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Free cash is generated when the actual operations of the fiscal year compare favorably withthe budget. Simply put, it results when revenue collections are greater than estimatedreceipts, and expenditures and encumbrances (committed funds not yet expended) are lessthan appropriations. It is reduced by illegal deficits, overdrawn grant accounts and deficits inother funds.
A formal reserve policy will allow the community to establish a practice of appropriatingmoney to legal reserves for future needs. Appropriations to reserves should be consideredannually as a part of the budget process and appropriations from reserves should be made forunanticipated or capital costs, not regular operating expenses.