FINANCIAL MANAGEMENT FOR NON FINANCE MANAGERS Training Slides for Lower Local Governments

FINANCIAL MANAGEMENT FOR NON FINANCE

MANAGERSTraining Slides for Lower Local Governments

Financial Management: Non-Finance Managers

2

Non Finance Managers: Course Objectives

At the end of the course, participants should be able to:

• Understand and explain the purpose of local government budgets;

• Explain the key component of LG budgets;

• Understand and explain the key steps and stages in budget preparation;

• Carry out good prioritisation;

• Compile annual workplans;

• Supervise budget implementation;

• Analyse and understand budget implementation reports.


3

Module One: Session One:An Overview of Financial Management

What is Financial Management:

Financial Management comprises of processes and actions taken by political and administrative leaders of a LG to acquire funds, allocate them over different activities and time periods and use them in the most economical, efficient and effective manner, with a view to achieving the goals and objectives of LG.

Purposes of Financial Management:

• To ensure LG has enough revenue;• To ensure that Financial Resources are utilised in accordance with LG’s priorities;• Provide adequate financial information.


4

Module One: Session One:An Overview of Financial Management

Key elements of Financial Management:

• Planning and Budgeting;

• Mobilisation of Revenue;

• Value for Money;

• Good cashflow management;

• Budgetary Control;

• Accountability.


5

Module One: Session Two: The Framework for LG Budgets

What is a Budget?A Local Government Budget is a detailed annual plan of how a local government intends to spend its financial resources in line with its objectives, needs and priorities.

What is Budgeting?This is the process of allocating a Local Government’s scarce resources between its needs and priorities. This process goes hand in hand with the planning process.

Why Budget?• To allocate scarce resources.• Budgets are legal requirements.• To identify and disclose source of funds.


6

Module One: Session Three: The Structure of LG Budgets

Overall Structure• All Local Governments will operate a

uniform recurrent and development budget structure with a new chart of accounts that has been harmonised with that of Central Government.

Link between Revenue and Expenditure• The recurrent and development budgets

provide the link between Local Government revenue and expenditure budgets.

Output Oriented Budgeting and ROM• Sectors set output targets and priorities

for the financial year. The analysis of direct output from a sector programme will show how much outputs have contributed towards the set outcomes/objectives.

Performance Indicators and Budgets• The Budget Structure contains a

hierarchy of performance indicators; outcomes, outputs, processes and inputs.

• Under the ROM, the relationships should be translated into a clear line of responsibilities within the Local Government

• These relationships are classified in terms of :

– Economy: Fewer inputs used to carry out a specific activity.

– Efficiency: Activities required to get an output.

– Effectiveness: Extent to which an output leads towards achievement of outcomes.


7

Module One: Session Four: FDS and its Implications

What is the Fiscal Decentralisation Strategy (FDS)?• This is a strategy approved by Cabinet whose aim is to increase

Local Government autonomy and flexibility in implementing national sector policies.

• FDS brings the fiscal activities of Government in line with existing legislation such as the LGA, 1997 that requires line Ministries to implement national policies via Local Governments.

Why FDS?Current conditional grants undermine autonomous LGs and are inconsistent with the laws of Uganda.

In addition to increasing autonomy and flexibility, the FDS also seeks to streamline and transfer modalities to enhance efficiency and effectiveness of LG programmes. The overall aim is to achieve PEAP goals in a transparent and accountable framework.


8

Module One: Session Five: The LG Budgeting Process

A Successful Budgeting Process: Pre-requisites• Consultative and participatory approach to ensure

ownership of both the process and the approved budget.• A systematic prioritisation based on informed choices.• Realistic and achievable outputs, activities and

expenditure allocations..• Council should avoid monopolised and biased

prioritisation.• Sufficient time for dialogue among stakeholders.• Relevant background materials for the budget must be

availed to Councillors in time.• There should be clear linkages between plans and

budgets.• Provide possible scenarios and consequences of

different choices as a basis for political discussion and decision-making.


9

Module One: Session Five: Steps in the Budgeting Process

Stage 1: Preparing for the Budgeting Process. This includes determining the timing, the activities to be undertaken, the responsibility centre and agreed outputs.

Stage 2: Preparing the LGBFPs Stage 3: Finalisation and approval of the

annual workplan and budgetTools in Budgeting:• The District Development Plan (DDP) that

constitutes the overall integrated planning framework for the LG;

• The LG Budget Framework – articulates the 3-year Budget Strategy of the LG;

• The Annual Workplan – showing the expected annual performance and financial plan for the coming financial year.


10

Module One: Session Five: LG Budget Call

The Budget Call is prepared by the budget desk which is a subset of the Local Government Technical Planning Committee and consists of the officers responsible for planning and facilitating the process. It includes:• The timing of events in the planning and budgeting

process;• The inputs required from other stakeholders by the budget

desk;• Any other information required by stakeholders to enable

them prepare their inputs.Functions of the Budget Call:Informs departments and lower LGs; communicates with stakeholders; provides indicative sector ceilings; provides minimum sector grant, recurrent grant allocations to departments; indicates areas for flexibility, cuts and cost savings


11

Module One: Session Six: Participatory Budgeting

The Budget Conference (BC): Structured in accordance with the Budget Framework Paper, the BC takes place in mid or late January.Purposes of the Budget Conference: • Inform the full Council about the previous year’s financial

performance.• Inform the full Council of the previous year’s

achievements and shortcomings.• Present and discuss sector objectives, development

programmes, and associated budget implications.• Review the prioritised interventions.• Reach a consensus about the objectives, priorities and

budget allocations to enable the Budget Desk prepare a final draft Budget.


12

Module One: Session Seven: Budget Implementation

• Budget implementation refers to the constant comparison of actual activities and achievements against set targets and timing within the Annual Work Plan.

• Remedial action is taken on a timely basis to ensure the achievement of policy objectives.

• Pre-requisites and controls include:– Clear identification of responsibilities;– Timely, and reliable feed back to decision – makers;– Delegation of authority to sectors or departments to

avoid unnecessary delays in implementation;• Budget reporting is necessary for:

- Provision of feedback information for decision making;

- Giving accountability to citizens, political leadership and Central Government.


13

Module One: Session Seven: Budget Reporting

What do we report on?• Outputs• Activities and Progress• InputsTypes of (monthly) Report• Internal reports within the LG to

provide information to managers• External reports to Council and

Central Government

Reports submitted to the Executive, Council and Central Government by the 20th day of the month:• A descriptive progress report;• Key department output performance;

• Financial Statement;• Bank reconciliation statements

supported by copies of bank statements.

Corrective action may include:• Cautioning those responsible for

unsatisfactory performance;• Reducing planned service levels;• Postponing start of capital

investment projects;• Freezing staff variances;• Approving only such expenditures

considered urgent and necessary• Staff retrenchment.


14

Module Two: Session One: Overview of Accounting

• Financial Accounting is the process of producing financial reports about the financial activities of an entity (the LG) and presenting them to users.

• The term accountable refers to the requirement to give a report or explanation of one’s actions in order for such action to be evaluated.

• Accountability is used to denote the explanations given by those who are accountable. It is always supported by documentary evidence.

• An information system is defined as ‘a system in which defined data is collected, processed, analysed and communicated to assist those responsible for the use of resources in decision-making’. It encompasses data capture, processing, communication and storage.


15

Module Two: Session One: Overview of Accounting

Two main basis of Accounting in LGs1. Cash Accounting2. Modified Accrual Accounting The difference lies in the timing of financial transactions and how they are recognised in the books of account.• Cash Accounting: Revenue is

recognized and recorded only when it is paid. Revenues not received at the end of an accounting period are not recorded within the accounts of the period. The same applies to expenses.

• Modified Accrual Accounting: Revenue is recognised and recorded during the period in which it is earned.

Whether money has actually been received or not, it is recognised within the period to which it relates. Similarly for expenses.

• Under the Commitment Basis of Accounting (with either cash or accrual accounting) expenses are recorded as soon as commitment to incur them has been entered into.

• Bookkeeping is the systematic recording of all monetary and or money-worth transactions pertaining to a named organisation, project, or activity as and when the transactions take place.


16

Module Two: Session Two: Financial Records

• An account is a record in a ledger form summarising all the transactions that have taken place in a particular event, or activity, or asset to which the ledger account relates. Examples are personal accounts, real or property accounts and nominal accounts.

• The double entry principle in bookkeeping is that every transaction that results in a transfer of money or monies involves the giving of a benefit and the receiving of that benefit.

• A Journal is a book where transaction entries to be recorded are first prescribed for certifying and naming of the ledger accounts.

The General Journal is for recording transactions of a general nature, and specialised transactions are recorded in special Journals, e.g. Cash receipts Journal and Cash Payment Journal.

• A Cashbook is part of the principal book, the ledger. It comprises both cash and bank accounts taken out of the ledger and maintained separately for the sake of greater care and attention.


17

Module Two: Session Three: Banking and Bank Reconciliation

Preparing a bank reconciliation means determining those items which make up the difference between the balance appearing on the bank statement, and the balance shown by the council’s cashbook (bank column) as at the same date - usually end of the month.Possible causes of differences:• Cash deposited with the bank late in

the day may be posted to the statement the following working day.

• Uncleared effects (cheques drawn on other banks) may not be credited until the proceeds are realised.

• Unpaid cheques (those returned dishonoured by the drawee bank) are debited to the customer’s account well before he/she is advised.

• Errors of casting especially in the cashbook and, at times, on the bank statement.

• Bank charges especially on up-country cheques are levied before the customer is notified.

• Standing orders may be effected at times when the customer concerned has not taken note of it.

• Direct payments to the bank account by the debtor who had earlier been advised to pay.


18

Module Two: Session Four: Cashflow Management

Key Issues

• Legal obligations of cashflow management.

• Analysing the cashflow patterns.

• Formulation of cash budgets.

• Cashflow activities.

• Updating the cashflow budget.

• Commitment control systems.

• Cashflow performance statements.


19

Module Two:Session Five: Financial Statements

• Section 87: LGA, 1997 and Reg. 150: LGFAR, 1998; All G Councils and Administrative Units shall produce financial statements. These are mandatory and intended to enforce accountability to the stakeholders.

Properties of Good Financial Statements:• Level of aggregation: Too much, too scanty details avoided.• Classification: affect the comparability of LG accounts.• Structure: Items are given correct prominence.• Articulation: Reflects the way different aspects of the same

transaction are shown in the different finance statements.LG financial statements include: Revenue Account; Balance Sheet: Trial Balance; Revenue and Expenditure Summary; Detailed Statements of Revenue and Expenditure and Notes to the Account.


20

Module Two: Session Six: Interpretation of Financial Statements

Sources of Financial Information• The annual financial reports of the LG.• Interim reports of the Local Council.• Others, e.g Revenue Returns, Creditors and Debtors

Schedules, Project Progress Reports, etc.• Government Statistics, e.g national standards of

financial performance on health and education.

Methods of Analysis/Interpretation• Financial Ratio analysis (the main tool).• Trend Analysis (for the same LG over time). • Cross-sectional analysis (compare with other LGs,

national standards of financial performance).• Budget performance analysis.


21

Module Two: Session Seven: Transparency and Accountability

Why Publish?

• To encourage community involvement

• Accountability to taxpayers

• To enhance transparency

• To promote community monitoring

• As a means of enhancing revenue collection

• To inform taxpayers, and others about LG activities

• To enable comparisons

• To help Councilors judge their performance

What to Publish?

• Budgets and Work plans

• Government grants e.g LGDP grants, conditional grants, equalisation grants, etc.

• Monthly, quarterly and annual accounts

• Tender Board minutes

• Financial decisions of the Council

• Internal and external audit reports

• Reports of investigations

• Reports of LGPAC

• List of approved suppliers and contractors

How to Publish?

• Notice Boards

• Local Press

• Local Radio Programmes

• Documents to NGOs, CBOs, LCs, Community Leaders, etc

• Regular meetings with stakeholders


22

Module Two: Session Eight: Assets Management

Key Issues:

• Acquisition;

• Maintenance;

• Capacity Utilisation;

• Activity Scheduling;

• Good Assets Management;

• Debt Collection;

• Storage Costs.


23

Module Three: Session One: Overview of Auditing

• Determining compliance with legal requirements- LGA & LGFARs

The Legal Requirements• 91 LGA: District/City/Municipality/Town

Council to have an Internal Audit Department.• Chief Internal Auditor to produce quarterly audit

reports.Roles of Internal Auditors:• Post audit all financial transactions;• Routine compliance auditing (regarding the law

and financial regulations);• Audit revenue collection;• Ensure budgetary controls are followed.


24

Module Three: Session Two: Audit Reports

Characteristics of Good reports• Objectivity

– Unbiased conclusions• Clarity - the reader has little or

no accounting knowledge• Tone -sincere expressions

supported by documented facts. Be courteous

• Title - explicit but brief• Brevity – avoid excessive detail• Accuracy• Layout -list of contents:

• Purpose;• Scope;• result (findings) may include

management views;

- Opinion of Auditor;- Recommendations;- Acknowledgement of good;- performance and corrective action;- Appendices.

• Confidentiality -If, print on face• Materiality -give prominence to

significant items• Acknowledgement- of information from

other sources• Completeness• Signature- by CIA, dated• Timely- late reports are useless• May include graphs, charts, tables,

percentages as these are powerful in driving messages home


25

Module Three: Session Two: Audit Report and their Follow- up

Audit reports have to be read and their recommendations implemented. In addition, • Council and the administration should react to

decisions taken. • The CIA should follow –up to ensure reports are

acted upon. This helps to avoid repeating the same recommendations again and again.

Bodies to follow- up audit reports:1. The LG Public Accounts Committee- examines

reports on behalf of the council and may request councilors/officers to submit/explain a report and to act on it;

2. The Executive Committee receives quarterly IA reports from the LGPAC and reports to council; follows-up special investigations.


26

Module Three: Session Three: Value for Money Audits and Assessments

Value means the worth of something compared to the price paid for it.Users of a service are the best judges of its value.

VFM is important in Local Governments because success cannot be measured in terms of profits.

VALUE FOR MONEY ELEMENTS

• Outcomes or Objectives

» EFFECTIVENESS

• Outputs (physical results

» EFFICIENCY

• Activities

» ECONOMY

• Inputs (resources)


27

Module Three: Session Four: Fraud in Local Governments

Fraud is deception to make one obtain goods/services illegally, or present a false picture of the local government financial position.

• It includes embezzlement, forgery, falsification of documents, defalcation and corruption;

• Fraud is normally perpetrated by trusted council employees’;

• Two broad categories of fraud;– Manipulation of financial records/ accounts– Stealing council funds and other assets


28

Module Three: Session Four: Fraud Prevention and Detection

• Management and the Executive Committee should consider well in advance fraud prevention measures. Once cash, or any other assets are lost, it is not easy to get them back.

Preventive mechanisms include:-• Strong internal control systems- especially

segregation of duties and authorization of transactions;

• Employee rotation within the council and mandatory annual leave for all employees;

• Creation of internal audit departments;• Regular independent bank reconciliations;• Regular assets and stores inspections;• Use of carbonized receipts; Stringent

deterrent penalties; Time accountability.

Tests to detect cash frauds:• Count cash immediately and reconcile

the cashbook;• Cast and vouch the cashbook,

scrutinize the CB against bank statements;

• Obtain bank confirmation directly;• Compare payees with details in CB;• Trace employees fro payroll to

personnel records;• Confirm debtors by circularization;• Account for all vouchers;• Note any irregular cash payments;• Trace purchase invoices to CB,

ensure no double payments;• Circularize creditors.