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Financial literacy

Under the Local Government Act 2009 (the Act), councils are expected to be accountable, effective, efficient and sustainable. As leaders of your council, you will ultimately be responsible for the financial sustainability of your council. A council that is not financially sustainable will struggle to provide essential services to the community.

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Financial sustainability

The Act says that a local government is financially sustainable if the local government is able to maintain its financial capital and infrastructure capital over the long-term. Financial capital is effectively money available, infrastructure capital is physical assets, and long-term means at least 10 years.

There are other commonly used definitions:

  • Being able to manage likely developments and unexpected financial shocks in future
  • Ability to manage and meet spending commitments, both now and in the

Key factors

Regardless of the size of the council, there are things that are controlled by council and can be done to ensure the business is run as effectively as possible and fit for purpose business processes, sometimes called the ‘hygiene factors’ are in place.

  • Council business and strategy – setting a vision and business strategy to maintain core services to the community over the long-term.
  • Governance and planning – providing leadership, setting appropriate policies and having good business processes.
  • Infrastructure management – knowing council’s asset conditions and prioritising expenditure for essential maintenance and asset renewal.
  • Financial management – monitoring budget versus actual, liquidity and understanding council’s long-term financial situation.

Measuring financial sustainability

When it comes to measuring financial sustainability both quantitative and qualitative factors should be considered.

The department’s Financial Management (Sustainability) Guideline 2013 refers to three key quantitative financial ratios (i.e. asset sustainability ratio, operating surplus ratio and net financial liability ratio) and each council is required to report against them each year.

It is important to note that no one ratio paints the whole picture, when assessing the ratios, it is important to look at all the ratios and the overall trend and consider the qualitative factors.

Getting the hygiene factors right and monitoring financial ratios are key components to understanding and managing your council’s financial sustainability.

Local government financial statements

Local governments are required to prepare audited financial statements that comply with local government legislation and the Australian accounting standards.

Financial statements provide information about the financial position and performance of a business. They tell the financial story of your council. For example, they show the capacity of a council to be able to meet its financial obligations as and when they fall due.

Councils are accountable to those that provide them with resources, and those that depend on them for the services or goods they provide. The information in the financial statements is used to make financial, business and economic decisions by a range of stakeholders. For example, your council’s stakeholders will include the Department of State Development, Infrastructure, Local Government and Planning, Queensland Audit Office, Queensland Treasury Corporation, suppliers, creditors, contractors and the community.

Statement of comprehensive income

The statement of comprehensive income (i.e. income statement) provides details of:

  • Income – For example, rates from properties and charges for services.
  • Expenditure – For example, employee salaries and materials and services which include costs such as contractor payments and utilities. Depreciation reflects the use of an asset over its useful life. It can be a significant cost to council but does not represent a cash outflow.

The net result is the difference between revenue and expenses. It can be either positive or negative.

Statement of financial position

This statement of financial position (i.e. balance sheet) provides details of the following:

  • Assets which are classified as either current or non-current. Current assets are assets that are held and provide benefit over the short-term (usually within one year). Non-current assets are those that are held and provide benefit over the long-term (that is, longer than one year).
  • Examples of current assets are cash (that is cash that can be accessed within the next 12 months) and receivables. Examples of non-current assets are property, plant and equipment which includes roads and buildings.
  • Liabilities are similar to assets in that they can be classified as either current (due within the following financial year) or non-current (due after more than one financial year).

Equity is the difference between assets and liabilities.

Statement of cash flows

This statement provides details of the cash receipts and payments for the year. It separates those cash flows into the following:

  • Operating activities:
    • the day-to-day operations of the council and include the receipt of rates
    • payments to employees or contractors.
  • Investing activities:
    • the purchase and disposal of assets
    • financing activities which include receipts from borrowings and repayment of loans.

The net position is the difference between the cash inflows and outflows. It will either be positive or negative.

Budget and long-term forecast

A budget is an outline of expectations for what a council wants to achieve for a particular period, usually one year. A long-term forecast is usually a minimum of 10 years. Comparing the budget to what was actually achieved will help council develop a strategy as to what changes may be needed to achieve budget or whether the overall strategy needs to be altered. Spending time and effort in ensuring forecasts are as accurate as possible will help your council manage uncertainty.

Looking at the historical trends will help you understand whether the assumptions underlying the long-term forecast are reasonable.

Questions for council management

It’s important for councillors to ask any questions of management that they may have. There is no such thing as a wrong question.

Statement of comprehensive income

  • Is the net position positive (that is, in ‘surplus’) or negative (that is, in ‘deficit’)? Councils often operate in an uncertain environment and the financial position can be significantly impacted by issues outside of the council’s direct control.
  • What are the main sources of revenue? For example, how much reliance is there on grant income as opposed to council-controlled revenue such as rates? A council has more financial flexibility if it is able to control its own revenue. For example, if it can increase rates if required.

Statement of financial position

  • How much cash does council hold? Councils should hold enough cash to be able to pay for a minimum of three months’ worth of operating expenses however your council may need to hold more. It’s important to get the balance right because there is an opportunity cost of holding cash above what’s needed for council’s operating cash cycle.
  • How much has council borrowed? What is its debt policy and how is it planning on repaying debt?

Cash flow statement

  • Is the operating cash flow positive? This indicates that council is able to meet its day-to-day expenditure. If it is negative, why?
  • How much has been spent on capital expenditure? You will see this in the investing activity section. Local government services are very capital intensive. Is council spending enough to maintain and renew its existing assets? How much is it spending on new assets and why?

Long-term forecast

  • Firstly, does the council have an asset management plan and is it linked to the forecast? It’s important that local governments have up-to-date asset management plans that form the basis of the capital expenditure forecast. A long-term asset management plan includes forecast expenditure for renewing and upgrading assets. It should explain how your council will deliver infrastructure and investment over the long-term.
  • Secondly, does the forecast include whole-of-life costs? Local government services are generally capital- intensive. They have a significant fixed cost component and can incur significant ongoing maintenance and operating costs. The initial cost of an asset is only one part of the total cost. It’s not only the upfront capital cost we need to consider but also ongoing operating and maintenance, refurbishments, rehabilitation and disposal costs. For example, a forecast should not only include the construction of a new community centre but also the ongoing maintenance and operating costs.
  • Thirdly, how often is the forecast updated? It should be updated at least annually or more frequently if significant changes to the business become known e.g. a large project is delayed, or some urgent capital expenditure needs to be funded.
  • Next, does council complete cash flow forecasting? Why is it important? It ensures there is adequate cash flow to support core operations and fund upcoming capital projects. It indicates any cash flow gaps (that is, periods when cash outflows exceeds cash inflows) and periods when external funding sources (that is debt or grant funding) will be required.
  • Lastly, does management consider different scenarios? We call this ‘what if’ analysis. For example, what if there is an increase in rates arrears? What if there is a natural disaster? What if there is an increase in capital expenditure cost or an increase in interest rates on borrowings? Use ‘what if’ scenarios to measure how reactive your council is to unexpected events and changes.

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More information

More detailed resources are available on the Queensland Treasury Corporation website.

Last updated: Friday, Apr 9, 2021