Financial Planning and Management in Public Organizations

416 Pages·2001·2.077 MB·English

by  Alan W. Steiss, Emeka O. Nwagwu

ISBN: 0-8247-0583-1
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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