Which is it – ‘In the Hole,’ or ‘Never in Danger of Running Out of Money?’

Bowie County TexasShort answer – both accurately describe a certain aspect of Bowie County’s finances.

Let’s look at the two basic types of accounting – cash and accrual. From Inc.com:

It’s important for you to understand the basics of the two principal methods of keeping track of a business’s income and expenses: cash method and accrual method (sometimes called cash basis and accrual basis). In a nutshell, these methods differ only in the timing of when sales and purchases are credited or debited to your accounts. If you use the cash method, income is counted when cash (or a check) is actually received, and expenses are counted when actually paid. But under the more common accrual method, transactions are counted when they happen, regardless of when the money is actually received or paid.

So with the accrual method, income is counted when the sale occurs, and expenses are counted when you receive goods or services. You don’t have to wait until you see the money or until you actually pay money out of your checking account. With some transactions, it’s not so easy to know when the sale or purchase has occurred. The key date here is the job completion date. Not until you finish a service or deliver all the goods a contract calls for can do you put the income down in your books. If a job is mostly completed but will take another 30 days to add the finishing touches, technically it doesn’t go on your books until the 30 days pass.

Whichever method you use, it’s important to realize that either one gives you only a partial picture of the financial status of your business. While the accrual method shows the ebb and flow of business income and debts more accurately, it may leave you in the dark as to what cash reserves are available, which could result in a serious cash flow problem. For instance, your income ledger may show thousands of dollars in sales, while in reality your bank account is empty because your customers haven’t paid you yet.

And though the cash method will give you a truer idea of how much actual cash your business has, it may offer a misleading picture of longer-term profitability. Under the cash method, for instance, your books may show one month to be spectacularly profitable, when actually sales have been slow and, by coincidence, a lot of credit customers paid their bills in that month. To have a firm and true understanding of your business’s finances, you need more than just a collection of monthly totals; you need to understand what your numbers mean and how to use them to answer specific financial questions.

When county auditor William Tye told me a couple weeks ago that the county was “never in danger of running out of money,” he was speaking from a cash perspective: Even though it was obvious there was a significant revenue shortfall, all the bills hadn’t been received yet. The county had enough cash to pay the current bills and payroll.

And when Tye said a couple of days ago that the county was “in the hole” by about $1.6 million, he was speaking from an accrual perspective: Even though there was still cash available when the fiscal year ended on September 30, when all the revenue and expenses were totaled, the county had received about $1.6 million less in revenue than budgeted.

After the Court adjourned, I spoke at length with Commissioner Pat McCoy, who had presided over the meeting in Judge Lacy’s absence, about the shortfall, why it happened, and how the budget for this fiscal year addresses the problem. Because of the detail and the length of the conversation, he asked that I send him my questions, so that he could respond in writing. The questions I am sending are:

  • During our conversation, you mentioned that the revenue shortfall was due to less-than-expected revenue from the jail and collected fines, and from paying down some debt too quickly. The current budget is a little over 2% more than last year’s. What do you think should have been done with the debt? What justifies the increased expenses? How does the current budget address the revenue shortfall?
  • We also talked about the tax rollback petition and possible election. How much will it cost the county to have the election if the petition drive is successful, and how much would it cost to re-send tax notices and/or refund any over-payments? Where would the cuts be made from the current budget?

Because I hadn’t looked at the budget in any detail, I assumed that since property taxes were increased by 16.87%, that the budget had increased by that amount. However, since the property tax isn’t the only source of revenue for the county, variations in revenue from the property tax don’t directly correlate with variations in the budget. When I asked a question based upon that assumption, Commissioner McCoy corrected me. So, because this is a complicated subject, and I’ve already misunderstood a significant part of it, I completely agree with his idea that he send me his answers in writing. I’ll post them verbatim.

***UPDATE*** I sent this entire article to McCoy, but never received a response. When I asked him about it in person a few days later, he said he saw the email, but didn’t read it. He turned and walked away, refusing to answer anything else I asked.

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