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.