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Financial Planning and Management in Public Organizations PDF

416 Pages·2001·2.077 MB·English
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ISBN: 0-8247-0583-1 This book is printed on acid-free paper. Headquarters Marcel Dekker, Inc. 270 Madison Avenue, New York, NY10016 tel: 212-696-9000; fax: 212-685-4540 Eastern Hemisphere Distribution: Marcel Dekker AG Hutgasse 4, Postfach 812, CH-4001 Basel, Switzerland tel: 41-61-261-8482; fax: 41-61-261-8896 World Wide Web http://www.dekker.com The publisher offers discounts on this book when ordered in bulk quantities. For more in- formation, write to Special Sales/Professional Marketing at the headquarters address above. Copyright ©2001 by Marcel Dekker, Inc. All Rights Reserved. Neither this book nor any part may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, microfilming, and recording, or by any information storage and retrieval system, without permission in writing from the publisher. Current printing (last digit): 10 9 8 7 6 5 4 3 2 1 PRINTED IN THE UNITED STATES OFAMERICA Preface Abasic responsibility of management in any organization is to reduce uncertainty and to bring risk within tolerable limits to improve the rational bases on which de- cisions can and should be made. Application of the techniques of financial plan- ning and management provides an important approach to this responsibility. The materials in this book are organized around three fundamental processes: (1) cash management, including the analysis of revenue sources and expenditures, cash mobilization, forecasting, and investment strategies; (2) fi- nancial planning, focusing on cost analysis techniques, budgeting, and capital re- source management; and (3) management control, dealing with financial accounting, fund accounting, budgetary accounting, and cost and managerial ac- counting. Information management and decision-support systems appropriate to sustain these basic processes are also examined. This book is the product of several years of effort to develop appropriate materials for use in the various courses in public administration, urban planning, and public health administration. Our methodological approach is predicated on the assumption that distinctions between the public and private sectors have be- come blurred, and emerging techniques to promote more efficient and effective management of financial resources are applicable to all organizations. Many contemporary works in the field of public financial management tend to be de- scriptive, building on various case studies. These works provide important in- iii iv Preface sights into the various components of public financial management. However, they tend to be fragmented and generally do not present a comprehensive ap- proach to these responsibilities. Our approach blends the prescriptive with descriptive materials—provid- ing “hands-on” examples to illustrate the various techniques, while offering a comprehensive analysis of issues that a financial manager or public administra- tor is likely to encounter on a daily basis. The materials are organized according to the procedural steps in the annual financial management cycle. Martin Gannon has suggested: “Control is the monitoring of plans and the pinpointing of significant deviations from them. Hence planning and control are intimately related and, in fact, represent opposite sides of the same coin. Without planning, there can be no control.” Traditional concepts of planning, however, have frequently been an appendage to, rather than an integral part of, the man- agement process. The framework of a planning-control continuum provides the first major component discussed in this book. Local revenues have tended to increase at a slower rate than the demands for public services and facilities, creating an ever-widening fiscal gap for many localities. In economic terms, it is said that local government revenues are rela- tively inelastic; that is, most local sources of revenues are not particularly re- sponsive to changes in the overall economy. The revenue structure of local government and the techniques for analyzing patterns of expenditures are out- lined in the second chapter. Local governments and other public organizations can realize considerable financial benefits if their cash flow and investments are managed efficiently. Cash management involves four elements: forecasting, mobilizing the cash flow, maintaining banking relations, and investing surplus cash. The primary focus of cash management is on maintaining sufficient funds on hand to satisfy legal obligations and fiscal commitments while providing opportunities to invest any excess cash in interest-yielding securities. These procedures and strategies are examined in Chapters 3 and 4. Acommon denominator among the various resources of any organization is the cost involved in their utilization. Effective budgeting and financial manage- ment requires analytical techniques that can accommodate the risk and uncertainty that are inevitably associated with future decisions regarding the commitment of scarce resources. Therefore, techniques available to analyze the costs involved in providing public services and facilities are explored in Chapter 5. The budget serves as a primary mechanism of both planning and control in public organizations. Various budgeting techniques and formats serve different aspects of the planning-control continuum, however. An examination of the ba- sic approaches to public budgeting provides the focus for Chapters 6 and 7. Significant economies can be achieved by the provision of public services and facilities for the mutual benefit of all or a majority of citizens. Capital facili- Preface v ties represent very large investments of public resources, usually exert their ef- fects over decades, and, once built, are not easy to modify. The provision of cap- ital facilities must involve planning, programming, financing, and debt administration. Each of these aspects is delineated in Chapters 8 and 9. Accounting and related financial management systems have traditionally served as the major mechanisms of management control in most organizations. However, students of planning and public administration are often unfamiliar with these important components of the management process. The basic tools of financial accounting, cost accounting, and managerial accounting are examined in Chapters 10 and 11 to provide a fuller understanding of their role as mecha- nisms of financial planning and control. Effective planning and control require access to relevant management in- formation. Although vast amounts of facts, numbers, and other data may be processed in any organization, what constitutes management information de- pends on the problems at hand and the particular frame of reference of the man- ager. The development of timely information is essential to the understanding and resolution of fiscal issues. Performance evaluation brings the budgeting and fiscal management process full circle by assessing the effectiveness of programs in achieving agreed-upon goals and objectives and identifying areas needing improvements through program modification (including the possible termination of ineffective programs). An examination of basic approaches to management information and performance evaluation systems is provided in the final chapter. Responsibility for financial planning and management is assigned to vari- ous offices within public organizations. Planners plan; financial analysts prepare budgets; accountants maintain financial records and prepare financial reports; the treasurer’s office manages investments; program personnel schedule and control resources for specific activities; and administrators monitor and evaluate perfor- mance. However, this “division of labor” established to deal with the complexity of these operations may well become a major impediment to the effective man- agement of financial resources. An underlying premise of this book is that a more comprehensive framework must be created to provide guidance and coordination so that the integrated whole can be more than the sum of its individual parts. Improved financial planning and management in government is one of this nation’s most pressing needs. Therefore, this book is dedicated to those profes- sionals who have committed their knowledge, skills, and talents to meeting this most important challenge. Alan Walter Steiss ‘Emeka O. Cyprian Nwagwu Contents Preface iii 1 Financial Management: An Overview 1 2 Revenues and Expenditures in the Public Sector 35 3 Cash Management 67 4 Investment Strategies 97 5 Analytical Techniques for Financial Planning and Management 125 6 Principles and Practices of Public Budgeting 167 7 Budgeting as a Mechanism for Financial Planning and Management 189 vii viii Contents 8 Government Responsibility for Capital Facilities 231 9 Debt Administration 267 10 Accounting Systems: Traditional Mechanisms of Management Control 297 11 Managerial and Cost Accounting 339 12 Management Information and Performance Evaluation Systems 365 Index 399 1 Financial Management: An Overview Private and public organizations have experienced significant changes in re- cent years in both size and complexity. As a consequence, the management process has become more difficult, requiring greater skills in planning, analy- sis, and control, aimed at guiding the future course of organizations faced with accelerating rates of evolution in technical, social, political, and economic forces. This book examines a major segment of these skills: the theory and practice of financial management in public organizations and, in particular, in local government. The purpose of this initial chapter is to provide a broad overview of the basic components of financial management, building on a planning-control continuum. 1 OBJECTIVES OF FINANCIALMANAGEMENT In theory, the objectives of financial management are quite simple—they are dif- ficult only in practice. In theory, one merely has to decide what is wanted (spec- ify goals and objectives), measure these wants (quantify the benefits sought), and then apply the means available to achieve the greatest possible value of the iden- tified wants (maximize benefits). The means are the resources of the organiza- tion. Therefore, the primary objective of financial management is to maximize benefitsfor any given set of resource inputs. 1 2 Chapter 1 1.1 Managing Public Resources Abasic tenet in financial management is that costs should be incurred only if by so doing, the organization can expect to move toward agreed-upon goals and ob- jectives. Determining whether the commitment of governmental resources im- proves conditions in the broader community can become complicated, however, particularly when no basis exists for assessing the value of such actions to indi- viduals. Not all members of the community are likely to benefit equally from a given government action. [1] Despite the best efforts to achieve rigor and sophis- tication, scientific analysis cannot provide definitive answers to many of the questions involved in the allocation of government resources. Many public choices are still open to political decision. Nevertheless, a continuous search must be maintained for more productive ways to operate public organizations and to assess their capacity to meet changing conditions and demands for the de- livery of services. The common denominator among the various resources of any organiza- tion is the cost involved in their utilization. The production of public and quasi- public goods and services requires the acquisition and allocation of relatively scarce resources, the values of which are measured and compared in the com- mon unit of dollars. Consequently, the focus of management most often is on fi- nancial resources. The essential tools for managing financial resources include techniques for assessing the long-term fiscal needs of the organization, procedures for acquiring and allocating resources and for managing costs, and mechanisms for recording and disseminating relevant financial information. Given the increasing role that government and other not-for-profit organizations play in the economy, the pub- lic has a significant stake in the effective performance of these organizations and institutions. In the absence of the verdict of the marketplace, the role and respon- sibilities of financial management in the public sector are even greater than those in profit-oriented organizations. 1.2 Basic Components of Financial Management Financial management in the public sector borrows liberally from the tools and concepts of business management. The transfer of these techniques cannot be complete, however, because the basic features of government services include the need to provide for the common welfare and safety of the community and to allocate basic public services on other than the criterion of the ability to pay. Several functions are common to financial management, however, whether in the private or public sector. Financial management involves the allocation of organizational resources and the tracking of performance resulting from such allocations. In a profit-ori- ented enterprise, financial statements (profit and loss) form the basis for the

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