Overview of Working Capital Funds

Working capital funds, also called intra-governmental or intra-agency revolving funds, are a financial tool used by the government to increase business efficiency by restructuring the way in which money is used. Assets in a working capital fund are capitalized and subsequently offset with income generated from the fund’s operations. All assets in the fund can be used to finance future operations and there are no fiscal year restrictions that must be considered since working capital funds are no-year funds. This allows for better decision making by opening up possibilities which would otherwise not be possible under standard accounting rules.

Restructuring Effort

Working capital funds aim to create efficiency by moving away from congressional funding going directly to an administrative office which provides services and toward funding the office’s customers (through various government programs) who then make orders with the office. This creates an entity which performs more like a business rather than strictly government. In a working capital fund, the government is still subject to regulations relevant to government activity but the fund uses typical business financial statements. These regulations shape the fund’s financial control and human resources behavior, among others. Additionally, the business generally operates toward a breakeven goal, so it is actively managed like a typical business to determine what the best financial decisions are. This is achieved through the appointment of a fund manager who reports to a board of directors.

Revolving Funds

Working capital funds are revolving funds, meaning that their initial capital comes from an existing government budget and then the fund is expected to generate its funds internally moving forward. Revolving funds can be thought of as being similar to personal bank accounts in that an initial deposit is made and any further purchases must somehow be funded by an increase in the account balance. An individual must earn some income and spend no less than he earns to stay financially stable; in the same respect, a revolving fund must generate enough revenue from customer orders to meet or exceed its expenditures. The term ‘revolving’ refers to the concept that revenue from customer orders today finances the fund’s operations in the future, which is distinct in the government to working capital funds since other operations are provided a yearly budget to conduct operations.

Conclusions

Since revolving funds are responsible for maintaining their own stability, there is an incentive for the fund manager and board of directors to make very careful decisions in the same manner that standard businesses do. This is particularly different from the yearly budget model because it eliminates the need for the government entity to make decisions based on the fiscal year, such as spending too much or too little as a result of the remaining balance of the yearly budget. By removing this factor, management can make long-term decisions strictly on the basis of preventing the business from taking a loss and therefore, when operated properly, the fund should remain self-sufficient at a high level of efficiency; this tends to be the case, as government departments have historically reported lower costs compared to their operations before converting to a working capital fund.

blog comments powered by Disqus
Scottrade