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Faced with an accelerating rate of change in technical, political, social, and economic forces, the management of public organizations has become more difficult, requiring greater skills in planning, analysis, and control. The basic components of financial management are outlined in Exhibit 1.

Exhibit 1. Linkages Among the Financial Management Cycles


Government exists to provide services and facilities that individuals or businesses are unable or unwilling to provide for themselves.

A traditional role for financial management has been that of "keeping score"--accounting for revenue (income) and expenditures (expenses).

A financial plan projects resource requirements for specific time periods and identifies the likely sources of the funds needed.

Managers must identify the magnitude of future needs, determine their timing, negotiate to achieve the appropriate resources to meet these needs, allocate existing resources (budgeting), and manage costs.


A basic objective of cash management is to minimize opportunity costs, while maintaining a sufficient cash balance to meet the day-to-day needs of the organization.

Revenue and Expenditures Analysis

Financial management and planning is complicated by the multiplicity of local jurisdictions that makes it difficult to achieve appropriate economies of scale in the delivery of public services.

Local government expenditures for various public services have been increasing at phenomenal rates.

Property Taxes

Property taxes have proven to be relatively unresponsive in meeting increasing demands for public services and facilities.

Property taxes support many local services which are not based on user-benefit, often resulting in a regressive impact with respect to income.

Real property tax is levied on the assessed valuation of taxable land and improvements, thereupon

Personal property tax is, or has been at one time or another, applicable to the assessed value of taxable tangible personal property, e.g., furniture and equipment, automotive equipment, animals, and inventories, and taxable intangible personal property, e.g., money, stocks, bonds, and other assets representing a property right that is not tangible in character.

Local Nonproperty Taxes

Local sales taxes are levied on retail sales of tangible personal property. Sales taxes are not inelastic, but vary less widely during business fluctuations than do the yields of net income taxes.

Gross receipts taxes are imposed on businesses and occupations and are measured by the gross income of the undertaking and, in some areas, have replaced former flat-rate business licenses.

Selective sales taxes may be levy on specific commodities or services in lieu of a general retail sales tax: public utility taxes; admission and amusement taxes; motor fuel and motor vehicle license taxes; business license taxes; and local taxes on alcoholic beverages and tobacco.

Income taxes have been applied at the local level to: (l) gross income from salaries and wages of residents earned both within and outside the city; (2) gross income from salaries and wages of nonresidents earned within the city; (3) net profits of professions and businesses of residents from activities wherever conducted; and (4) net profits of professions and businesses of nonresidents and of corporations from activities conducted within the city.

Service charges are amounts received from the public for performance of specific services benefiting the person charged and from sales of commodities and services--except by city utilities--and generally bear a direct relation to the cost of providing the service.

Licenses and permits involve charges that often are less than the actual cost of the administration of a government activity.

Special assessments differ from taxes in that they are related to a specific benefit, need not be uniform throughout the jurisdiction, and generally allow no exemptions.

Financial Analysis

Baseline funds support the current, ongoing operations of the organization and are used to pay current operating expenses, provide adequate working capital, and/or maintain current plant and equipment.

Strategic funds are invested in the new programs to meet strategic objectives--to purchase new assets, such as equipment, facilities, and inventory; to increase working capital; to support direct expenses for R & D, marketing, advertising, and promotions; and for mergers, acquisitions, and market development.

Computer-assisted methods are available to: (1) analyze cash flow requirements, (2) optimize financial leverage, (3) project financial statements, (3) compare lease versus purchase options for difference depreciation schedules, (4) evaluate impacts of proposed organizational changes, and (5) assess impacts of risk and uncertainty on financial decisions.


Public organizations must develop reliable estimates of their cash flow positions in order to maximize returns on their financial assets.

A forecast is an approximation of what will likely occur in the foreseeable future, the objectives of which is to provide a basis on which to measure differences between actual events and the plan adopted to achieve certain objectives.

Cash Mobilization

Cash mobilization falls into two areas: (1) acceleration of receivables--funds that come into an organization's treasury; and (2) control of disbursements--funds paid out to vendors and others who have provided services to the organization.

Lines of credit--commitments by banks to make loans available subject to certain conditions--are important hedges against unanticipated contingencies, such as temporary financing needs and short-term cash flow shortages.

Idle funds, such as checks sitting in safes, cash registers, or desk drawers over the weekend or even overnight, can earn income for the organization if invested in short-term securities.

Investment Strategies

The ideal investment is one that yields a high return at no risk, offers promise of substantial growth, and is instantly convertible into cash if money is needed for other purposes.

A fundamental objective of financial management is to maximize yield and minimize risk.

Primary determinants in selecting a specific security are: (1) safety/risk, (2) price stability, (3) liquidity and marketability, (4) maturity, and (5) yield.


Effective management requires the application of planning and analytical techniques to accommodate the risk and uncertainty that are inevitable in future-oriented decisions.

An effective manager, whether in the public or private sector, must be aware of how opportunity, innovation, and risk are interrelated and must be willing to take risks appropriate to his or her level of responsibility.

Cost Analysis

Cost is a common denominator in the use of the various resources of any organization.

Costs can be measured in various ways, depending on the information requirements of management.

Monetary Costs and Economic Costs

Cost factors should be considered throughout the analysis: (1) in developing plans and programs; (2) in preparing budget requests; and (3) after commitments have been authorized, as programs or projects enter the implementation phase.

Research and development costs, investment costs, the cost of operating, maintaining, and replacing programs and facilities are monetary costs commonly reflected in financial accounting.

Some program costs are fixed (that is, they are the same regardless of the size or duration of the program); other costs are variable and may change significantly as the scope of the project or program is increased.

It is important to consider the marginal or incremental costs of increasing the size or scope of a program.

Direct costs represent costs incurred for a specific purpose that are uniquely associated with that purpose.

Indirect costs are associated with more than one activity or program that cannot be traced directly to any of the individual activities.

Controllable costs are defined as those costs subject to the influence of a given manager for a given time; noncontrollablecosts include all costs that do not meet this test of "significant influence" by a given manager.

Economic costs include:

Activity-Based Costing is a process-oriented method, based on the recognition that labor-intensive processes may represent the single largest contribution to the increasing cost of doing business, which provides a more representative distribution of resource use since cost allocations are based on the direct cost drivers inherent in the work activities that make up the organizational structure.

Cost-Benefit and Cost-Effectiveness Analysis

Two approaches may be taken to cost-benefit analysis: (1) to maximize benefits for an established level of costs or a predetermined budget; or (2) to determine the minimum level of cost necessary to achieve some specified level of benefits.

The basic components of Cost-Benefit Analysis:

The present value of both costs and benefits must be determined by multiplying each by an appropriate discount factor.

Cost-effectiveness analysis can be viewed as an application of the economic concept of marginal analysis.

The analytical task is to determine the most effective program, where the preferred alternative will either (1) produce the desired level of performance for the minimum cost or (2) achieve the maximum level of effectiveness possible for a given level of cost.


A budget traditionally has been used as a control mechanism to ensure fiscal integrity, accountability, and legal compliance.

The object-of-expenditure budget has two distinct advantages:

Although seldom practiced today, many characteristics of performance budgeting have survived.

Program budgeting combines planning with the basic functions of management and control.

A program is a distinct organization of resources directed toward a specific objective: (a) eliminating, containing, or preventing a problem; (b) creating, improving, or maintaining conditions affecting the organization or its clientele; or (c) supporting or controlling other identifiable programs.

Results to be accomplished within a specific time period should be specified, and program objectives must be consistent with the resources available (or anticipated).

Service level analysis seeks to identify essential service levels so that such services can be maintain and deliver--and be accounted for--in a more efficient and effective manner.

Capital Facilities Planning and Programming

The term capital facility refers to any project having a long life (usually a minimum of 15 to 20 years), involving a relatively large investment of resources of a nonrecurring nature, and yielding a fixed asset for the community or organization.

Capital facilities planning should be built upon a continuous assessment of community/ client preferences, demographic estimates, economic forecasts, and projections of development expectations.

For any given budget period, the overall cost of capital projects proposed will likely exceed the available financial resources, and therefore, proposed projects must be evaluated and rated against an explicit set of criteria

A capital improvements program (CIP) usually spans a five- to six-year period, providing sufficient lead time for the design and other preliminary work required by such projects.

Projects included in the CIP should be arrayed according to their priority ranking.

Debt Financing and Administration

A sound long-range revenue program seeks to develop an appropriate mix among these three methods of financing capital improvements:

A bond is a promissory note ensuring that the lender will receive: (1) periodic payments of interest (at some predetermined rate) and (2) at the due date, repayment of the original sum invested.

Debt administration refers to the management of funds for the construction/acquisition of fixed assets.

Accurate debt records develops confidence on the part of investors and the general public as to the management of the financial affairs of the jurisdiction or public organization.


Financial accounting is concerned primarily with the historical results of fiscal transactions and the consequent financial position of some organizational entity.

The basic financial accounting equation can be expressed as follows:

Revenue represents an inflow of money and/or other representations of value in return for selling goods or providing some type of service.

Expense represents an outflow of resources, or incurring of obligations, for goods and services required to generate revenues.

Net income is simply the excess of revenue over expense.

Whereas profit entities seek to generate net income, not-for-profit organizations strive to "break even"--that is, to balance revenues and expenses.

A balance sheet shows the financial position of an entity at a particular time--resources available (assets) and liabilities outstanding (obligations and debts).

Owner's equity--sometimes called net worth, capital, or proprietorship--represents the residual interest in the entity after various obligations have been deducted; in governmental accounting, the concept of fund equity is substituted for owner's equity.

Fund accounting provides the primary mechanisms for the control of governmental activities.

Revenues are controlled through the appropriation process, whereby public agencies are authorized to incur financial commitments based on estimated revenues to be collected.

A fund is an independent fiscal, accounting, and often legal entity to which all resources and related liabilities, obligations, reserves, and equities are assigned.

Separate financial statements are prepared for each of the major funds, and combined statements of funds with similar purposes often are distributed.

Budgetary accounting, with its emphasis on budgetary controls, represents a major distinction between financial management in government and in the private sector.

Appropriations may be subdivided according to agencies, programs, and classes of expenditures.

Allocations may be made to specific line items or object codes, and specific limitations may be imposed as to the deviations permitted within these expenditure categories.

An allotment system further subdivides allocations into time elements--for example, monthly allotments for personal services (salaries and wages).

Encumbrances record the placement of purchase orders or the letting of contracts as an obligation against the agency's allocation, preventing overspending of the funds available during any fiscal period.

Cost accounting ensures the proper recording of cost flow by assembling and recording all elements of expense incurred to attain a purpose, to carry out an activity, operation, or program, to complete a unit of work or project, or to do a specific job.

Managerial accounting involves the formulation of financial estimates of future performance and the analysis of actual performance in relation to these estimates (program evaluation and performance auditing).

Performance Evaluation

A performance evaluation involves:

An evaluation can focus on the extent to which programs are implemented according to predetermined guidelines (process) or the extent to which a program produces change in the intended direction (impact).

As Rossi has observed: "Evaluations cannot influence decision-making processes unless those undertaking them recognize the need to orient their efforts toward maximizing the policy utility of their evaluation activities." [1]

Productivity/Quality Management

While several models seek to address the issues of performance, productivity, and quality, actual programs tend to be hybrid systems--even when labeled as a productivity measurement system, a participative management process, or a quality management approach.

Perhaps the most important lesson to learn from the efforts to improve productivity and the quality of services is the fact that it is relatively easy to establish a productivity/quality improvement program. The hard part is to sustain such efforts.


The basic objectives of financial management define a planning-control continuum.

Kast and Rosenzweig have defined planning as:

Traditional planning efforts tend to be "one-shot optimizations," drawn together periodically, often under conditions of stress.

A plan is of relatively little value if it does not look far enough into the future to provide a basis on which change can be logically anticipated and rationally accommodated.

Fixed targets, static plans, and repetitive programs are of relatively little value in a dynamic society.

Strategic planning focuses on: (1) the definition of problems (2) consideration of relevant alternatives; and (3) the establishment of strategic objectives and policy guidelines.

Management planning involves: (1) programming approved strategic objectives into specific projects, programs, and activities; (2) designing and staffing organizational units to carry out approved programs; and (3) budgeting and procuring the necessary resources to implement these programs over some time period.

Operational planning is concerned with on the tactics of performance, the setting of standards for the use of specific resources to achieve strategic objectives, and the scheduling of detailed program activities that are integral parts of the strategic and management plans.

Some form of control has been exercised for as long as formal organizations have existed. Increased emphasis on accountability, efficiency, and effectiveness in the public and private sectors has made imperative the application of more effective control techniques.

Mockler suggests that control is:

Strategic controls are used to evaluate the overall performance of an organization or a significant part thereof. When an organization fails to meet broad expectations, the remedies may include the recasting of goals and objectives, a reformulation of plans and programs, changes in organizational structure, improved internal and external communications, and so forth.

Management controls involve the measurement and evaluation of program activities to determine if policies and objectives are being accomplished efficiently and effectively and to ensure that resources are used appropriately in the pursuit of strategic objectives.

Operational controls seek to assure that specific tasks or programs are carried out efficiently and in compliance with established policies by (1) considering the costs of several alternatives; (2) establishing criteria for resource allocation and scheduling; (3) providing a basis for evaluating the accuracy of estimates and the effects of change; (4) assimilating and communicating data regarding program activities, and (5) revising updating operational plans.

The relative mix of these planning and control components may be determined by management styles and the complexity of organizational structure.

Principals and techniques of management have been closely linked with the objectives of control and efficiency.

Management must adopt a planning perspective to be responsive to changing needs of an organization and its broader environment (e.g., client groups or the public).

Control without planning can do little to reduce the uncertainty that surrounds many of organizational activities.

Information Managemnent Systems

Information is incremental knowledge that reduces uncertainty in particular situations.

Although vast amounts of facts, numbers, and other data may be processed in any organization, what constitutes management information depends on the problem at hand and the particular frame of reference of the manager.

Contemporary management activities are both information-demanding and information-producing.

Organizing for Financial Planning and Control

The distribution of financial planning and management responsibilities within local government may vary considerably, depending on the size and form of govermnment, existing legal parameters in state and local laws and ordinances, past practices and traditions, and the management styles of those individuals with overall executive responsibility.

Exhibit 2. Department of Finance Organization Chart

Director of Finance
Handles debt administration Supervises all finance activities

Advises Chief Administrator on fiscal policy

Manages retirement & other city investments

Makes interim and annual financial reports
Controller Assessor Treasurer Purchasing Agent Budget Officer*
Division of Accounts Division of Assessments Treasury Division Purchasing Division Budget Division
Keeps general accounting records

Maintains or supervises cost accounts

Preaudits all purchase orders, receipts, and disbursements

Prepares payrolls

Prepares & issues all checks

Bills property & other taxes, special assess- ments, and utility & other service charges

Maintains investory of all municipal property

Makes studies of property values for assessment purposes

Prepares & maintains property maps & records

Prepares assessment roles

Assesses property for taxation

Distributes special assessments for local improvements

Collects all taxes, special assessments, utility bills & other revenues

Issues licenses & permits

Maintains custody of all city funds

Disburses city funds on proper vouchers or warrants

Purchases all materials, supplies, & equipment for city departments

Establishes standards & prepares specifications

Tests & inspects materials and supplies purchased by the city

Maintains warehouses and central stores system

Provides certain central services such as mailing, duplication, etc.

Administrers city's insurance program

Conducts studies for development & administration of budget system

Assembles budget estimates & assists Chief Administrator in preparation of budget document

Acts as agent of Chief Administrator in controlling the administration of the budget by executive allotments, etc.

Conducts studies relative to improvements in administrative organization & procedures

*The Budget Officer often is responsible directly to the Chief Administrator, being physically located in the Finance Department to minimize duplication of records. In many cities, the Finance Director also serves as the Budget Officer.

The chief executive is responsible for: (1) formulating long-range plans for the entire organization; (2) preparing and administering the annual and capital budget; (3) maintaining the financial reporting activities; and (4) developing related systems for measuring program accomplishments.

A governing body (for example, a board of directors, city council, board of commissioners): (1) determines overall fiscal policy; (2) approves the budget for the organization; (3) adopts revenue and expenditure authorization measures; and (4) holds the chief executive accountable for the effectiveness of fiscal procedures and program results.

Day-to-day financial responsibilities often are distributed among five offices: Controller, Treasurer, Assessor, Purchasing Agent, and Budget Officer. The Budget Office may operate as one of the divisions of a Department of Finance or as a separate unit directly responsible to the chief executive. This latter arrangement reflects the policy emphasis of the budget as contrasted to the line emphasis of the other divisions.


[1] Peter H. Rossi, Howard E. Freeman, and Sonia Wright, Evaluation: A Systematic Approach (Beverly Hill, Calif.: Sage Publications, 1979), p. 283

[2] Fremont E. Kast and James E. Rosenzweig, Organization and Management (New York: McGraw-Hill, 1979), pp. 416-417.

[3] Robert J. Mockler, The Management Control Process (New York: Appleton-Century-Crofts, 1972), p. 2.