Financial Management

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  • 1. Financial Management Overview Proper financial management is essential to the community transportation organization. Financial management activities involve daily tasks such as maintaining current accounting records, handling cash, and managing accounts receivable. This functional area also involves preparing budgets, developing cost allocation plans, and other activities that occur on an annual basis. Furthermore, some activities are performed only periodically such as developing service cost and pricing proposals, and preparing long-range financial forecasts. Each of the following subjects is discussed in more detail in this section of the manual. • Accounting Procedures and Practices • Cash Management • Cost Allocation • Performance Evaluation • Budgeting • Financial Reports • Funding Regulations • Audits • Business Plan Accounting Procedures and Practices All community transportation organizations must use generally accepted accounting principles (GAAP) to guide financial management and reporting for their transit systems. Community transportation managers rely on trained accounting personnel to carry out the day-to-day accounting and record-keeping functions for their organization and therefore do not need to know the details of bookkeeping procedures. Managers, however, do need to understand the special requirements funding agencies place on local governments and nonprofit organizations. These requirements are contained in the federal Office of Management and Budget (OMB) circulars. Links to the current versions of OMB Circulars 87 and 122, the ones most directly
  • 2. applicable to governmental and nonprofit transportation operations, are included in the links and resources for this section. In addition, specific funding program regulations and guidelines will also influence the accounting practices of community transportation systems, especially as related to line item accounts to be reported, treatment of in-kind and capital expenditures, and operating statistics that accompany financial accounting reports. More information on general accounting terminology and practices can be found in Chapter 10 of the MTAP workbook, Comprehensive Financial Management Guidelines for Rural and Small Urban Public Transportation Providers. www.surtc.org/cctm/sect2/downloads/Chapter10.pdf (PDF, 3187K) Cash Management Cash management is the process of assuring effective collection, deposit and disbursement of cash and other income to maximize the amount of cash and cash availability. Good cash management practices are particularly important to community transit systems since they are typically small organizations with limited working capital. Further, many transportation funding programs are of the reimbursement type, i.e., they only reimburse for expenses after the expenses are incurred. Since a delay in receiving funds of 60 to 90 days is not uncommon, good cash management is essential to insure a system’s ability to pay employees and vendors on time. Symptoms of poor cash management practices include an inability to execute planned operations such as inventory purchases, retirement of debt, acquisition of capital equipment, frequent unexpected cash shortages, frequent and unexpected over-withdrawals of bank accounts, and repeated sporadic short-term borrowings to meet obligations. Other cash management problems include excessive accounts receivables collection time and unnecessary delays in availability of deposited funds.
  • 3. There are five key elements of most effective cash management systems. These elements include: • cash flow management • excess cash investment • cash flow forecasting • daily cash reports • bank selection and credit establishment More information about each of these five key elements can be found in Chapter 7 of the MTAP workbook, Comprehensive Financial Management Guidelines for Rural and Small Urban Public Transportation Providers. www.surtc.org/cctm/sect2/downloads/Chapter7.pdf (PDF, 3479K) Cost Allocation Community transit systems, especially coordinated systems, are constantly faced with the issue of determining how much a specific service costs so that funding agencies pay their fair share of the total costs. Similarly, transit systems need cost information to set fares, evaluate new service proposals, and to develop performance indicators. Another use of cost information is to compare competitive service bids. All of these costing needs require a cost allocation model to determine the operating cost of a particular route, service, or services to a specific rider group. A two-variable cost model that allocates operating costs based on the number of vehicle miles and vehicle hours required to provide a service is the most common approach used for community transit systems. A step-by-step example of how to construct this model is contained in the PowerPoint presentation that was used as part of a recent training program and can be accessed via the following link: www.surtc.org/cctm/sect2/downloads/FinalCost.pdf (PDF, 141K) Additional discussion of cost allocation procedures and issues is included in the Kansas RTAP
  • 4. program bulletin including in the links section and in Chapter 12 of the MTAP Financial Management report. Performance Evaluation Performance evaluation is the process of quantifying the goals and objectives of a transit system to evaluate results of policies and program decisions. It is also a way to manage a system by tracking key performance statistics related to program goals. Furthermore, for publicly funded programs, it is a way to communicate to employees, the public, and funding agencies. Community transit managers will benefit by having an ongoing performance monitoring process to help them make better management decisions, and to enable them to communicate with their policy boards and the general public. Managers and their policy boards sometimes avoid keeping and reporting performance measures because they believe that it takes too many resources to collect the necessary data, and, in some cases, because they are afraid that they will not like the results. However, a simple performance-measurement scheme is neither prohibitively difficult nor expensive to implement, and if used properly it will improve the system and the credibility of the management and policy board. The key to a simple but effective performance evaluation process is to identify a few (probably fewer than 10) key indicators directly related to the goals and objectives of the transit system and then track these indicators over time for the system. Periodic peer group comparison of data with other similar systems will also help the manager and board gauge the efficiency and effectiveness of the services being provided.
  • 5. More detailed information on how to develop a performance evaluation framework can be found in a number of sources including: • Rural Transit Performance Measurement, CTAA, www.ctaa.org/ntrc/rtap/pubs/ta/perform2.asp • And a PowerPoint presentation that accompanied a recent training program www.surtc.org/cctm/sect2/downloads/PerformEval.pdf (PDF, 139K) Budgeting Budgeting is often thought to be a very dull subject that is left to the folks with green eye shades and garters. In reality, a budget is a crucial document for both setting policy and managing a public transportation program. As one expert has said, “a budget is a series of goals with price tags attached.” Put another way, a transit agency’s annual operating budget is the embodiment of and summary of its operating plan. It is also the annual element of its longer-term strategic vision and plan. Budgets authorize programs and provide financial data for evaluating performance of systems. They also are highly political weapons that permit elected and appointed officials to punish opponents and reward supporters. (adapted from Managing Public Transit Strategically, by Gordon Fielding) Funding agencies nearly always require annual (and perhaps 3-year future estimate) budgets as a condition of funding. Further, public agencies and most non-profit providers will also use budgets to set goals and control expenses. The budget process is an excellent way to communicate among funding agencies, policymakers, management, and users of the transit service. Three budgeting strategies can be used to construct budgets, incremental (the most commonly used approach), zero-based, and cross-functional analysis. Incremental budgeting is the most common approach whereby line items are adjusted from one period to the next based on proposed changes in service or estimates of changes in costs or revenue. This process begins by assuming a level of service and then estimating the level of each line item in the budget based on
  • 6. the number of units to be consumed multiplied by the cost of each unit. Revenue is forecast based on ridership estimates (usually past trends projected into the future) and fare levels. Zero-based budgeting is not common in transit and the term is somewhat of a misnomer. Budgets are not assumed to be zero before starting the process as the name implies. Rather, the budget analyst assumes budget estimates of say 90, 100, and 110 percent of current levels and then estimates the level of service and performance that can be achieved. Cross-functional analysis, while desirable because it allows evaluation of the impacts of budget changes in one area (say maintenance), on other parts of the organization, is seldom used in small transit organizations, but could be considered as a refinement of the basic incremental approach. Budgets are usually prepared three to six months before the start of the fiscal year for which they are developed. Since most budgets are incremental, the standard approach to preparing a budget is to first project out the current fiscal year based on six or nine months of actual expenditures and then prepare a budget document that shows at least the present fiscal year budget, estimated actual expenses and revenue to the end of the fiscal year and then the budget for the upcoming year. Once a budget is adopted, it becomes the basis for monitoring the financial condition of the transit system. Ideally, monthly income and expense statements should be prepared and reviewed by the policy board and management. Funding agencies will usually require quarterly, or at the very least, annual budget reports on actual results. An example budget and financial report for a small public transit agency can be reviewed via the following link to an Excel spreadsheet: www.surtc.org/cctm/sect2/downloads/CataBudget.xls (Excel, 24K)
  • 7. More information on general accounting terminology and practices can be found in Chapter 5 of the MTAP workbook, Comprehensive Financial Management Guidelines for Rural and Small Urban Public Transportation Providers. www.surtc.org/cctm/sect2/downloads/Chapter5.pdf (PDF, 8378K) Financial Reports Once a budget is adopted, it becomes the basis for monitoring and reporting the financial condition of the transit system. Ideally, monthly income and expense statements should be prepared and reviewed by the policy board and management. Funding agencies will usually require quarterly, or at the very least, annual budget reports on actual results. An example budget and financial report for a small public transit agency can be reviewed via the following link to an Excel spreadsheet: www.surtc.org/cctm/sect2/downloads/CataBudget.xls (Excel, 24K) The monthly financial report showing actual revenue and expenditures by line item should be accompanied by written or verbal explanation of variances. As shown in the example financial report, a column reporting percentage of budget is included. If, as in the example spreadsheet, the monthly report includes all 12 months included in the budget, then it would be reasonable to expect that the percentage of actual to budget should be 100 percent; however, if the report is for just the first two months of the year, only two twelfths (16.6 percent) of the revenue or expense line item should be expected. An explanation for each line item that is more than, say, 20 percent, above or below budget should be offered to help decision and policymakers understand the true financial condition of the system. In addition to the income statement that includes a variance analysis, regular reporting of key operating and performance indicators will help management, policymakers, funding agency personnel and users better understand the condition of the transit system. Time series tables and graphs that track key financial and performance indicators will assist in this communications process.
  • 8. Funding Regulations All public transportation organizations need to follow generally accepted accounting principles and institute sound business practices to manage the finances of their organization. In addition, each organization must be cognizant of the specific policies and regulations imposed by funding agencies. These program-specific policies will include rules on: • line item detail to be kept and reported (including definition of cost terms • specific operating data that must be kept and reported including operating data and information about riders (clients), their characteristics, eligibility, and trip characteristics • acceptability of in-kind matching of funds and methods to account for in-kind services • financial record retention requirements • audit requirements • cash management practices Audits An audit is a series of procedures performed on select transactions, account balances, and internal control features of an accounting system. An audit must be performed under the supervision of a Certified Public Accountant. The end result of an audit will be an opinion by the audit on the fairness of the financial statements. The audit does not certify that the statements are correct or accurate. Instead, the opinion states that the financial statements present fairly, in all material respects, the financial position of the organization. Further, management is required to provide much of the information used in the audit so that the auditor includes this qualification in the final opinion.
  • 9. Not all transportation programs require formal audits, though most programs that receive state and federal funds do require a periodic audit either by the funding agency or the transportation organization. Banks may also require audits as a condition of extending credit. Each funding agency that provides support to a transportation organization may require an audit, though most are willing to accept an audit performed in accordance with OMB Circular A-133 that describes procedures for implementing the Single Audit Act of 1994 as amended www.whitehouse.gov/omb/circulars/a133/a133.html More detail on audits, how to select an auditor, how to prepare for an audit, and how to use the results of an audit are contained in Chapter 9 of the MTAP workbook, Comprehensive Financial Management Guidelines for Rural and Small Urban Public Transportation Providers. www.surtc.org/cctm/sect2/downloads/Chapter9.pdf (PDF, 3442K) Business Plan Development of a short range transit plan is an essential part of the transit development activity described in the first section of this guide. The typical short range plan includes an analysis of existing trends and conditions and recommendations for future service and management initiatives. In the past few years the typical short range transit plan has taken on a new focus on guiding operations and is most commonly called a business plan. The change in name reflects the new emphasis on the financial and organizational resources required to implement the plan. A typical outline of a business plan is as follows: 1. Introduction and scope a. The nature and purpose of the business plan b. Brief history of the transit system c. Financial and operating trends over past 3-4 years d. Overview of rest of plan 2. Description of system’s organization and governance a. Legal structure and purpose b. Make up of board and suggested changes c. The role of the agency in the region
  • 10. d. The organization chart for the system from board to drivers e. Evaluation of current governance and organizational structure 3. Market for public transportation in the system’s service area a. Demographic info on counties and cities within service area including population, age distribution, disabled, low income, auto ownership and other factors along with past and future trend projections b. Estimate of current ridership by area c. Per capita projections of possible ridership levels as service is developed 4. Description of existing services and facilities a. Description of current services b. Description of fuctional areas of operation: 1. Call taking/dispatching 2. Maintenance 3. Personnel 4. Management information systems (client records, ridership and operating data) 5. Accounting/finance c. Description of vehicles 1. Vehicle roster 2. General assessment of condition d. Description of maintenance/administrative facilities e. Performance evaluation using a few key measures 1. Time series for system 2. Peer group comparison with other systems 5. System mission, vision, goals and specific objectives to guide next 5 years a. A vision for the system and its relationship to regional goals b. Transit-specific objectives the results of which can be measured c. Specific performance measures and future goals 6. Discussion of future expansion/service options a. Description of options (e.g. more rural commuter routes, more rural services, etc) b. Quantification of the miles, hours required to implement each possible improvement, a ridership forecast, then estimate capital and operating costs for each
  • 11. c. Some ranking of the relative priority for each improvement and timing of implementation 7. Proposed short-term performance objectives for each of the next 3-5 years 8. Capital improvement plan (capital budget) for 5 years (2006 - 2010) a. Vehicle replacement needs and timing b. Vehicles for expansion c. Facilities expansion d. Computers, information systems, maintenance equipment, other small capital items 9. Operating budget and plan for next 5 years a. Operating revenue, expense, and deficit projections for 5 years for base service and proposed expansions b. Analysis of income options for state, federal and local match c. Proposed changes in staffing levels or other management changes needed to support future services. 10. Recommendation for on-going performance monitoring and future updating of plan a. Suggested performance measures b. Suggested information systems to track performance c. Possible triggers to suggest plan update While the business plan is primarily a planning activity, the later sections of the plan, specifically sections 5-9, relate directly to financial management activities of budgeting and performance evaluation. The goals, objectives and performance measures developed as part of the business plan will provide the basis for the ongoing performance reporting that should be a part of a community transportation operation. Further, the capital and operating budget projections can guide annual budget preparation. An example of a business plan from a Canadian system, Central Fraser Valley Transit, can be accessed at the following website: www.busonline.ca/regions/cfv/business_plan.cfm
  • 12. Resources & Links The following Internet website/resource links were used in preparing this section and serve as resources to expand on the information and concepts presented: McGlynn, Janet, “Non-Traditional Funds for Community Transportation”, Community Transportation, January/February 1999, (Accessed March, 2005) www.ctaa.org/ct/janfeb99/funding.asp This article identifies non-transportation funding sources that can be accessed to support community transportation and gives examples of how systems have obtained and used these funds. OMB Circular A-87 “Cost Principles for State, Local, and Indian Tribal Governments, www.whitehouse.gov/omb/circulars/a087/a87_2004.pdf and OMB Circular A-122 “Cost Principles for Non-Profit Organizations” www.whitehouse.gov/omb/circulars/a122/a122_2004.pdf These Office of Management and Budget (OMB) documents describe the policies, procedures, and requirements that apply to the cost accounting for governmental and nonprofit transportation programs. Rural Transit Performance Measurement, CTAA, www.ctaa.org/ntrc/rtap/pubs/ta/perform2.asp A National RTAP technical assistance document that provides information on setting up a performance evaluation scheme for rural and community transportation programs.
  • 13. Weaver, Patricia, “The Art of Cost Allocation”, Kansas RTAP Fact Sheet #5, October 2001, (Accessed March, 2005) www.kutc.ku.edu/~kutc/pdffiles/FS5CostAllo.pdf This article provides a short summary of cost allocation procedures as applied to the Kansas Medicaid transportation program, but it is generally applicable in situations where operators need to set a fee for service (fare). Transit Business Plan for the Fraser Valley, (Accessed March, 2005) www.busonline.ca/regions/cfv/business_plan.cfm This link illustrates a complete business plan for a transit operation in British Columbia. It is probably more complex and extensive than what might be required for a small community transportation operation, but the structure of the report illustrates the key components of a business plan. Financial Management for Transit: A Handbook Final Report, Institute for Urban Transportation Indiana University, Prepared for University Research and Training Program Urban Mass Transportation Administration, 1985, (Accessed March, 2005) http://ntl.bts.gov/DOCS/fmt.html This handbook explains the fundamentals of financial management issues for the transit industry. Topics range from financial planning techniques for transit, accounting fundamentals, budgeting, cash control, inventory management and risk management. (202 pages)
  • 14. Additional Resources Comprehensive Financial Management Guidelines for Rural and Small Urban Public Transportation Systems, American Association of State Highway and Transportation Officials, Multi-State Technical Assistance Program, September 21, 1992 Miller, James H., Shared-Ride Paratransit Performance Evaluation Guide, US Department of Transportation, September 1989 (Reprinted by the UMTA Technical Assistance Program (DOT- T-90-10)