What does the term fund balance refer to?

The term fund balance refers specifically to the difference between a fund's assets and liabilities. In the context of municipal finance, it serves as a key indicator of the financial health of a particular fund. A positive fund balance indicates that the total assets exceed the liabilities, which means that the municipality has resources available for future spending, investments, or to cover any unforeseen expenses.

Understanding fund balance is crucial because it helps managers evaluate available resources for budgeting and financial planning. It reflects the accumulated excess or deficiency of resources over time, thereby providing insight into fiscal sustainability and operational effectiveness of municipal funds.

The focus on assets and liabilities distinguishes fund balance from other financial terms. While cash reserves might contribute to the fund balance, it is not the sole component, as fund balance also includes receivables, inventories, and other assets, minus the municipal obligations. Moreover, it is not a measure of debt, nor does it solely represent annual surplus or deficit, all of which are reflected in broader financial statements and reporting practices.