Post on 22-Jan-2018
Financial ManagementChapter 7
Overview
Understand how subject matter is crucial to politicians & bureaucrats.
Discuss financial solvency
Understand the following topics:
cash management, risk management, procurement, cutback management, and debt management
Know techniques that can be used to manage govt. during economic prosperity as well as downturns.
Financially Solvent or Not?
Ability of a local government to finance
its services on a continuous basis.
Maintain existing service levels
Withstand local and regional economic
disruptions
Meet the demands of natural growth,
decline, ad change
Measuring Financial Condition
Numerous factors can hinder the process
The nature of a public entity
The state of municipal financial analysis
The character of municipal accounting
practices
Financial Trend Monitoring System
(FTMS)
Financial Factors
Revenues
Expenditures
Operating position
Debt structure
Unfunded liabilities
Condition of capital plant
Environmental Factors
Community needs and resources
Intergovernmental constraints
Disaster risk
Political culture
External economic conditions
Evaluation Questions
Financial factors: Is your government
currently paying the full cost of operating,
or is it postponing costs to a future period
when revenues may not be available to
pay these costs?
Environmental factors: Do the
environmental factors provide enough
resources to pay for the demands they
make?
Evaluation Questions Cont’d.
Organizational setting: Do your
management practices and legislative
policies enable your government to
respond appropriately to changes in the
environment?
The analyst examines each of these
characteristics using arrows. The
direction of the arrow will determine
whether further investigation is needed.
Additional Analysis
Trend analysis is the primary tool that the
system uses.
The user should use graphs, tables, and
other visual tools to show the trends.
Policy statements should be developed to
plan a strategy to manage the areas of
concern.
Detecting an Operating Deficit
The budget reserve continues to drop over several years possibly indicating that expenditures are exceeding revenues
Frequent short-term or internal borrowing
Selling assets to bring in one-time revenues used to fund current operating expenditures rather than for one-time expenditures.
Accounting gimmicks
Deferment of a payment
Cash Budget
Estimate cash receipts for the month
Estimate cash disbursements that will take
place during the month
Subtract cash receipts from cash
disbursement to determine excess or
deficit
Ass this balance to the prior month’s
balance to find the projected total cash
balance.
External Cash Management
Managing liquidity
Accelerating collections
Maximizing investment earnings
Reduce borrowing
Manage disbursements efficiently
Depositing checks
Economic Ordering Quantity
FormulaP=b(T/c)+vT+i(c/2)
Used to determine the cash position of the
govt. once the govt. has determined that
funds are available for investment.
Calculate optimal transfer size, number of
transfers, average cash balance, and initial
cash balance.
Managing Cash Internally
Use checks as much as possible to pay for
services.
Never write checks payable to cash.
The person writing the checks should not
be used to reconcile the accounts
Checks should be used in numerical order
and signed only by authorized staff.
Maintain firm control over bland and
voided checks.
Managing Cash Internally Cont’d.
Use separate bank accounts for each fund
in order to maintain merging of funds.
Sporadically audit petty cash.
All checks should be tied to vouchers or
invoices.
Make sure that the correct check number
is placed on vouchers and invoices.
Cash and checks should b edeposited at
least once a day
Managing Cash Internally Cont’d.
Use computer technology to facilitate
fund transfers as well as any other
financial transactions.
Negotiate with banks for better rates as
well as services
Take advantage of discounts for prompt
payment.
Risk Management
There is a cost associated with risk.
Governments can purchase insurance to
cover the risk or self fund the risk.
Five fundamental elements:
mission identification
risk and uncertainty assessment
risk control
risk financing
program administration
Procurement
The government must provide services in an efficient and effective manner.
The government must secure equipment at the most reasonable price available.
The government must ensure that the procurement process is free of fraud and abuse.
Procurement helps the government to achieve some of its broader economic goals.
Life-Cycle Cost
Acquisition Cost+Lifetime Maintenance
Cost+Lifetime Energy Cost – trade in
allowance – expected resale value
Other considerations:
trade in value
failure cost
labor cost
expected resale value
Cutback Management
Implementing cost cutting reductions in
resources while attempting to maintain
services at their current level.
Results primarily from five things:
problem depletion, erosion of the
economic base, inflation, taxpayer revolt,
limits to growth
Cutback Strategies
Budget maximizing
One time drastic cut
Across the board cuts
Efficiency versus equity
Attrition
Debt Management Policy
Assures bondholders that debt burdens and operational debt expenditures will be controlled.
Provides staff with a framework to work from assures the legislative body that proposals meet policy mandates
Assures continuity in financial operations.
A practice that a city can use to strengthen its credit position.
Additional Options
Zero-based budgeting is a future oriented
budget strategy that requires analysis of
current and future expenditures.
Performance based budgeting
concentrates on agency activity objectives
and outcomes rather than the purchase of
resources.