounts to the budget requirement to reduce the precept levied on the community.

For example if a project is envisaged at a point in future and is cancelled the amounts reserved for that project can be transferred to the budget and re- allocated after consent by the council.

Comments

Thanks for your response. Let me try to clarify a little…the PC has unrestricted cash raised from the prior and current year precept. It has restricted cash which generates interest, albeit very little. The capital (restricted cash) cannot be spent, only the interest derived from it. For the new FY, in very simple terms the finances will be £2k brought forward from this CY + precept income 6k - budgeted expenditure £6k. Assuming the budget is spent in full, this would then leave £2k. However, a budget was approved with expenditure  £6k+ EMR £2k + General Reserve £3k. So total (EMR + general) reserves of £5k vs available u restricted cash of £2k. I don’t think this stacks up mathematically, never mind recommendation of general reserves holding compared to precept. Any advice please?

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We are into accountancy juggling now. I assume that the general reserves have been split into the two sections one of which is locked into an interest paying account and locked by terms of the bank not the council ( only by their voted acceptance of those terms)
Your general reserves of 3K  should be defined in the accounts( and budgets) as to what they are held for and the council is able to redefine and use this amount as they vote to do so. It is a contingency in effect. The council may also vote to release the locked amount should they comply with the requirements of their fiscal policy.

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The restricted cash was a bequest specifying that the capital cannot be spent only the interest from it. It is in a separate bank account to the general. So for all intents and purposes this money is not available to spend.

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So gets me back to the position of EMR + general reserves agreed as the budget of £5k, where as available cash is only £2k.

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Sorry you lost me somewhere

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Lost me at the question title....

I can't decipher what it is you are even asking...

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Sorry for any confusion in trying to set this out…let me try again… the Council has approved its budget for the next year including earmarked and general reserves of £5k. Problem is, it only has £2k to cover them. Is this right?

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Lets see if we can finally get there. When your budget is set it should have an amount set for transfer to the reserves section of the account with specified listing of what it is reserved for. The balance of your budget( and precept requirement) is to cover whatever you wish to spend on the foreseen day to day running of the council over the following budget year. So your precept should be bid enough to cover day to day projects and running cost + Reserves to be held. The £2k that was bequeathed cannot be touched and presumably the interest enters either the reserve account or the day to day budget .

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Yes that’s right. So when it set its budget, it didn’t have sufficient cash in the bank plus the precept it will collect to cover its budgeted spend and transfer/allocate money to its total reserves. Its cash in is 2+6=8. It’s cash out is 6+5=11. Simply put, it doesn’t have enough cash to cover its reserves. Does this seem right?

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Sounds like your finance group need some training on basic accountancy practices and better budgeting planning.

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So there must be a minus figure on your balance sheet ?

Answer 2

Investments which are locked up for 12 months or more should be accounted for in a different way than other balances. They aren't recorded as cash on the balance sheet and annual return but should be counted among the assets instead because the money isn't available to spend. It doesn't sound like the budgetary process was adequate if the budget relies upon using this money.

Comments

For those of us who have worked in budgetary control PC Finances are a whole new world.  I still cant understand why we review EMR a month after set the budget/percept

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Forgive me, but where is this stated?

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John 1706 . I agree it isnt . When I challenged the clerk. Her response was
1.        We have to submit our budget by the end of Jan, we don’t have the
same restriction on EMR.
2.        Reserves are reviewed annually, close to the year end so that any
use of reserves can be taken into consideration.

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Reply to John1706:
You'll find it in JPAG Practitioners Guide, which lays out "proper practices" in local council accounting.