B2B Payments

Smoothing Bumpy Cash Flow For Small Town Governments

Local governments of small towns across America are in a precarious situation. Like small businesses in the private sector, small local governments struggle with limited resources and revenue streams. And yet like large city, state or federal government entities, these often tiny operations must still adhere to regulations and ensure transparency in the way they manage and spend public funds.

Often, these local government entities can face even greater pressure than normal to provide financial clarity, because a city's mayor or finance director will often have a personal relationship with its citizens.

That pressure for transparency is a tough one to manage, says Mark McClenahan, ETA-CPP certified payments manager of local government financial management software provider Springbrook.

"Local governments have a limited number of revenue streams, requiring very tight management of cash flows," he told PYMNTS in a recent interview. Unlike a mom-and-pop shop on Main Street, a local government entity cannot simply turn to a bank to draw down on a line of credit or take out a loan, either. "For small governments, their expenditures are controlled down to the budget, down to the line item, down to the dollar. There's not the agility in a small government to spend as there is in the private sector, and that requires a strong level of cash flow discipline."

Digitizing Cash Inflows For Smoother Outflows

One of the largest sources of lumpy cash flow for small local governments is in the imbalance between the way these entities receive payments and make them.

The most common revenue streams include utility and tax payments, but according to Doug Smith, Springbrook's chief revenue officer, adoption of electronic payment gateways in these scenarios is far from consistent.

"There are some cities near Silicon Valley where the acceptance rate of paying online and auto pay is upwards of 80 percent of the citizenry," he told PYMNTS. "You have other areas where you're lucky to get 10 percent of citizens willing to do that. Instead, people bring their check in and drop it off at city hall."

When a local community retains the habit of in-person check payments, the administrative burden on a local government surges, and prevents the kind of revenue predictability and data quality that can be attained from online payments and auto pay capabilities.

Yet even when capital inflows remain inconsistent and unpredictable, both Smith and McClenahan said, small local governments tend to prioritize timely payments to their own suppliers because — again — many of those suppliers have personal relationships with city personnel.

"As a mayor, I might go to the same church as the sand supplier for my icy roads, said McClenahan. "If I have a terms code of Net 30, I'm going to make sure I pay the guy I go to church with by Net 30."

That's far different than larger government entities that often wield the contract negotiating power for vendors, enabling them to expand out payment terms to Net 60 or 90 days, he noted.

The Digitization Challenge

With lumpy capital inflows and stringent capital outflows, Smith emphasized the importance of budgeting and planning for small local governments — as well as the imperative of exposing that spending strategy to the public.

"Quite often, the budget has to balance to the penny," he said.

Encouraging citizens to embrace electronic auto payments is an important part of helping to smooth out cash flows, but it's only the beginning. McClenahan and Smith pointed to an array of technologies that can support automation and digitization for more robust cash flow management, from accounting software to integrating water utility usage data with Google Maps to obtain a visual representative of which areas of a city may be using the most water.

But for many of these small towns, just as local citizens may resist their payment habits, government entities may also struggle to make the leap to digitization.

"It's just the age-old, 'I don't like change, I've always done it this way,'" said McClenahan.

Smith added that the regulatory disruptions stemming from town councils can add yet another layer of complexity for government entities looking to embrace digitization, because any tool they adopt must promote compliance not only with federal and state rules, but with the frequently-shifting rules of their own town. With few resources, it's important for these local governments to embrace collaboration with software providers, the executives said, that can act as a partner to guide them along the digitization process in a compliant manner.

According to McClenahan, change is slow, but it's steady as a new generation of city officials steps in.

"In the last few years we've seen a fair amount of turnover in management, and their succession plans involve younger people that are more likely to embrace something technological, that's an enhancement," he said. "Some of that mindset is changing, and now there is a lot going on when you think about the digitization of an agency."

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