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Public Sector Financial Management for Managers

Andrew Graham School of Policy Studies, Queenss University Kingston, Canada

November 2011


Acknowledgement

PublicSectorFinancialManagementforManagershasbeenproducedfortheCanadianGovernanceSupportOfficewith

fundingfromtheCanadianInternationalDevelopmentAgency,GovernmentofCanada,asageneralguideforfinancial

managementforlinemanagersintheAfghanistanpublicservice.

ItcanbefreelyreproducedbyanyAfghanMinistry,GovernmentDepartmentorAgency.

PleaseacknowledgetheGovernmentofCanadainanyreproductions.

Usebyinternationalorganizationsrequirestheexpress

permissionofCANADEM.

CANADEM 2011


Table of Contents

Section1:TheNatureofPublicSectorFinancialManagement......................................................1

KeyPoints....................................................................................................................................1

Question1:WhatisthePublicsector?.......................................................................................2

5KeyFeatures:................................................................................................................................2

Question2:WhatisFinancialManagement?.............................................................................3

8KeyFeatures:................................................................................................................................3

Section2:CornerstoneOne:AllocatingResourcesBudgets.......................................................5

KeyPoints....................................................................................................................................5

TheBudgetCycle.........................................................................................................................5

BudgetMethodologies................................................................................................................6

OrganizingBudgetInformation.......................................................................................................6

ProgramBudgetoftheOttawaGeneralHospitalforFiscalYear2005...........................................8

TraditionalBudgetingversusPerformanceBudgeting..................................................................10

Section3:UnderstandingtheBudgetaryProcess.........................................................................11

KeyPoints..................................................................................................................................11

BudgetsandPlanningCycles.....................................................................................................11

ElementsofanEffectiveBudgetCycle..................................................................................12

StrategicPlanningPhase.......................................................................................................12

CostAnalysisPhase...................................................................................................................13

TheRoleofRevenueinCostAnalysis...................................................................................13

HowtoDetermineCosts.......................................................................................................13

FixedandVariableCosts........................................................................................................14

GettingApprovaltoSpend:TheAppropriationProcess...........................................................14

CentralAgencyversusProgramOrganizations.....................................................................15

TheNewVersustheOld........................................................................................................15

ComplexityversusClarity......................................................................................................15

OnBudgetVersusOffBudget................................................................................................15

Conclusion.................................................................................................................................16

Section4:Budgeting:CapitalPlanning..........................................................................................17

KeyPoints..................................................................................................................................17

CapitalBudgets..........................................................................................................................17

CharacteristicsofCapitalAssets............................................................................................17


ToolsofCapitalPlanningandBudgeting...................................................................................18

CapitalImprovementPlans...................................................................................................18

TimeValueofMoney................................................................................................................20

PresentValueandFutureValue............................................................................................20

NetPresentValue..................................................................................................................22

RiskAssessment........................................................................................................................22

ExamplesofRiskCategoriesinAssessingCapitalAssetRisks.......................................................22

Conclusion.................................................................................................................................23

Section5:CornerstoneTwo:MonitoringMoneyManagerialControl......................................25

KeyPoints..................................................................................................................................25

WhatisManagementControl?.................................................................................................25

ManagementControlFramework.........................................................................................25

RiskandRiskManagement...................................................................................................26

UnderstandingandDefiningtheRisks.............................................................................27

ControlProceduresandPolicies............................................................................................28

WhoandWhentoControl...............................................................................................28

WhoistheController?.....................................................................................................29

TrustandEthicsinControl....................................................................................................29

Trust..................................................................................................................................29

Ethics................................................................................................................................29

ValuesandEthicsApproaches..........................................................................................30

ControllershipCapacityChecklist..............................................................................................31

StrategicLeadership.........................................................................................................31

ClearAccountability.........................................................................................................32

SharedValues&Ethics.....................................................................................................32

MatureRiskManagement................................................................................................32

IntegratedPerformanceInformation...............................................................................32

MotivatedPeople.............................................................................................................32

RigorousStewardship.......................................................................................................33

Section6:CashManagement:InYearControl.............................................................................35

KeyPoints..................................................................................................................................35

ObjectivesofEffectiveCashManagement,MonitoringandControl.......................................35

EstablishingaCashManagementSystem.............................................................................36

InyearBudgetDesignFactors..........................................................................................37


EstimatingWorkFlows.....................................................................................................37

UseofHistoricalData.......................................................................................................38

MonitoringFinancialPerformanceandVarianceAnalysis....................................................38

SettingupaMonitoringTimetable..................................................................................39

Governance......................................................................................................................39

PerformanceReports.......................................................................................................39

EastbrookCorrectionalFacility,Eastbrook,NovaScotia..............................................................39

Staffing:PlanversusActual...........................................................................................................40

VarianceReports..............................................................................................................40

ForecastedversusActualReport......................................................................................40

AnalysisofKeyVariancesReport.....................................................................................40

HistoricalInformation......................................................................................................41

HistoricalStaffingPatterns:CustodialOnly:YearAverage...........................................................41

ReallocationandReadjustment............................................................................................42

TheAuthoritytoReallocate.............................................................................................42

FreeingUptheFunds.......................................................................................................42

Conclusion.................................................................................................................................43

Section7:CornerstoneThree:ReportingOnHowMoneyIsSpentAccounting.......................44

KeyPoints..................................................................................................................................44

AccountingPrinciples................................................................................................................44

1.TheEntityPrinciple.......................................................................................................44

2.MoneyasaMeasure/theCostPrinciple.....................................................................45

3.TheGoingConcernPrinciple........................................................................................45

4.TheConservatismandCostConcept............................................................................45

5.TheMatchingPrinciple.................................................................................................46

6.TheConsistencyPrinciple.............................................................................................46

7.TheMaterialityPrinciple..............................................................................................46

8.TheDualityPrinciple.....................................................................................................46

9.TheAccrualPrinciple....................................................................................................47

TheQualityofInformation....................................................................................................47

TheOutputsofAccounting....................................................................................................48

TheAccountingCycle.......................................................................................................48

DoubleEntryBookkeepingandtheFundamentalAccountingEquation......................................48

DebitsandCredits.........................................................................................................................49

ExamplesofDebitsandCreditsTransactions...............................................................................49


Wherearetheseactivitiesactuallyrecorded?..............................................................................50

KeyDefinitionsofTermsUsedInFinancialStatements................................................................50

AnExampleofDepreciation..........................................................................................................52

Equity/NetAssets/FundBalance...................................................................................................53

TheBalanceSheet.........................................................................................................................53

TheIncomeStatement..................................................................................................................54

ByObject:salaries,benefits,rentals,costofservices...................................................................54

IncomeStatementOrganizedbyObject(PlusYeartoYearComparison)....................................54

TheStatementofCashFlows...........................................................................................54

Conclusion.................................................................................................................................55

Section8:AccrualAccounting:ProvidingaFullerStory................................................................56

KeyPoints..................................................................................................................................56

WhydoweneedAccrualAccounting?......................................................................................56

CashBasisAccounting:AnOverview.....................................................................................57

AnotherExampleofCashAccounting...........................................................................................57

ExampleofCashAccounting.........................................................................................................57

AccrualBasisAccounting:AnOverview................................................................................57

ExampleofAccrualAccounting.............................................................................................58

TheDifferencebetweenCashandAccrualAccounting........................................................58

CashVersusAccrualTreatmentofAssetAcquisitionandUse......................................................59

ImplicationsoftheAccrualAccounting.................................................................................59

AnExampleofaWeekintheLifeofOneGovernment................................................................60

FinancialReportsoftheGovernment...........................................................................................61

TheProsandConsofCashandAccrualAccountingandBudgeting.....................................62

ConclusionsandOverview........................................................................................................64

Section9:AccountabilityandReporting.......................................................................................65

KeyPoints..................................................................................................................................65

WhatisAccountability?.............................................................................................................65

TheRelationshipofAccountabilityandFinancialManagement...........................................66

TheUsersofFinancialandPerformanceReports.....................................................................67

TheObjectivesofFinancialandPerformanceReporting..........................................................68

TheRoleofAuditintheAccountabilityProcess.......................................................................69

InternalAuditFunctions...................................................................................................69

LegislativeAuditors..........................................................................................................70


Independence...................................................................................................................70

ReportingtotheLegislature.............................................................................................70

ThirdPartyAccountabilityandtheBurdenofOversight.................................................71

Conclusion.................................................................................................................................73

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Public Sector Financial Management for Managers 2

identifysomeofthecomponentsofthesethreebroadstagesbyaskingthequestions:WhatisthePublicsector,andwhatisFinancialManagement?Question 1: What is the Public sector?

Summary:ThePublicsectorneedstoworkwithinspecificfinancialboundarieswhiletryingtosolveproblemsaffectingthecitizensitrepresentsandserves.5KeyFeatures1:i)ThePublicsectorisbroad.Itencompassesallorganizationsthatreceivetheirfundingfrompublicsourcessuchastaxes,feesorlicences.Therefore,itwillembracenotjustgovernmentdepartments,butalsogovernmententerprises.ii)ThePublicsectorhasmultiplegoals.Ratherthanhavingasinglebottomline,thepublicsectorhasseveral,whicharebeingpursuedatonce.iii)ThePublicsectorusesvarioustoolstoreachitgoals.Thereareaseriesofinstrumentsusedtoachievethegoalsofgovernment2.iv)ThePublicsectoroftenusesthePrivateSectortodeliverPublicGoods.Moderngovernmentsfrequentlyusecontractswithprivatecorporationsasameansofacquiringneededexpertise,outsourcingwork,orextendingtheirworkforceswhileseemingtocontainthegrowthofthepublicservice.

Thiscontractedworkdoesnotmeanthattheregularpublicserviceisrelievedofitsaccountabilityforpublicfunds.Governmentsdevoteconsiderableenergytoadministeringcontracts,especiallyduringaperiodofincreasedscrutinybythepublicandbythecontractingcommunityinparticular.v)ThePublicsectorisademocraticinstitution.Governmentsownnoneoftheresourcestheyspend.Taxpayersdo.Inademocraticsociety,thewaysinwhichgovernmentsspendresourcesmustbetransparentandreadilyopentoquestioning.AccountingforPublicsectorfundsandtheirproperexpenditureisnotonlypartofgoodmanagement,itisessentialtogoodgovernmentandgoodgovernanceofthepublicenterprise.Itisalsowheregovernmentsaremostheavilyscrutinizedandwheretheycangetintoagreatdealoftrouble.Suchscrutinyisoneofthebasisofagovernmentslegitimacy.

1CICAPublicsectorAccountingHandbook,RevisedUpdateNo.18,SectionPS1100,AppendixA2Salamon,LesterA,RethinkingPublicManagement:ThirdPartyGovernmentandtheToolsofGovernmentAction,PublicPolicy29,no.1(Summer,1981)andSalamon,LesterAandMichaelS.Lund,TheToolsApproach:BasicAnalysitcsinBeyondPrivatization;TheToolsofGovernmentActioneditedbyLesterASalamon,..2350,Washington,UrbanInstitutePress,1989


Question 2: What is Financial Management? Summary:FinancialManagementhelpstoprovidekeyinformationtodecisionmakersanditintroducescontrolsthateitherpreventabuseorcreateincentivesforgoodservicetothepublic.FinancialManagementhelpsthePublicsectorcollectmoney,allocatemoney,spendmoney,weighthecostsandbenefitsofcertainprograms,accountformoney,reportonhowmoneywasspent,andplanforthelongterm.8KeyFeatures:i)FinancialManagementinvolvesthecollectionofmoney.ThePublicsectormakesmostofitsmoneythroughtaxation,transfers,fees,thesaleofgoods.

ii)FinancialManagementinvolvesallocatingresources.TheincomeofthePublicsectorisnottiedtoanyonespecificgoal.Rather,PublicsectorfundsareconsolidatedintoaConsolidatedRevenueFund(CRF)andsubjectedtoademocraticdecisionmakingprocessthatdistributesthemacrossarangeofactivities.Thisisknownasthebudgetaryprocess.Thereareexceptionstothisruleinwhichspecifictaxesorfeesaredirectedtospecificprograms.ABudgettellsthepublichowthegovernmentintendstospenditsmoney.Thebudgetaryprocessisaplanningtoolandatoolofregulationandcontrol.Agovernmentbudgetsetsalegallimitforexpenditures.Italsocreatesthelegalauthorizationfordelegatedofficialstospendfund.ABudgetisalsothetoolbywhichthegovernmentsfinancialperformanceisjudged.Managersareheldtoaccountfortheirperformancerelativetothebudget.iii)FinancialManagementinvolvesspendingmoney.Delegatedofficialsareexpectedtospendpublicfundsforthepurposesforwhichtheywereallocated.Therefore,financialmanagementinvolveshavingcontrolsinplacetomonitorexpenditures.iv)FinancialManagementinvolvesoversightwatchingthemoney.Thegovernmentmustfrequentlyandsystematicallymonitorandreportontheflowofmoney.Thisensuresactualfinancialactivitymatchesplannedfinancialactivity.Financialrolesandresponsibilitiesaswellasfinancialreportingtimelines,areoutlinedinlawtoensurespecificindividualsarelinkedtothesuccessorfailureofaparticularstageinthefinancialprocess.Informationsystemssupporttheserolesbymakingpublicservantsawareoftheirlevelofprogress.Legislationcreatingpublicorganizationscanbeverybroadwithrespecttotheamountoflegislativecontrolthatisexertedastheorganizationgoesaboutitsdaytodaybusiness.Legislaturesseldomengageintheactualmanagementofpublicorganizations.Rather,theyserveotherkeyroles:creatingtheorganization,settingoutthepoliciesthattheywillcarryout,providingthefundingtocarryoutthepolicies,holdingthe


organizationtoaccounteitherdirectlyorthroughexternalauditorsappointedbyandresponsibletothelegislatures.

v)FinancialManagementinvolvesaccountingformoneycollectedandmoneyspent.ThePublicsectormustassurethepublicthatitsmoneyisbeingspentwell.Thismeanstheyneedtoask:

Ismoneybeingspentforanappropriateuseforthepublicgood?

Arefundsbeingallocatedforthestatedpurpose?

Arefundsbeingspentaccordingtotherulesthatapply?

Didthefundsachievetheintendedresults?

Canthefundsbetracedandidentified?

Canothersassessthefinancialinformationoftheorganizationexternalrevieworaudit?

Essentially,pastfinancialbehaviormustbereconciled,audited,andreviewedinrelationtothebudgettogivethelegislatureandpublictheassurancesthatfundswerespentfortheirintendedpurpose.Thepublicaccountsandtheassociatedfinancialstatementsarethemaindocumentsusedbygovernmenttoshowfinancialactivity.

vi)FinancialManagementinvolvestakingcareofassets.Publicsectororganizationsbuildoracquirecapitalassets.Theyowncapitalassets,whichcanbeconsiderable,inordertodeliverservicesandthepublicgoodobjectivesthattheywanttoachieve.Consequently,thePublicsectorhasconsiderablemaintenancerequirementsandoperationalcosts.Financialmanagersmustensurethatassetsareproperlypurchasedandsustainable.

vii)FinancialManagementdoesrequiredueregardforprocess,recordkeepingandreporting.Therecanbeatensionbetweentheobjectivesofthepublicservicetoquicklyservetheneedsofcitizensandeffectivefinancialmanagement,seeingitasinhibitingeffectiveclientservicethroughexcessivecontrols,inadequatefundingorapreoccupationwithpaperwork.Nonetheless,theserequirementsremainessentialforpropercontrolandaccountabilityaswellaspublicconfidenceinthegovernmentsfinancialprudenceandhonesty.

viii)FinancialManagementisEverybodysBusiness:Oftenpublicservantsdonotseethemselvesasmanagersofresources,butratheraspolicymanagersofhighlyspecializedfunctions.BecauseofthecomplexityofthePublicsector,thefinancefunctionwillhaveitsownseniormanagerswhoareoftenseparatefromlineoroperatingmanagers.Tensionsoftenensuebetweenthesetwocultures.Thesearenormaland,whenwellmanaged,healthyandnecessary.

Inreality,allmanagersarefinancialmanagers.Theabilitiestoobtainresourcestoachieveprogramobjectives(budgeting),maximizeprogrambenefitswithinthebudget(allocation),effectivelymanagethebudgettoachievefullbenefit(cashmanagement),anddemonstrateresultsandprocessadherence(accountability),areimportantmanagementskillsforallgovernmentemployees.


Section2:CornerstoneOne:AllocatingResourcesBudgets

Key Points

Abudget isa time limitedplan thatputs resources inplace to implement thegoalsofanorganization.

Forthepublicsector,abudgetisalegallyauthorizedannualmonetizedplanthatestablishesspendinglimitsforthevariousprogramsthatcomeoutoflegislation,policy,andorganizationalintent.Abudget,therefore,doestwothings:

1)Ittranslatespolicyintentionintospecificactivitiesthroughresourceallocation.

2)Itisalsothebasisforfinancialcontrolwithinthepublicsectororganizationinthatitarticulatesexpectationsofrevenueandexpenditures.Assuch,itisausefulbenchmarktocontroltheoperationsofgovernmentdepartmentsandagencies.

Typically,aGovernmentwillhaveanorganizationwidebudget.

Thisdocumentwillthengetdividedintopartsinordertoformdepartmentbudgets.And then those department budgetswill be further divided in order to producebranchbudgetsofvarioussorts.

Inthissection,wewillexplorethevarioustypesofbudgetsusedinthepublicsector.The Budget Cycle Thereare threebudgets inplayatall times forpublic sectormanagers:past,presentandfuture.The manager has an immediate concern for the management of funds within thecurrentfiscalyear.Thisistherealmoftheuseandcontroloffunds,cashmanagement,andprogrammanagement.However, the manger also has to continuously participate as part of the planningprocesstosecurefundsforcomingyears.Thisistheexpenditureplanningprocess,thepolicy planning cycle or the strategic exercises of the organization. This is fordevelopmentofthefuturebudget.Finally, themanagermust account for past use of funds. This is based on the pastbudgetandthewayitwasspent.


Importantly,thisthirdbudgetlifethepastiscriticalsincesomuchofthebudgetingprocess is incremental in nature, as changes aremade in small increments based onprior years levels of resources, e.g. an increase of 2% per annumwith no change inprogram fund distribution. Many organizations make the majority of their budgetdecisionsbasedonpastperformanceandallotments.Howmuchwasactuallyused inthepastisanimportantfactor.Budget Methodologies Core Elements: There are three coreelements to abudget: revenue,operations andcapital.Thesearedescribedbriefly.RevenueBudgets:Forthemostpart,governmentsmanagetheirrevenuestrategiesatthewholeofgovernmentlevel,imposingtaxesandfees.Theythendistributemoneytodepartments through the budgetary and appropriations process. Individualmanagershave littletodowiththispartofthebudgetprocess,unlesstheyworkontherevenuesideofgovernment.OperatingBudgets:Operating budgets describe the programs and resources used tocarrythemoutwithinaspecifiedperiodoftime.Theoperatingbudgetcontainstheplanforrevenuesandexpendituresfortheperiod,usuallyreferredtoasafiscalyear.In governmental terms, the expenditure plan represents the authorized limit ofexpenditures for the operating unit.Most operating budget provide funds for suchelements as staff, benefits, supplies and operating expenses as well as grants anddisbursements.CapitalBudgets:Capitalbudgetscontaintheplansandresourceallocations forcapitalacquisitions..Theyreceivedifferenttreatmentthanoperatingfundsbecausetheiruseisoftenamorecomplexand longertermpropositionthantheoneyearoperatingfunds.Theyofteninvolvecomplexplanningprocesseswithconsiderablefinancialriskandcashoutlay.Landandbuildingsarewellknowncapitalgoods. Increasingly, information technologyinfrastructure is a part of the capital budgets. Determiningwhat is andwhat is nottreatedasacapitalitemisamatterofpolicywithinpublicsectororganizations.OrganizingBudgetInformationBudgetsvaryconsiderably incomplexity.Thiswilldependuponthepurpose forwhichtheywerecreatedandhowtheywillbeused.Inseekingthebestwaytodisplaybudget


information, there are three main approaches, each with useful intent as well aslimitations:

Lineitembudgets, Programbudgets, Functionalbudgetswhichcombinetheformertwo,and Performancebudgeting.

Mostgovernmentpracticeallthreeforms,usingthemtomeetthevariousgoalsofabudget.Forinstance,asimplelineitembudget,describedbelow,willmeettheneedsofamanagertounderstandwhatresourcesshehasandforwhatkindofpurpose,e.g.,staff,supplies,etc.Aprogrambudgetwilllinksuchinformationtotheprogramswithinaparticularunit.Afunctionalbudget,averycommontool,combinesthelineandprogrambudget.Aperformancebudgetwilllinkthemoneyallocatedtospecificanticitipatedperformanceoutcomes,e.g.,pavingsomanykilometersofroadsforsomuchmoney.Eachisusefulinitsownturn.LineItemBudgets:Thelineitembudgetisoneoftheeasiesttoprepareandoneofthemostusefulintermsofcontrolofbudgetswithinaspendingperiod.The financial information is organized according to the types of expenses or costcategories.Thesegenerallyfocusonstaff,supplies,rentals,andcontracts,allofwhichcanbecharacterizedascostsofoperations.AsimplelineitembudgetfortheOttawaGeneralHospital,focusingonexpensesonly,isshownhere.Themainorientationofalineitembudgetisexpenditurecontrolandaccountability.Thisbudgetwillinformthemanagerorstakeholderswhatisbeingspentonwhatitemofexpenditure.Theseareknownasinputsinthattheyidentifythecategoriesofresources,e.g.stafforsupplies,neededtodothework.Sinceitusescommonobjectsorobjectscodes,italsopermitsinterbudgetcostcomparisonsbetweenprogramsor

Line-Item Budget of the Ottawa General Hospital for Fiscal Year 2005

Object Budget 100. Salaries $8,000,000 200. Supplies 2,000,000 300. Rentals 250,000 400 .Professional Fees 750,000 Total $11,000,000


organizationswithsimilarfunctions.Agoodexample,ifallhospitalsusedthesameobjectcodesorlineitems,isthatitwouldenableaninterestedobservertodetermineiftheOttawaHospitalhadahigherstaffcosttooverallbudgetratiothananothersimilarhospital.ProgramBudgets:Programbudgetsarebudgetswhichareorganizedfordisplaypurposesaccordingtoprogramtypes.Itshowshowresourcesareallocatedtoeachparticularprogram.Thistypeofbudgetassignsresourcestotheoperatingunit,zone,areaorspecializedprogramwithinwhichitisbeingspent.

ProgramBudgetoftheOttawaGeneralHospitalforFiscalYear2005 Unit Budget

1.OperatingRoom $4,000,0002.Laboratory 1,000,0003.Radiology 1,000,0004.PatientCare 2,500,0005.OutpatientCare 1,500,0006.Administration 1,000,000Total $11,000,000

FunctionalBudgets:Afunctionalbudgetisabudgetthatcombinesthelineitembudgetwiththeunitbudgettoprovideamorecompletepictureoftheresourcedistributionwithinanorganization.Thisisoftentheformatthatisusedforexternalreportinginformation.Ithasthebenefitofallowingabetterbasisforcomparisonamongunits.Forinstance,oneareamayhavehighsalarycosts,e.g.operatingroomwhileanother,e.g.,administration,maybelower.Thatmayreflectthelabourintensityoftheworkorthesizeoftheunitaswellasthecostoftheprofessionalandsupportstaffineachunit.Thefunctionalbudgetdeliversabetterunderstandingofwhatfundsaretobespentfor.Itcombinesinformationaboutinputsandunitsorprogramsthatarebeingfunded.BelowisadisplayofthefunctionalbudgetofOttawaGeneralHospital.


FunctionalBudgetoftheOttawaGeneralHospitalforFiscalYear2005

Unit 100.Salaries 200.Supplies 300.Rentals 400.ProfessionalFees

Total

1.OperatingRoom

3,250,000 250,000 50,000 450,000 4,000,000

2.Laboratory

550,000 350,000 25,000 75,000 1,000,000

3.Radiology

450,000 450,000 0 100,000 1,000,000

4.PatientCare 2,000,000 400,000 0 100,000 2,500,0005.OutpatientCare

1,200,000 175,000 25,000 100,000 1,500,000

6.Administration

475,000 325,000 50,000 100,000 1,000,000

Total

7,925,00 2,000,000 150,000 925,000 11,000,00

PerformanceBudgets:Performancebudgetsareintendedtolinkresourcestotheresultsdesiredfromaprogram.Whilealineitembudgetisfocusedentirelyoninputsandazerobasedbudgetgoesbacktobasicsandreinventsitselfeachyear,theperformancebudgethascertainfeaturesthatmoveitmoreintotherealmofpublicsectoraccountabilitywithagreateremphasisonoutcomesandresults:

1. thereismeasurementofthegoodsandservicetobedelivered,2. unitcostsaredeveloped,3. budgetfiguresaredevelopedbasedonthelevelofserviceasdeterminedby

multiplyingtheunitcostandlevelofservice,4. expectedoutputsarereportedwithinthebudget.

Theperformancebudgetisdesignedtoprovideaclearerpictureofwhatlevelofserviceistobeprovidedforhowmuchmoneyandwithwhatresults.AnexampleofthiswouldbetoaddadditionalinformationtotheOttawaHospitalbudgetdocumentsthatoutlinesomeofthefollowingoutcomes:

a. numberandtypesofoperations,b. waitingtimesforoperationsc. costperoperationsd. overheadcostsasapercentageofoverallbudgete. changesinservicelevels.

Theperformancebudgetisagoodsteptowardscostingofservices,identifyingclearlyservicelevelsofcurrentresourcesandhelpingdecisionmakersmakeabetterlinkbetweenthosetwowhendeterminingfutureresourcing.


TraditionalBudgetingversusPerformanceBudgeting

TraditionalBudgeting PerformanceBudgetingBudgetOrientation MoneyControl Linkingmoneytoprogram

andactivitiesAppropriationControlLevel

Department Program

BasicBudgetingUnit Object,objectcodeorlineitem

Activity

EfficiencyMeasurement None Unitcost,volumesResultMeasurement(Effectiveness/Quality)

None Programlevels,activitylevels

BudgetPeriod

Oneyear Ongoingyearoveryear

Someofthekeyelementsofperformancebasedbudgetsare:

1. servicesaredefinedandmeasurescreatedforthem,2. disaggregatingofservicespermitsindividualcostingandthedevelopmentof

workloadmeasurements3. servicestandardsaredeveloped,4. thereisastandardizedcostingmethodology,5. unlikeotherbudgetformats,therewillbeaconsiderableamountofnarrativeto

explainservicelevels,how6. theyarecostedandhowcostsaredistributed,7. someformofbenchmarkingisinvolved:thisprovidescomparativedataofcosts

andworkloadlevelsinsimilarcircumstance,e.g.comparingthecostofgarbagecollectionfromonetowntoanother.


Section3:UnderstandingtheBudgetaryProcess

Key Points

Agoodbudgetprocessisfarmorethanthepreparationofalegaldocumentthatappropriatesfunds.

Goodbudgetingisabroadlydefinedprocessthathaspolitical,managerial,planning,communication,andfinancialdimensions.

Agoodbudgetprocessischaracterizedbyseveralessentialfeatures.Agoodbudgetprocess:

Incorporatesamediumtermperspective Establisheslinkagestobroadorganizationalgoals Focusesbudgetdecisionsonresultsandoutcomes Involvesandpromoteseffectivecommunicationwithstakeholders Provideincentivestogovernmentmanagementandemployees

Thesekeycharacteristicsofgoodbudgetingmakeclearthatthebudgetprocessisnotsimplyanexerciseinbalancingrevenuesandexpendituresoneyearatatime,butisstrategicinnature,encompassingamultiyearfinancialandoperatingplanthatallocatesresourcesonthebasisofidentifiedgoals.Budgets and Planning Cycles

Arrivingatthefinalbudgetwillentailsomemeasureofforecasting,analysisofoptions,settinginplaceplansoverthelongtermandfinallyassigningresourcelevels.Thisisthebudgetcycle.Understandinghowitworksisessentialforapublicsectormanager.

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Missioncomprehensivestatementexpressingthepurposeoftheorganization.

Visionstatementoftheendresultspursuedbytheorganization.

GuidingPrinciplesphilosophythatsteerstheorganizationindeliveringservicesandaccomplishingitsmission.

SituationAnalysisdescriptionofkeyinternalandexternaltrendsthatarelikelytohaveanimpactontheagencyoverthetimeperiodoftheplan.

Goalsstatementsthatdescribetheagencysdestination,direction,and intentfortheperiodoftheplan.

Objectivesinitiativesthatimplementthegoals.

PerformanceMeasuresandTargetsprecisemilestonesforeachobjectivethatwillhelp theorganizationwillevaluateprogress toward theobjectivesand thegoalsthatitsupports.

Linkage of General Goals to Annual Performance Plan description of therelationship between annual goals in the performance plan andthe generalmultiyeargoalsandobjectivesinthestrategicplan.

ResourcesNeeded descriptionof thehuman, capital, information,andotherresources and the operational processes, skills, and technology needed toachieve theagencygoals;highlightingwhere significant change from currentlyavailableresourceswillbeneeded.Note:this isnotthebudget forthecomingyear, but a resource discussion that will certainly affect budget decisions infutureyears.

ProgramEvaluationsdescriptionofhowtheresultsofprogramsorpolicywillbeevaluated.

Cost-Analysis Phase TheRoleofRevenueinCostAnalysis

Managers have to make predictions about anticipated revenues because withoutunderstandingwhat resourceswill be available to government, it becomes extremelydifficulttodecidewhatprojectsshouldbeallocatedresources.Usinghistoricaltrenddataisaneasilyavailableanduseful tool forpredicting revenue.Onceaprediction ismade,attentioncouldthenbemadeaboutcostsandthespendingprioritiesofgovernment.HowtoDetermineCosts

One way of examining costs is to divide them into two basic categories: Direct andIndirect.


Directcostsarecosts incurredwithintheorganizationalunit forwhichthemanagerhasresponsibility, and costs of resources used for direct provision of goods or services oractivitiesthatrelatetothecoremissionoftheorganization.3IndirectcostsorOverheadare:costsassignedtoanorganizationalunitfromelsewhereintheorganizatione.g. informationtechnologysupport,andcostswithinaunitthatarenotincurredfordirectprovisionofgoodsorservices,i.e.corebusinessormissioncentral,butarenonethelessneededtoprovidethoseservices,e.g.logisticalsupport,informationtechnology,physicalplant,financialservices.4Often organizations fail to fully take into account all the costs of service delivery. Theobjectiveofsoundbudgetingpractice,however,istoarriveatafullunderstandingofthetotalcostofproviding themissioncriticalservicesof theorganizations.Therefore,bothindirectanddirectcostsneedtobeincludedinanybudget.

FixedandVariableCosts

Anotheressential toolof costing is theuseof fixedandvariable costs.Thisanalysis isimportant for it enables themanager to determine how costswill reactwhen certainvariablesare changed. It canestablish cost sensitivity, i.e. thepointatwhich costs caneitherbereducedor increasedwithchanges inactivity.Establishinganunderstandingofcost sensitivitieswill enable themanager to better understand the impact of programchanges.Fixed costs are those costs thatdonot change in total as the volumeof serviceunitschangesoverarelevantrangeofactivity.5Variablecostsarecoststhatvarydirectlywithchangesinthevolumeofserviceunitsoverarelevantrangeofactivity.6Getting Approval to Spend: The Appropriation Process Asthebudgetprocesssuchasdescribedabovebecomesmoreinstitutionalizeditengagesmore players and eventually produces a formal budget submitted to the authorizingauthority. In general, thiswillmean that the final stage of the budgetary processwillprovidelegislativeapprovaloftheplannedexpenditures.Thepurposeofthisauthorityistoobtainspecificapprovaltospendmoney.Suchauthorizationiscalledanappropriation.Appropriations create theauthorization for spending theamount in thebudget. In thiswaythebudgetmovesfrombeingasubmissionforfunds,thenaplan,thenabudgettobecomingthelegalinstrumentofthegovernment,whichbothpermitstheexpenditureoffundsandrestrictsthatflowtothelevelssubmittedforapproval.

3 Finkler, p. 97 4 Finkler, op.cit. 5 Finkler, p. 99 6 Finkler, op.cit. p. 99


CentralAgencyversusProgramOrganizations

Typically, during the budgetary cycle, the overall planning and legislative process issupportedbycentralagenciessuchastheMinistryofFinance.Centralagenciesprovideawholeofgovernmentassessmentofthesupplyofrevenueaswellasthetolerablescopeforprogramexpansion.Theyensurethatdebt isavoidedby lookingatthebigpictureofprogramspending.Centralagenciesusetheanalyticaltoolsmentionedabovetoprovideadetailed assessment of the costs of government programs and then providerecommendationstothelegislature.Thereisaninherenttensionbetweenthedesiresofprogramdepartmentsofgovernmentto spend to meet all their program needs and aspirations and the desire of centralagencies to control the demands towhat is both realisticwithin government revenueprojectionsanddesirablewithinthegovernmentsoverallpriorities.Suchtensionmeansthatprogrammanagerswillhavetoworkeffectivelywithcentralagencies iftheyaretobesuccessfuldefendersoftheirprogramfundsorproponentsofnewfunding.

TheNewVersustheOld

Perhaps one of the greatest sources of tension within budgetary systems and thebudgetary approval process is the desire by governments to extract funds from onespendingcentreandmove ittoanother.Whilethisgoesbymanynames, it isgenerallyknownasreallocationofexisting funds.This isoftenamatterof fundingnewprogramswithexistingfunds.Governments will be continually looking for ways to improve efficiency of currentoperationstoreducecosts.Theywillalsobelookingforprogramsthatnolongerserveanimportantpublicpurpose.

ComplexityversusClarity

Budgetsaremadeupofastreamofdecisions,somewhatinvolvespendingandsomethatinvolvelimitingspending.Veryfewdecisionsarealikeandavarietyofpolitical,socialandeconomicfactorscomeintoplayintheircreation.Formanypublicsectororganizations,inorder to achieve the objective of public involvement and transparency, the budgetprocesscanbea longone, involvingmanydifferent forums, inorder toarriveata finalproduct.

OnBudgetVersusOffBudget


A challenge formany countries is getting a true picture of government expenditures.Oftengovernmentswillseektominimizethescopeofpublicexpendituresbytakingsomeexpenditure items offbudget. This can be done for legitimate policy and accountingreasons.For instance, ifapublicsectorprogram isselffunding,suchasonethatobtainsallof its revenues fromservice fees, itcanbesaid tooperateoffbudgetas itdoesnottakeupanyappropriated funds from thebudget.Often suchentitiesestablish financialreporting statements seperate from the overall government financial statements. Thisservesonegoodofclarity.However,itisalsocontendedthatremovingitfromthegeneralgovernmentbooksdistortsthedegreeofpublicsectorspending.Thisdebateisuniversal.Oneelementofconcern,however,iswhenoffbudgetentitiesarecreatedtodeliberatelymask or distort either government revenues, e.g. development grants from externalsourcesorremoveeffectivelegislativeoversightofthispartofthepublicsector.Conclusion Theprocessofformulatingandgettingapprovalforabudget,atanylevelandinanykindofpublicsectororganization, isan integralpartofhow thatorganizationcarriesout itsmission. It can be complex or simple, depending on the nature of the organization.However,somecommonelementsforpublicsectororganizationsemerge:

Budgetsbringtogetherneedsandcapacity,oftenfromdifferentpartsof

theorganizations,whetheritistaxcapacityandprogramdemandsorclientneedsandfundraisingcapacityoftheorganization.

Budgetsdemandatechnicalcommandofthekeyelementsofneedsmeasurement,effectivecostingofprogram,revenueprojections.

Budgetsinthepublicsectorarelegaldocumentsthatdefineexpendituresauthoritiesandlimitittothoselevelsonceapprovedbytheauthorizinglegislature.

Budgetmakingtakesplaceinanorganizationalculture,richinnuance,withpowerplayingasmucharoleofgoodpolicymaking.

Budgetsareinherentlytransparentinthepublicsector,bothintermsofhowtheyareformedandinhowtheyareexecuted.

Budgetsareboththeresultofplanningbasedonpastexperienceandtheexistingpolicyormissionframeworkoftheorganizationandfutureorientations.

Budgetsinthepublicsectoraresubjecttointensescrutinynotonlybythosewhowillmanagethem,butalsothosewhowillbenefitfromorbesubjecttothem.


Section4:Budgeting:CapitalPlanningKey Points

Capitalassetsareexpensive,havea long life,can lock inanorganization intermsofalternativeoremergingtechnology.

Thetotalcostofacapitalassetovertimemayincludesizeableoperatingexpenses. Itsacquisitioncandistortoperationalplanningifthisisnotadequatelyconsidered

attheplanningphase. Capitalrequiressomespecialtreatmentbothfromthebudgetingandaccounting

perspective.Capital Budgets Acapitalbudgetisaplanfortheacquisitionofbuildingsandequipmentthatwillbeusedbytheorganizationinoneormoreyearsbeyondtheyearofacquisition.Adistinctionthathasalreadybeendrawnbetweenoperatingandcapitalbudgetsisthatoftime.Operatingbudgetsareappropriatedandreporteduponforasinglefiscalyear.Generally,theoperatingassetsareapprovedandusedupwiththeyear.Thecapitalbudget,whileitinvolvesactualcashdisbursementswithinthecourseofafiscalyear,moreofteninvolvesaflowofcashoveranumberofyearstocreateanasset,whichhasalifelongerthanoneyearataminimum.Therefore,boththeinvestmentflowandtheassetreturnextendoveraconsiderableperiodoftime.Havingcapitalprojectsdependentonyeartoyearapprovalsrestrictsthecapacityoftheorganizationtocommittothefullcostoftheproject.Approvingthefirstphaseofamajorconstructioninvestmentandthenreviewingitentirelywhilenotapprovingthenextphasecanleadtoaseriesofcomplicationsfromwasteofpublicfundstoareluctancetoengageinthehighriskventureinthefirstplace.Finally,itisoftenthecasethatcapitalprojectsinvolvelongtermdebtfortheorganization.Thechallengeoflongtermfinancinginvolvesagoodunderstandingofthetruecostsoftheinvestment.CharacteristicsofCapitalAssets

Fromanaccountingpointofview,somethingisacapitalassetwhenitmeetsfourcriteria:

thattheyareusedintheproductionorsupplyofgoodsandservices(productivitycriterion),


thattheirlifeextendsbeyondafiscalyear(longevitycriterion) thattheyarenotintendedforresaleintheordinarycourseofoperations that the monetized value of the asset is sufficiently high (materiality

principle)

Tools of Capital Planning and Budgeting

Effectivecapitalbudgetingbeginswithanunderstandingoftwoelements:

o CapitalImprovementsthecapitalrequirementsoftheorganization,bothnowandinthefuture

o Maintenanceunderstandingoftherequirementstomaintainpresentcapitalassetsinausefulstate.

Governmentsstruggleonbothcounts,becauseoftheconcernforthecostsinvolvedandbecausetheyhavenotalwayssufficientlyseencapitalassetsasbeingsubjecttodeteriorationandinneedofrenewal.Aswell,intheabsenceoflifecycleanalysisandtheapplicationoftruecostingtoolssuchasTimeValueofMoneyandReturnonInvestmentAnalysis,capitalexpendituresareusuallyseenasanannualexpenditureandnotaninvestmentflow.

HerearesometoolsofgoodCapitalPlanning

CapitalImprovementPlans

ACapitalImprovementPlanhasamultiyearperspective.Itcanberenewedandupdatedratherthanrecreatedeachyear.Inthisway,majorcapitalinvestmentdepreciationisnotforgottenandmaintenanceissuesremainonthetable.Itisveryeasy,especiallyinapoliticalenvironment,toforgetpipesunderthegroundortheexistingbuildingsinanefforttofocusonmoreimmediatecrisesorthedesiretocreatenewcapitalprojects.Anexampleofacriticalareainthisregardistheneedtoupgraderoadsonaregularbasis.Itmaynotbethemostpoliticallyexcitingthing,butitisnecessary.Anditcostsmoney.

SomeofthestepstobefollowinginthecreationofaCapitalImprovementPlanare:

o StrategicRelevance:Astatementthatlinkstheorganizationsgoalsandobjectivestoitspresentandfuturecapitalneeds

o AnalysisofFactorsAffectingtheOrganizationsCapitalAssetBase:Somefactorstotakeintoaccountinthatregardare:

o Demographics:Bothcurrentandfutureindicators,suchaspopulationchangesbyagecohort;impactsofbirths,deaths,immigrationandemigration;andissuesspecifictoprogramareas.

o Programchanges:Theseincludenewinitiatives,programterminationsorchangesinprogramparameters.


o Technologicalchanges:Technologicalimperativesareessentialconsiderationstoday,especiallyasbusinessprocessesbecomemorewebbased.

o Economicorbusinesschanges:Theseincludecurrentandprojectedfinancialormarkettrendsandopportunitiesandemergingtrendsinthewaybusinessisconducted.Anexampleistheemergenceofserviceprovidersasalternativeservicedeliverersofpublicservices.

o Legislation:Factorstoconsiderhereincludeanynewstatutoryrequirementsaffectingtheorganizationoritsserviceplan.

o Environmentalfactors:Theseincludetheimpactofanypotentialchangestoenvironmentalstandards.

o InventoryandConditionAnalysis:Acomprehensiveassetinventory,includinganassessmentofthephysicalcondition,functionality(i.e.abilitytosupportcurrentprogramdelivery)andutilization(capacity)ofitscapitalstock.Thisshouldbeupdatedonanannualbasis.Thefollowinginformationshouldbepartofthisanalysis:

o Baselineinformation:Informationonassetssuchasland,buildings,buildingsystemsandequipment,trackingsuchfactorsas:

i. ownershipstatusii. locationandzoningiii. structuraltypesiv. size(landareaifapplicable,squarefootage,vehiclecapacity,etc.)v. ageandhistory(e.g.rehabilitation,repairs,maintenanceactivity,

additions,renovations)vi. valuevii. currentuse,viii. estimatedservicelife;andix. anyothersignificantissuessuchasenvironmentalliabilities.

o Physicalconditionandriskfactors:Anassessmentorratingofthephysicalconditionoftheinventory,includingmaintenancerequirements,seismicvulnerability,asbestos,etc.

o Functionality:Anassessmentofhoweffectivelyeachassetmeetsexistingprogramorserviceneeds;functionalityissometimesmeasuredasthedifferencebetweencurrentoperatingcostsandtheprojectedcostofoperatinga"stateoftheart"facility.

o PurposeorUseoftheAsset:Anassessmentofhoweachassetisbeingused;thisissometimesmeasuredbycomparingforecastservicedemandagainstanassetscurrentcapacity

o Maintenance Needs: Maintenance requirements must be identified in capitalplans. Plans should also explain the methodologies used to develop the


maintenanceforecasts(e.g.measurementtools,standardsandformulasbasedonassetvalueorsquarefootage).

o EstimatesofRequiredResources:Estimatesofcapitalassetrelatedneedsshouldbeaggregatedintoidentifiablecategories.Theoverallcapitalcosts,whenoutlinedthoroughly, can be staggering for public sector organizations. Very seldom dorevenueexpectationsmatch thestraightlineanticipatedcapitalcosts.Usuallyatthispoint,variousprioritysettingprocessescomeintoplay.

o DevelopmentofStrategiesandAlternatives:TheCapitalImprovementPlan(CIP)itself does not provide decisions about capital expenditures. Rather, it is thebackground againstwhich the public sector organizationwill set priorities.Oneimportantservice itcanprovide istoofferalternativestrategies fordealingwithcapital pressures. For instance, the CIP could also identify alternative deliveryforms such as publicprivate partnerships that would, in essence, transfer thecapital costs of a new building to the private sector builder while imposing adownstreamoperatingcostforgovernment intheformofguaranteedrentalandpaymentofdebtcostsbacktothesupplier.

Time Value of Money

Becausecapitalprojectsarecostlyandofteninvolvemajorgovernmentinvestments,thecostoftheprojecthastobesetintothetimeframewithinwhichgovernmentswillincurthecosts.Atthispoint,someformoftimevalueofmoneyanalysiswillhavetobeappliedbeforefinalspendingdecisionscanbemade.

Thesimplestexplanationoftimevalueofmoneyisthatadollartodayisworthmorethana dollar tomorrow or at any time in the future. Partially, this difference in value isattributabletotheearningandcompoundingofinterestforadollarinvestedtoday.Thisis also attributable to opportunity cost, meaning that money spent now addressespresentneedswhilemoneydeferredmissestheopportunitytodoso.

Anotherfactorthatrelatestothetimevalueofmoneyisrisk.Riskinthisinstancereferstopossible lossofvalueof the fundsavailable throughanunsuccessful investment inacapitalproject.Thedollar inhandtodayhasnorisk. It isfirmlywithinthecontroloftheorganizationand itcandisposeof it,save itor invest itas itsees fit.Thepromiseofadollartomorrowcarriessomeriskthatyouwon'tgetitoryouwon'tgetitwhenyouhavebeenpromisedyouwillgetit.

Taking all theseelements into account, time valueofmoney considerationsencouragemangers to calculate themonetizedbenefitsofa capital investmentand thendiscountthosebenefitsinawaythatreflectsthedecliningvalueofadollarofbenefitoccurringinthefutureratherthantoday.

PresentValueandFutureValue


Applyingtechniquesofinterestcompoundinganddiscounting,itispossibletodetermineeitherthepresentvalue(PV)orfuturevalue(FV)ofacapital investment,usingasimpleformula thatapplies interestand time to theamounts thatareeitheravailablenow forinvestmentincapitalorthepresentvalueofafuturepayment.Thevariablesusedinbothcalculationsare:

PV=PresentValue

FV=FutureValue

i=InterestRatePerPeriod

n=NumberofCompoundingPeriods

PresentValue is an amount today that is equivalent to a future payment, or series ofpayments, thathasbeendiscountedby an appropriate interest rate. Sincemoneyhastimevalue,thepresentvalueofapromised futureamountisworth less the longeryouhave towait toreceive it.Thedifferencebetween the twodependson thenumberofcompoundingperiodsinvolvedandtheinterest(discount)rate.

Therelationshipbetweenthepresentvalueandfuturevaluecanbeexpressedasshown:

Relationship between Future Value and Present Value

PV = FV [ 1 / (1 + i)n ]

Example: You want to buy an emergency generator for the Fire Department that will only become useful 5 years from now for $150,000. Assuming a 6% interest rate compounded annually, how much should you invest today to yield $150,000 in 5 years?

FV = 150,000 i =.06 n = 5

PV = 150,000 [ 1 / (1 + .06)5 ] = 150,000 (1 / 1.3382255776) = 112,088.73


NetPresentValue

NetPresentValue (NPV) isameanstocalculatewhetherthepublicsectororganizationwillbebetterorworseoff if itmakeacapital investment. Itdoessobycalculating thepresentvalueofinflowsminusthepresentvalueofoutflows.

NPV=PVInflowsPVOutflowsRisk Assessment It iscriticaltounderstandandassesstherisk involved ineach initiative.Risksshouldbeidentifiedattheearlieststageofplanningastheymayimpactfinancingandprocurementoptions. Once risks have been identified, they must be analyzed and evaluated todetermine the likelihood, consequences and level of risk. Finally, a riskmanagementand/ormitigationstrategymustbeputinplace.Risksshouldalsobereviewedandupdatedastheinitiativemovesforward.Thetablebelowprovidesexamplesoftheriskcategoriesthatshouldbeconsideredwhenplanning andmanaging infrastructure expenditures. It also provides examples of howthesetypesofrisksmaybetreatedtoreducethelikelihoodorconsequencesofpotentiallosses.ExamplesofRiskCategoriesinAssessingCapitalAssetRisks7RiskCategory

DescriptionandTreatment

GeneralRisks Examples includehighlevelconcerns related to thedecision toundertakeaninitiative.Risk treatmentmay includedocumentinghowan initiative fitswithestablished strategic objectives; assessing the requirements for a newcorporate structure; enhancing the initiatives profilewith the public,mediaandgovernments;andworkingcollaborativelytoenhancelabourandindustrialrelations.

PolicyRisks Examples include the likelihood that an initiative represents, or may beaffected by, a major shift in government or agency policy, or change inlegislation.

PublicInterestRisks Examplesincludetheinitiativesenvironmentalimpactanditsrelationtopublichealth, safety and security issues. Risk treatmentmay includeworkingwithneighbours and the community to address public concerns in the initiativeplanningphase.

ManagementorOrganizationalRisks

Examples include the complexities associatedwithpartnerships, investmentsand management. Risk treatment may include managing dependencies onlinkedfundingandcontingentinvestments;ensuringtheavailabilityofqualifiedinitiativemanagers;andensuringtheinitiativedevelopmentteamhasaccesstoappropriateexpertisewhenundertakinganewtypeofinitiative.

7 BC Capital Asset Management Framework


Design/Construction,Commissioning,PartnershiporSupplierRisks

Examplesincludesponsorrisk(e.g.,thelikelihoodthataprivatepartnermaybeunable todeliver) and general supplier/market capacity.Risk treatmentmayincludeensuringtheavailabilityofmaterialandequipmentsupplies;ensuringthatexperienceddesigners,contractorsandtradespeopleareavailable intherequired time frame; anticipating the need for community permits andapprovals;anddesigningconstructionwindowstoavoiddelaysduetoadverseweather.

PoliticalRisks Often unspoken, but certainly real are many political risks associated withcapitalprojects.Examplesofsomeare:

short tenure of a government that may mean the project is reevaluatedorchangedbyanewgovernment,

local opposition to a project that leads to considerable politicalcontroversyandreversalongroundsofcommunityconcerns

failuretoadequatelyconsultortakeintoaccountvariousstakeholderinterests

SiteRisks Examplesincludetherisksassociatedwithsiteselectionandacquisition.

Risktreatmentmayincludeensuringthatthesiteisavailableatanaffordableprice;evaluatingsitechallengessuchassoilcontaminationorpotentialflooding;andensuringthedesiredsiteisfreeofpotentiallandclaimissues.

FinancingRisk Examplesincludeanentitysabilitytodrawtherequiredfinancialresourcesandtheoverallfinancialviabilityoftheinitiative.Risktreatmentmayincludeensuringthatfinancingisavailableattheappropriatetime;anticipatingtheimpactofinterestrateincreases;andevaluatingthecreditworthinessofpotentialpartners.

Cost,EconomicorMarketRisks

Examplesincludeallpossibleeventsthatcouldaffectcashflowduringinitiativedevelopment.Risktreatmentmayincludeplanningforcontingenciesinthemarketsuchasadropindemandforservices;anticipatingthepotentialforlabourormaterialcostescalations;ensuringfundingisavailabletocoveroperations,maintenanceandadministration;andassessingthepotentialforcompetingfacilities.

OwnershipandOperationsRisk

Examplesincludelabour relations,maintenance,andtechnicalandassetobsolescencerisks.Risktreatmentmayincludetakingstepstokeepmaintenanceinlinewithforecastlevelsandtakingappropriatemeasurestoaddressthelikelihoodofabandonment.

OtherRisks Risksthatcouldbesubstantiveandrequireresolutionand/ormanagementpriortocommitmenttotheexpenditure,orduringdelivery,includinguncontrollableforcemajeureriskssuchasweatherandglobaluncertainty.Risktreatmentmayincludedevelopingcontingencyplanstoavoidorreduceconstructiondelaysduetoemergenciesordisaster;andensuringthatbusinesscontinuityplansaddressawiderangeofpotentialevents.

Conclusion Theconceptualtoolsandplanningprocessessuggestedhereisanimportantpartoforganizationalfinancialmanagementwherevercapitalplaysanimportantroleincarryingoutthatorganizationsmission.Thinkingaboutcapitaloftenchallengesthelinemanagertoescapetheyeartoyearoperatingbudgetorientationandlookattheimplicationsofsuchelementsastheactualcostofaninvestmentincapitalforbothoperatingcostsdowntheroadandfurthercapitalinvestments.


Oneoftheothervery importantreasonstohaveaspecialawarenessofcapitalbudgetsandhowcapitalbehavesovertimeisthatofteningovernment,theissueofmaintenanceandreplacementofcapitalgoodsiseasilydeferredwhendifficultbudgetcutshavetobemade. What this has led to in some countries is a serious underinvestment ininfrastructurethatwillnowcostmuchmore,inpresentvalueterms,toreplace.Thishasbeenthevictoryoftheshorttermoverthelongterm.Unseensewersveryseldomattractpoliticalattentionuntiltheybreakdown.


Section 5: Cornerstone Two: Monitoring Money Managerial Control

Key Points Thebudgetisaplan.Onceapproved,ithastobecarriedout.Thedesiredoutcomeofimplementingthebudgetistoachievetheobjectivesoftheprogram,projectorlineofactivityinthemostefficientandeffectivemeansthatarereasonabletothesituationbutwithanequalconcernfortheproperuseofpublicfunds.Inanyenterprise,thisrequiresaseriesofcontrols.Takentogether,theseformafullcontrolframework.Controlbeginsandendswithafocusontheendstobeachievedandhowtomonitorperformance.Forthelinemanager,controlsestablishtheextentoftheirdiscretionandoutlinetherulesbywhichtomakedecisions.Effectivecontrolswillensurethatthereisatimelyunderstandingoftheperformancewithintheorganizationthatwouldpermitadjustmentsinbudgets,behavior,orprogramexpectationstoaccommodateunforeseensituationsandmonitortheimpactofmanagersdecisions.What is Management Control? Managementcontrolsystemsconsistofallorganizationalstructures,processesandsubsystemsdesignedtoelicitbehaviorthatachievesthestrategicobjectivesofanorganizationatthehighestlevelofperformancewiththeleastamountofunintendedconsequencesandrisktotheorganization.8

Management Control Framework

Acontrolframeworkisawayofdescribingthearchitectureofcontrolfortheorganization.Acontrolframeworkwithinanorganizationwillinvolvecertainkeyfeatures:

Establishingtheorganizationsgoalsandobjectives Assigningrolesandresponsibilities. Performancestandardswheretheycanbeestablished.

8Systems Theory and Management ControlBy:Dr. Shahid Ansari: http://faculty.darden.virginia.edu/ansaris/Systems%20Theory%20and%20MCS-TN.pdf


Anunderstandingoftherisksinherentintheprogramandtheenvironmentalinwhichitistakingplace

Positivemitigationandmonitoringtoolstocontinuallyreassesstherisks Aseriesofcontrolproceduresandpoliciestobothaddresstherisks

identifiedandtosatisfycertainlegislativeorpolicycreatedrequirementsforadequatecontrol

Asystemofmonitoringatboththeoperationalandfinancialleveltoensurethattheorganizationfullyunderstandswhatishappeningrelativetoitsgoalsandtheriskenvironment

Asystemofauditingandevaluation,bothinternalandexternal,thatprovidesassurance,fromanindependentperspective,thatthereisanadequatecontrolframework,thatitisworking(andnotjustpaper)andthattheoutcomes,bothoperationalandfinancial,areastheorganizationclaims.

Risk and Risk Management

Inmanyways,actuallyexercisingcontrolmeansanticipatingandmitigatingriskswithintheorganizationorprogram.ControlisaboutRiskManagement.Riskandriskmanagementhavebothanarrowdefinitionassociatedwithfinanciallossandalarger,morecomprehensiveoneassociatedwithorganizationalgoalsandthethreatstoattainingthem.Inthecontextoffinancialmanagement,riskmanagementencompassesboth.Nonetheless,riskcanbroadlybedefinedasfollows:anythreat,event,patternofpastoranticipatedbehaviourorpredictedeventthatcoulddetertheorganizationfromachievingitsgoals.Inapplyingthisdefinitiontopublicsectorfinancialmanagement,thereareclearlysomeconditionsthathavetotakenintoaccount.First,thegoalsofallpublicsectororganizationsaretoperformapublicgoodinthemannerprescribedbylaworpolicyinacosteffectivemanner.Second,itispossibletoreadilyinterpretthisdefinitioninfinancialtermsinanumberofways:

Thedangerofnotmanagingentrustedfundseffectivelyorlegally, Thedangerofinadequatefundingcombinedwithexaggeratedobjectives, Thedangerofspendingoverbudgetwithouttakingmitigatingmeasures, Thedangeroffraudormisuseoffunds, Thedangerofunforeseencircumstancesthatstrainorthreatenthe

financialcapacityoftheorganization, Thedangeroflossofconfidencefromthepublic,thelegislature,donorsor

stakeholdersinthecapacityoftheorganizationtodeliveritsservicesaspromised.


Riskmanagement,therefore,istheestablishmentofproceduresandmanagementsystemstoidentify,assess,validate,mitigateandmonitorriskstotheorganizationinsuchawaytoeliminatethem,effectivelyreducetheirimpactorbepreparedtorespondtothem.UnderstandingandDefiningtheRisks

Akeypartofriskmanagementinvolvestheneedformanagerstomakedecisionsaboutwhatriskstoactonandwhichonesdonotrequireanyactionatthetimeofreview..Notallrisksarethesame.Itisnecessaryfortheorganizationtodecidewhichonesareimportantanddemandingofacertainlevelofmitigationandwhichonesareeithernotasignificantthreat,nottimelyoreasilymitigatediftheydooccur.Anumberofsystemshavebeenestablishedtohelporganizationsdeterminethelevelofriskthattheycanaccept.Suchsystemsarevaluableastheyestablishacommonlanguageandframeworkfororganizationstoeffectivelycometoanunderstandingoftheriskstheyfaceandthemeaningoftheiridentificationofthem.Ensuringthatalllevelsoftheorganizationsusesuchcommontoolsensuresthatmisunderstandingsaboutrisksandthecontrolneedsthatmayflowfromthemarereduced.Belowisastandardgridtoenableorganizationtorankriskontwokeyaxes:impactandlikelihood.Withoutdeterminingwhatthelikelihoodandpotentialimpactofanyidentifiedrisk,thereisnoreasonablewaytodeterminewhattodoabouttherisk.Further,thisisthekeywaytodifferentiaterisksanddeterminewheretoapplyscarcemanagerialresourcesinthemitigationprocess.

IMPACT POTENTIAL RISK MANAGEMENT ACTIONS

Significant Considerable management

required

Must manage and monitor risks

Extensive management

essential

Moderate Risks may be worth

accepting with monitoring

Management effort worthwhile

Management effort required

Minor Accept risks

Accept, but monitor

risks Manage and monitor risks

LOW MEDIUM HIGH

LIKELIHOOD


Control Procedures and Policies

WhoandWhentoControl

Nowthatwehaveanideaaboutwhereourobjectivesmaybecompromisedthroughariskidentificationprocess,weneeddecidehowtoachievethekindsofcontrolsthatareneeded.Theactofcontrollingfinancialresourcesisanactiveonethatboththemanageroftheprogramandthefinancialexpertshavebeengagedin.Itcannotbelefttofinancetoprovideallthecontroloversight.Itistoocloselytiedtothemanagersresponsibilitiestodeliverthepublicgoodforwhichheorsheisresponsible.Thefirstcontrolquestiontoaskwhencontemplatingthemeansofcontrolis:whotocontrolandwhentodoit.Intermsofwhotocontrol,therearetwochoices:theorganizationasawholeoranindividual.Theindividualmaybeapersonwithintheorganizationwhoismakingadecisiontospendfundsonbehalfoftheorganization.Alternatively,theindividualmaybetherecipientofapublicgoodorentitlement.Inmanycases,whentheorganizationistobethesubjectofcontrol,thecontrolswillentailinformationatanaggregatedlevelofperformance,e.g.quarterlyreportsoncontractsauthorizedandlevels.Ifitisanindividual,itmaybeattheindividualtransactionlevel.Intermsoftimeorwhentocontrol,thealternativesaretoexercisecontroleitherbeforeoraftertheindividualororganizationhasacted.Beforethefact,orexante,controlsinvolvesubjectingadecisionthattheorganizationorindividualisabouttomaketosomelevelofapprovalorreviewinadvance.Asanexample,anorganizationmayrequireapprovalfromitscentralofficebeforepurchasingequipmentoverthevalueof$50,000.Thisapprovalisaformofcontrolandrequiredbecauseofthematerialityofthepurchase.Thisisinspiteofthefactthatpurchaseofthisitemmayhavebeenapprovedaspartofalargerbudgetplan.

Afterthefact,orexpost,controlinvolvesareviewprocessfordecisionsandexpendituresthathavealreadybeenmade.Insuchcircumstances,theactor,beittheindividualortheorganization,isfullyresponsiblefortheactionthatwastaken,astheyhadtheauthoritytoapproveitandactionwastakenasaresultoftheirauthorization.Forexample,achequemaybeissuedontheauthorityofanindividual,notsubjecttoanyotherreview,excepttoverifythatitistheapprovedofficialwhohasthatauthority.However,someformofcontrol,throughmonitoring,sampling,summarizedreportingorvarianceanalysis,isputinplacetooverseethequalityofdecisionsalreadymadeeitheratanindividual,oraggregatelevel.Thisisthemorecommonformofcontrolexercisedoverfinancialtransactionswithinorganizations.Itismoreefficientintermsofprocessingpayments,etc.italsofocusespriorapprovalsontheriskiertransactions,therebyeffectivelybudgetingseniormanagementandgovernancentime.


WhoistheController?

Thenextquestiontoaskiswhothecontrolleris.Thesimplefactisthatcontroller/controlleerelationshipsexistatmanylevelsandoperateinmanyways.Therefore,whileonemanagermayexercisecontroloveragroupofstaffandsetupprocessesofcontrolsuchasregularperformancereviews,delegationtolimitstodefinediscretion,etc.,thatverymanagerwillalmostcertainlybesubjecttocontrolsbothfromasuperiorandalsofromoversightbodiessuchasexternalauditors.Anotherpointisthattheyareimperfectandoftencloudedbyothermatters,betheyoperational,financialorpolitical.

Trust and Ethics in Control

Ifriskmanagementisthefaceofcontrolthewayinwhichcontrolisexpressedthantrustandethicsaretheheartofcontroltheculturalrealitythateithersupportordestroyeventhemostperfectcontrolplan.Fundamentally,allcontrolsarebuiltaroundtwonotions:

thedegreeoftrustthecontrollerplacesintheorganizationorpersonswithauthorityandresponsibility,and

theassumptionsaboutethicalbehaviorinthecultureandlegalframeworkoftheorganization.

Trust

Trustisacalculationthatismadebytheorganizationaboutitsownpeople,aboutotherorganizationsandotherpeopleaswellasitsleadership.Trustisalsoanimportantelementinbalancingthedesireforfullassurancethroughcontrol(nosurprises,noerrors)withthecostorimprobabilityinachievingit.Intheend,morecontrolsystems,nomatterhowtechnologicallysoundordetailed,dependonthepeoplerunningthemandoperatingwithinthem.Therefore,adegreeoftrustisnecessarilyextendedtooperatorsofthesystemswiththeassumptionthattheirintentionsaresoundandthat,basedontheirtrackrecord,suchtrustisdeserved.Ethics

Notallcontrolisaboutsystems,procedures,documentationandprocess.Infact,allofthiscontrolcouldbehappeningand,withthewrongvaluesinplay,seriousintrusionsintopubictrustcouldbeaccruing.Thiscouldbeeitherthroughmisappropriationofpublicfunds,usingthemforpurposesnotintendedortheirdiversiontootherpurposesofapersonalnature.Itisaxiomaticthatthepublicsectororganizationsandthepeoplewithinthemhavetoactinanethicalmanner.Therefore,ensuringthattheethicalframeworkoftheorganizationsanditspersonnelissoundisyetanotherformofcontrol,onethatisessentialtothesuccessofallotherefforts.


Values and Ethics Approaches

Political and senior management leadership that promotes ethical conduct

Clear statements of values and ethics or codes of conduct Approaches to decision making that

o require consideration of values and ethics o align management policies to support ethical conduct o offer recourses to report ethical concerns

Clear guidance for interaction between the public and private sectors Assessment of and reporting on effectiveness of values and ethics

initiatives

Source: Organization for Economic Co-operation and Development (OECD), Principles for Managing Ethics in the PublicService

Oneofthemostimportantelementsofestablishingstrongvaluesandethicsisthroughethicalleadershipwithintheorganization.NotethatthisisthefirstitemidentifiedbytheOECDinitsframeworkforethicalpublicsectororganizations,aslistedbelow:TheattributesofethicalleadershipweredocumentedbytheCanadianfederalgovernmentsTaskforonPublicServiceEthics9:

Createasupportiveworkenvironmentthato valuespeople,treatingthemwithdignity,civilityandfairness;o emphasizesopennessandthesharingofinformation;o promoteshonestandcollegialleadership;o encouragesandsupportsspeakingtruthtopower;ando supportsabalancedfamilyandworklife.

Makedecisionsthato servethepublicinterest;o respectdemocraticprinciplesandtheruleoflaw;o ensuredueprocess,impartialityandobjectivity;o provideeffectiveservicestocitizens;ando promotetransparency,probityandaccountability.

9AStrongFoundation:ReportoftheTaskForceonPublicServiceServiceValuesandEthics,JohnC.Tait,Q.C.,Chair,availableathttp://www.myschoolmonecole.gc.ca/Research/publications/html/p91/1_e.html


Someofthetoolsthatpublicorganizationscananddousetoensurethattheyhavepromotedethicalbehaviourare:

establishingcodesofconductorethicstosignaltheimportantvaluesoftheorganization

supportingsanctionsforethicalmisconduct usingmeritprinciplesinhiringandpromotion awidevarietyoftraininginitiativesonethicsforbothnewemployeesand

thosealreadyinposition identificationofhighriskpositions(notpersons)whereeitherspecial

trainingonethicalchallengesorspecialsurveillanceiscalledfor disclosureofanyconflictsofinterestandpoliciestosupportthis,noting

thatthisbecomesmoreimportantthehighertheleveloftheposition, toolstoreportmisconductofsuperiorsandadequatesafeguardsforthose

reporting,i.e.confidentialchannelsandwhistleblowerlegislation Ombudsmenpositions ethicalcounselors,trainers,offices theinvolvementofprofessionalassociations,suchasCICA,todevelop

ethicalguidelinesformembership

Clearly,controldoesnothappenwithoutadequatevaluesandethicstosupportit.Therefore,addressingethicsaspartofanoverallcontrolstrategymakesgoodsenseandisprobablylesscostlythatmoreregulatorymeasures.

Controllership Capacity Checklist AccordingtotheTreasuryBoardofCanadatherearesevenkeyareasofcontrollership,allofwhichhavebeendiscussedimplicitlyorexplicitlyabove.ThesevenkeyareasoftheComptrollershipCapacityCheckare:StrategicLeadership

Leadershipcommitment:Awarenessandcommitmentofdeputyheadandseniormanagementtoestablishingandimplementingamodernmanagementpracticesenvironment

Managerialcommitment:Awarenessofmanagersoftheirmodernmanagementpracticesresponsibilities,andcommitmenttoimplementingthem

Seniordepartmentalfunctionalauthorities:Extenttowhichseniordepartmentalfunctionalauthorityandsupportingorganizationareusedforobjectivecommentaryandindependentadvice

Planning:Strategic,businessandoperationalplanning,andthelinkagesbetweenthemandtoresourceallocation

ResourceManagement:Mechanismsforrankingprogramoptions,identifyingfundingrequirementsandallocatingresources,andbudgetingandforecasting


Managementofpartnerships:Partnershipsareusedextensivelybytheorganizationinsupportofservicedeliverybyleveragingthecapabilitiesofexternalstakeholders,partners,andothergovernmentorganizations

Clientrelationshipmanagement:Commitmenttoconsciouslystrengtheningrelationshipswithclientorganizations,andtointegratingandcoordinatinghowclientservicesaredevelopedanddelivered

ClearAccountability

Clarityofresponsibilitiesandorganization:Clarityofassignmentofresponsibilitiesandaccountabilitiesthroughouttheorganization

Performanceagreementsandevaluation:Extenttowhichtheachievementoffinancialandoperatingresultsisembeddedinperformanceagreements

Specialistsupport:Availabilityoftopflightcounseltohelpmanagersmakejudgmentcallsonmodernmanagementandoperationalissues

Externalreporting:ExtenttowhichParliamentary,centralagencyandkeystakeholderinformationreportingrequirementsaremet

SharedValues&Ethics

Valuesandethicsframework:Leadershipofpoliciesandactivitiesthatvisiblysupporttheethicalstewardshipofpublicresourcesandgivepriorityto"modernmanagementpractices"

MatureRiskManagement

Integratedriskmanagement:Measuresareinplacetoidentify,assess,understand,acton,andcommunicateriskissuesinacorporateandsystematicfashion

Integratedmanagementcontrolframework:Appropriatenessofmanagementcontrolsinplace,andlinkagesbetweencontrolsthroughanintegratedcontrolframework

IntegratedPerformanceInformation

Integrateddepartmentalperformancereporting:Keymeasuresexisttomonitoroverallorganizationwideperformanceandbestvalueresults

Operatinginformation:Measuresandsystemstomonitorservicequalityandefficiencyofprogramdelivery

Measuringclientsatisfaction:Utilizationofclientsurveyinformationonsatisfactionlevels,andimportanceofservices

Servicestandards:Monitoringagainstclientservicestandardsandmaintainingandupdatingstandards

Evaluativeinformation:Utilizationofnonfinancialinformationrelatedtoprogrameffectivenessandoutcomes

Financialinformation:Reliablefinancialinformationisavailableinatimelyandusefulfashion

Costmanagementinformation:Mechanismsforusingactivity/product/resultsbasedcosts

MotivatedPeople


Modernmanagementpracticescompetencies:Extenttowhichmodernmanagementpracticescompetenciesaredefinedandmanagershaveaccesstotraining

Employeesatisfaction:Mechanismsinplacetomonitoremployeemoraleandstaffrelations

Enablingworkenvironment:Practicesforcommunication,wellness,safetyandsupportthatenablestafftoprovideclientfocuseddeliverywhilereachingtheirfullpotential

SustainableWorkforce:Theenergiesofstaffaremanagedwiselytohelpsustaintheorganization'sviability

Valuingpeoples'contributions:Extenttowhichtheorganizationalculturefostersstaffparticipation,teambuilding,sharingofideas,risktaking,innovation,andcontinuouslearning;andrewardsorprovidesincentivesforsuchbehaviour

RigorousStewardship

Businessprocessimprovement:Extenttowhichprocessesareclearlyunderstood,areconductedinauniformfashion,andarecontinuouslyimprovedinlinewithbestpractices

Managementtoolsandtechniques:Rangeofanalyticaltechniques(e.g.,costbenefit,sensitivity,lifecycle,benchmarking)availabletomanagers

Knowledgemanagement:Performance/managementinformationisreadilyaccessibletointernalandexternalusersviatechnology,andlessonslearntaresharedacrosstheorganization

Accountingpractices:Recordsoffinancialtransactionsarekeptonaconsistentandusefulbasisforpurposesofauditandreporting,andareconsistentwithgenerallyacceptedaccountingpracticesandtheFinancialInformationStrategy(FIS)10

Managementofassets:Assetsaremanagedandutilizedefficientlybasedonalifecycleapproach,recordsofassetsaremaintained,andassetsareaccountedforonanaccrualbasisaccordingtoGAAP/FIS.

10InexplainingwhattheFISis,thefederalgovernmentofCanada,statesthefollowing:FISisagovernmentwideinitiativedesignedtoenhancedecisionmakingandaccountabilityacrossgovernment,andimproveorganizationalperformancethroughthestrategicuseoffinancialandnonfinancialperformanceinformation.ThethreekeycomponentsofFISare:

Systemstheintroductionofnewmodernintegratedinformationsystems;Policiestheadoptionoffullaccrualaccountingsimilartowhatispractisedinthe private sector; Peopleaculturalchangefocussedonenhancedanalysisanduseofinformation.

Accountingisonlythestartingpoint.ThegreatergoalofFISistobringaboutalltheattendantchangesinsystems,policiesandpeople.Ultimately,FISaimsatnothinglessthanchangingthecultureofresourcemanagementintheGovernmentofCanada.http://www.tbssct.gc.ca/fin/sigs/fissif/faq/faqfissif_e.asp#whatis


Internalaudit:Stronginternalauditprogramisinplace,andauditresultsareacriticalinputtomanagementdecisionmaking

Externalaudit:Processforensuringadequateattentiontoresultsandrecommendationsofexternalauditsofdepartmentoperations


Section 6: Cash Management: In-Year Control Key Points Inadditionto,exanteandexpostcontroltools,therearealsotoolsofcontrolwithinthecurrentyearmanagementofresources.Thisisrealtimecontrol,whentheissuescanbequitevisceralforanorganization.Willtherebeenoughcashtopaythestaffattheendofthemonth?Areweareontargetforourbudgetprojections?Howdowefindresourcesforthisunexpectedemergency?Wherecanwefindfundstomeetsomeshorttermdemandsthatarewellwithinourmandateandauthority,butthatwehavenotallocatedfundsfor?Whatwillwedowiththisunexpectedsurplusduetoadropinprogramlevelsthatwehadnotexpected?Manyoftheanswerstothesequestionsarecontainedinaprocessknownascashmanagement.Someofthekeystogoodcashmanagementare:

effectivecashflowprojectionsandforecastinginordertoassesstheorganizationperformanceagainstplanandbudget,

reportstotheappropriateauthoritiestoalerttochanges,confirmthatthebudgetwillbespentaccordingtoplans,releasesurplusfundingforreallocationandmonitormanagerialperformancetomakeadjustmentsintheshortterm

governanceprocedurestoensurethetimelyreviewoffinancialandperformanceinformationandtomakedecisionstoadjustprograms,reassessbudgetsorfindalternativestrategiessuchasincreasingcashavailableorreallocatingfundsnotneeded..

Inessence,cashmanagementembracesabroadrangeofcontrolpracticesassociatedwiththemonitoringoffinancialperformancewithinthecurrentfiscalyear(inyear)toassurethatadjustmentscanbeandaremadetoaccommodatechangesinrelationtotheplanandbudget.Objectives of Effective Cash Management, Monitoring and Control Theobjectivesofcreatingasystemfororganizationalcashmanagementare:

Tohavefundstopaythebills,i.e.,sufficientliquidity Tousebudgetedresourcesfortheirprogrampurposesandnotleave

neededfundsunspent Tokeepwithintheappropriatedorauthorizedbudget Tohavetheorganizationalandresourcecapacitytoreacttochangesin

plan


Toreallocateavailablefundstomeetemerging,shorttermpriorities.

Establishing a Cash Management System

Oncethereisabasicunderstandingofcashinflow,youcannowmoveontodevelopingcashmanagementsystem.Beyondsimplyfocusingonsourcesofcashandfocusingoninyearbudgetmanagement,acashmanagementsystemwillhavethefollowingelements:

Anappropriatedbudget Buildinchangesandmodificationstotheapprovedbudgettocreateanadjusted

budget Cashflowprojectionsoverthebudgetperiod:theinyearcashfloworexpenditure

plan Asystemofmeasuringactualfinancialperformanceinrelationtotheprojected

plan Asystemofm

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