Army Working Capital Fund:

Army Faces Challenges in Managing Working Capital Fund Cash Balance during Wartime Environment

GAO-10-480: Published: Jun 22, 2010. Publicly Released: Jun 22, 2010.

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The Army Working Capital Fund (AWCF) collected over $16 billion for goods and services provided to customers in fiscal year 2009. Cash generated from sales is used by AWCF to cover its expenses such as paying employees. In light of the Army's changing role in the Middle East, GAO was asked to determine whether (1) AWCF's monthly cash balances fell within the Department of Defense's (DOD) cash requirements for fiscal years 2000 through 2009, (2) the cash transfers resulted in AWCF's monthly cash balances falling below the minimum amount required by DOD, and (3) the AWCF's projected monthly cash balances are expected to fall below DOD's minimum cash requirement for fiscal years 2010 and 2011 and actions the Army can take to manage those balances. To address these objectives, GAO (1) reviewed relevant DOD guidance, (2) obtained and analyzed AWCF budget and accounting reports containing cash information, and (3) interviewed DOD and Army officials.

GAO analysis showed that the AWCF monthly cash balance fluctuated significantly between fiscal years 2000 and 2009 and exceeded the maximum cash requirement prescribed by DOD regulation for 94 out of 120 months. The fluctuations were due to differences between receipts and disbursements, including the (1) receipt of collections from AWCF operations, (2) appropriations received in support of the wars, (3) disbursements made to pay for AWCF expenses, and (4) transfers made to fund other Army requirements. The Army transferred $4.8 billion out of AWCF from fiscal years 2004 through 2009. Most of the transfers funded requirements of Operation Iraqi Freedom, Operation Enduring Freedom, or military personnel costs. These transfers helped to reduce the cash balance, but also resulted in the AWCF cash falling below the minimum cash requirement for a 6-month period in fiscal year 2006. GAO analysis of the AWCF fiscal year 2011 budget and cash plan showed that the projected monthly cash balances for fiscal years 2010 and 2011 would exceed DOD's minimum cash requirement for 22 out of 24 months. While the Army does not expect a cash shortfall due primarily to an increase in military build-up activities in Afghanistan, a cash shortfall may occur if certain Army actions are not implemented and monitored effectively. These actions include (1) reducing AWCF obligations to less than the amount of inventory sold, (2) collecting funds from Defense Logistics Agency (DLA) for inventory items transferred from AWCF to DLA, and (3) reducing the amount of inventory at industrial operations activities. Further, the relevant DOD Financial Management Regulation lacks sufficient clarity to determine the appropriate level of inventory to be held at these activities.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To (1) improve the management of the AWCF's cash balances, and (2) clarify the DOD Financial Management Regulation that contains guidance on inventory levels to be maintained by the industrial operations activities, the Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to clarify the term normal business operations in the DOD Financial Management Regulation as it pertains to the amount of inventory items to be held for use by the industrial operations activities.

    Agency Affected: Department of Defense

    Status: Open

    Comments: While the Under Secretary of Defense (Comptroller) has committed to coordinating with the Under Secretary of Defense (Acquisition Technology and Logistics) to define the term "normal business operation" contained in the DOD Financial Management Regulations, as of August 2013, the regulations have not been updated.

    Recommendation: To (1) improve the management of the AWCF's cash balances, and (2) clarify the DOD Financial Management Regulation that contains guidance on inventory levels to be maintained by the industrial operations activities, the Secretary of Defense should direct the Secretary of the Army to take action if the industrial operations activities do not reduce their inventory levels to the specified amount in the fiscal year 2011 budget.

    Agency Affected: Department of Defense

    Status: Open

    Comments: The Army did not reduce their inventory levels to the specified amounts in fiscal year 2013 due to the following reasons. First, the Army expected inventory levels to begin dropping when a specific performance-based logistics contract at Corpus Christi Army Depot was to expire in December 2010; however, this contract, which enables the contractor to push inventory to the depot regardless of immediate need, has been extended. Second, ten depot maintenance and ordnance activities transitioned to the Logistics Modernization Program (LMP) in October 2010. Inventory balances at these locations increased by $58 million in the first quarter of fiscal year 2011 and have remained high ever since implementation. According to Army officials, the spike is consistent with growth seen at other activities upon LMP conversion due to changes in revenue and expense recognition practices. In order to address the growing inventory levels, Army headquarters hosted a teleconference with the Army Materiel Command (AMC) to discuss potential actions to reduce inventory. Based on the teleconference, Army headquarters issued a memorandum to AMC containing guidance on managing inventory levels. AMC is now tracking inventory as a standard part of their weekly production update meetings. AMC is also working with Defense Logistics Agency and the supply management business area whenever possible to hold long lead and high dollar inventory items until needed. Further, AMC plans to review settings for repair part orders in LMP to ensure lead times set in LMP approximate normal lead times experienced with reasonable safety levels. As of August 2013, inventory level at Corpus Christi Army Depot and the other 12 Army depot maintenance and ordnance activities have not dropped to the specified amount in the fiscal year 2011 budget.

    Recommendation: To (1) improve the management of the AWCF's cash balances, and (2) clarify the DOD Financial Management Regulation that contains guidance on inventory levels to be maintained by the industrial operations activities, the Secretary of Defense should direct the Secretary of the Army to evaluate periodically the unit cost ratio (obligations to sales) and take action to adjust the ratio as necessary, to support the war effort in Iraq and Afghanistan and the eventual drawdown of troops.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: In response to our recommendation, the Army evaluated and adjusted the unit cost as necessary to support contingency operations and set its unit cost ratio at 0.903, 0.913, 0.921, and 0.914 for fiscal years 2010, 2011, 2012, and 2013, respectively. To the extent the Army continues such monitoring and adjustments to its unit cost ratios, the Army should be better able to make more informed decisions on the war effort in Iraq and Afghanistan.

    Recommendation: To (1) improve the management of the AWCF's cash balances, and (2) clarify the DOD Financial Management Regulation that contains guidance on inventory levels to be maintained by the industrial operations activities, the Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to oversee Army and DLA efforts to reach agreement on the amount that DLA will reimburse AWCF for the consumable items transferred to DLA and ensure that DLA reimburses AWCF for the items transferred in a timely manner.

    Agency Affected: Department of Defense

    Status: Open

    Comments: The Under Secretary of Defense (Comptroller) has provided guidance in DOD Financial Management Regulation Volume 11B, Chapter 2, Section 0205 regarding the transfer of funds between agencies and plans to continue to monitor the funding associated with the transfer of consumable items. Army officials told us that the transfer of consumable items was completed in February 2011, but Defense Logistics Agency (DLA) did not transfer funding to the Army at that time. As of August 2013, the funding associated with the transfer of consumable items from DLA to the Army has not occurred.

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