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Financial Management Manual                       For  Madhya Pradesh Urban Local Bodies          Madhya PradeshUrban Admi...
Manual on Good Practices of Financial Management for ULBs of Madhya PradeshPrefaceAs the urban population is growing at a ...
Manual on Good Practices of Financial Management for ULBs of Madhya PradeshContents1     INTRODUCTION .......................
Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh4.1       Concepts ...............................
Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh7.2        Good practices of debt management .....
Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh11.3       Policies ..............................
Manual on Good Practices of Financial Management for ULBs of Madhya PradeshList of TablesTable 1: Structure of the Financi...
Manual on Good Practices of Financial Management for ULBs of Madhya PradeshTable 23 : Format for calculating budget requir...
Manual on Good Practices of Financial Management for ULBs of Madhya PradeshLIST OF FIGURESFigure 1: Financial management p...
Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh1 INTRODUCTION1.1 Purpose of this manualThe pri...
Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh•   Performance enablers - Apart from this ther...
Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh2 INTRODUCTION TO FINANCIAL MANAGEMENTFinance h...
Manual on Good Practices of Financial Management for ULBs of Madhya Pradeshsewerage and urban transportation systems. In a...
Manual on Good Practices of Financial Management for ULBs of Madhya PradeshFigure 1: Financial management process         ...
Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh3 BUDGETING PRACTICESThis section of the manual...
Manual on Good Practices of Financial Management for ULBs of Madhya PradeshParticipatory Budgeting: It refers to the adopt...
Manual on Good Practices of Financial Management for ULBs of Madhya Pradeshbudget should meet the requirements of these va...
Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh                                               ...
Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh Advantages                                    ...
Manual on Good Practices of Financial Management for ULBs of Madhya Pradeshperformance levels are what matter — not the co...
Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh   a. Number of structures saved from fire;   b...
Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh3.1.4.3 Zero-based budget (ZBB)Peter A. Pyhrr a...
Manual on Good Practices of Financial Management for ULBs of Madhya PradeshTable 6: Advantages and disadvantages of zero-b...
Manual on Good Practices of Financial Management for ULBs of Madhya PradeshPerformance budgets relate the input of resourc...
Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh Performance Measures                          ...
Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh Advantages                                    ...
Manual on Good Practices of Financial Management for ULBs of Madhya PradeshGender budgeting is not the only tool that can ...
Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh    •   Construction and running Health care ce...
Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh3. ULB should analyse the variances between pre...
Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh1. Budget should be contingent on resource mobi...
Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh3.2.5 Monitoring and evaluating the budgetIf th...
Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh    budgeting and outcome budgeting for prepari...
Manual on Good Practices of Financial Management for ULBs of Madhya Pradeshrepresenting function description and the third...
Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh Name of the form          Description BUD 7   ...
Manual on Good Practices of Financial Management for ULBs of Madhya Pradeshprocess. These documents must be circulated wit...
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
Financial Management Manual for ULBs of M.P.- English
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Financial Management Manual for ULBs of M.P.- English

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Financial Management Manual for Urban Local Bodies of Madhya Pradesh - English

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Transcript of "Financial Management Manual for ULBs of M.P.- English"

  1. 1. Financial Management Manual For Madhya Pradesh Urban Local Bodies Madhya PradeshUrban Administration and Development "Project Utthan" Madhya Pradesh Urban Services for the Poor
  2. 2. Manual on Good Practices of Financial Management for ULBs of Madhya PradeshPrefaceAs the urban population is growing at a fast pace and larger share of GDP comes from urban areas,Urban Governance and Development has become the focus of increased attention in the last decade bycentral and state governments and other stakeholders across India. Consequently, Urban Local Bodies,being at the fulcrum of urban management, have received more attention in terms of legal powers andautonomy, financial resources, technical assistance and capacity building inputs to assist urban reformprocesses under various government schemes including JNNURM.Madhya Pradesh Government is at the forefront of the process of improving urban governance andachieving urban development by pursuing a wide variety of innovative urban reforms facilitated by theMadhya Pradesh Urban Services for the Poor (MPUSP) programme. The MPUSP programme, which isan outcome of a partnership between the GoMP and the Department for International Development(DFID) of the United Kingdom, is a major initiative of the GoMP towards implementing municipal reformsand strengthening of Urban Local Bodies (ULBs) in MP.A core area of focus for MPUSP funded reforms has been to improve the financial management of ULBswhich often faced difficulties in implementing prudent and optimal financial management practices in theareas such as: budgeting, costing, expenditure management, receivables management, cashmanagement and other areas of financial management.This Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh was conceived bythe Urban Administration and Development Department (UADD) , Government of Madhya Pradesh(GoMP) as a direct response to these issues. The Manual is probably the first initiative of its kind in Indiaand will not only serve the ULBs of Madhya Pradesh but it will also be useful to all ULBs across thecountry.The manual beside defining financial management and explaining how it can be applied to ULBs, hascovered theoretical and practical aspects of financial management tools/techniques such as: financialanalysis, operating budget, capital budget, cash, receivables, payables and debt management, assetsmanagement, financial information system, internal control etc.It is expected that the ULBs of the MP will adopt and implement these good financial managementpractices which will improve their financial performance and overall financial status. It is envisaged thatthe manual will may be revised in the light of emerging learning and lessons to ensure that it is a usefulliving document. Finally it is hoped that it will pave way to make ULBs financially efficient andsustainable. Commissioner Urban Administration and DevelopmentBhopalDt. 08/11/2011 -2-
  3. 3. Manual on Good Practices of Financial Management for ULBs of Madhya PradeshContents1 INTRODUCTION ................................................................................................................................. 101.1 Purpose of this manual .................................................................................................................. 101.2 Target group of users ..................................................................................................................... 101.3 How to use this manual .................................................................................................................. 101.4 Structure of this manual ................................................................................................................. 102 INTRODUCTION TO FINANCIAL MANAGEMENT ........................................................................... 122.1 Defining financial management...................................................................................................... 122.2 Need for financial management in ULBs ....................................................................................... 122.3 Financial management process ..................................................................................................... 133 BUDGETING PRACTICES ................................................................................................................. 153.1 Concepts ........................................................................................................................................ 153.2 Good practices of budgeting .......................................................................................................... 283.3 Policies recommended for adoption............................................................................................... 313.4 Procedures ..................................................................................................................................... 343.5 Case study: Budgetary reforms at Vadodara Municipal Corporation ............................................ 464 CAPITAL IMPROVEMENT PROGRAM AND CAPITAL BUDGETING ............................................. 52 -3-
  4. 4. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh4.1 Concepts ........................................................................................................................................ 524.2 Good practices of CIP .................................................................................................................... 534.3 Policies recommended for adoption .............................................................................................. 534.4 Procedures ..................................................................................................................................... 544.5 Case study: CIP of Pune Municipal Corporation (PMC) ................................................................ 685 CASH MANAGEMENT........................................................................................................................ 745.1 Concepts ........................................................................................................................................ 745.2 Good practices of cash management ............................................................................................ 755.3 Policies ........................................................................................................................................... 765.4 Procedures ..................................................................................................................................... 786 RECEIVABLE AND PAYABLE MANAGEMENT ............................................................................... 896.1 Concepts ........................................................................................................................................ 896.2 Good practices of receivables and payable management ............................................................. 896.3 Policies ........................................................................................................................................... 906.4 Procedures ..................................................................................................................................... 917 DEBT MANAGEMENT ........................................................................................................................ 977.1 Concepts ........................................................................................................................................ 97 -4-
  5. 5. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh7.2 Good practices of debt management ............................................................................................. 987.3 Policies ........................................................................................................................................... 987.4 Procedures ................................................................................................................................... 1007.5 Case Study: Debt management strategy of Vadodara Municiapal Corporation .......................... 1068 ASSET MANAGEMENT .................................................................................................................... 1078.1 Concepts ...................................................................................................................................... 1078.2 Good practices of asset management ......................................................................................... 1098.3 Policies ......................................................................................................................................... 1098.4 Procedures ................................................................................................................................... 1109 EXPENDITURE MANAGEMENT ...................................................................................................... 11510 COSTING PRACTICES ..................................................................................................................... 11810.1 Concepts ...................................................................................................................................... 11810.2 Policies ......................................................................................................................................... 12210.3 Procedures ................................................................................................................................... 12311 INTERNAL CONTROLS.................................................................................................................... 13211.1 Concepts ...................................................................................................................................... 13211.2 Good practices of internal controls .............................................................................................. 135 -5-
  6. 6. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh11.3 Policies ......................................................................................................................................... 13511.4 Procedures ................................................................................................................................... 13612 FINANCIAL MANAGEMENT INFORMATION SYSTEMS ............................................................... 14512.1 Concepts ...................................................................................................................................... 14512.2 Policies ......................................................................................................................................... 14712.3 Procedures ................................................................................................................................... 14813 FINANCIAL ANALYSIS .................................................................................................................... 15113.1 Concepts ...................................................................................................................................... 15113.2 Good practices of financial analysis ............................................................................................. 16613.3 Policies ......................................................................................................................................... 16613.4 Procedures ................................................................................................................................... 16714 PROCUREMENT ............................................................................................................................... 170ANNEXURE 1: FORMATS FOR BUDGETING........................................................................................ 171ANNEXURE 2: FORMAT FOR ASSET MANAGEMENT ........................................................................ 179ANNEXURE 3: FORMATS FOR FMIS ..................................................................................................... 180ANNEXURE 4: TOR CHECK LIST .......................................................................................................... 190 -6-
  7. 7. Manual on Good Practices of Financial Management for ULBs of Madhya PradeshList of TablesTable 1: Structure of the Financial Management Manual ........................................................................... 11Table 2: Example of line-item budget for a ULB ......................................................................................... 17Table 3: Advantages and disadvantages of line-item budgeting ................................................................ 18Table 4: Advantages and disadvantages of programme budgeting ........................................................... 21Table 5: Example of zero-base budgeting .................................................................................................. 22Table 6: Advantages and disadvantages of zero-base budgeting .............................................................. 23Table 7: Sample performance measures .................................................................................................... 24Table 8: Advantages and disadvantages of performance budgeting ......................................................... 25Table 9: Forms prescribed in MPMAM for budget layout ........................................................................... 33Table 10: Sample format for listing and linking proposed capital investment works to budget allocations 36Table 11: Format of CIP prepared by PMC ................................................................................................ 72Table 12: Sources of information for Cash Flow forecast ........................................................................... 81Table 13: Format for gathering data for trend analysis ............................................................................... 84Table 14: Illustration on judicious use of investments ................................................................................ 87Table 15: Decision matrix for choosing among long-term financing alternatives ..................................... 105Table 16: Illustration on cost savings through outsourcing ....................................................................... 121Table 17: Illustration showing apportionment of indirect expenses .......................................................... 126Table 18: Physical parameters for costing ................................................................................................ 126Table 19: A typical cost sheet of Water Works Department ..................................................................... 127Table 20 : Format for calculating budget requirements for electricity charges for streetlight service....... 171Table 21: Format for calculating budget requirement for O&M of streetlight service ............................... 172Table 22: Format for calculating budget requirement for fuel expenses for vehicles & other machinery . 174 -7-
  8. 8. Manual on Good Practices of Financial Management for ULBs of Madhya PradeshTable 23 : Format for calculating budget requirement for purchase of tyres for vehicles ......................... 175Table 24: BIDS for listing spill over works and for estimating their budget liability ................................... 178 -8-
  9. 9. Manual on Good Practices of Financial Management for ULBs of Madhya PradeshLIST OF FIGURESFigure 1: Financial management process ................................................................................................... 14Figure 2: Sample budget calendar .............................................................................................................. 35Figure 3: Decision making process for O& M expenditure ......................................................................... 40Figure 4: Identification of capital works and formulation of capital budget ................................................. 44Figure 5: Summary of budget preparation process ................................................................................... 45Figure 6: Capital investment decision making process ............................................................................... 54Figure 7: Procedure followed by PMC for preparing CIP ............................................................................ 68Figure 8: Linkages of cash budget .............................................................................................................. 86Figure 9: Relationship between AMP and Budget .................................................................................... 114Table 10: Function and functionary codes for Cost Object - Water Supply .............................................. 124Figure 11: Internal control system ............................................................................................................. 133Figure 12: Format for collecting information on ULB assets ..................................................................... 179Figure 13: Format for monthly financial position ....................................................................................... 180Figure 14: Format for statement showing actual receipts against budgeted receipts .............................. 181Figure 15: Format for statement showing actual expenditure against budgeted expenditure .................. 182Figure 16: Format for statement showing investments in bank fixed deposits ......................................... 183Figure 17: Format for statement on returned/ dishonoured cheques ....................................................... 184Figure 18: Format for summarised status report on returned/ dishonoured cheques .............................. 185Figure 19: Format for unadjusted advances status report ........................................................................ 186Figure 20: Format for outstanding loans/ liability statement ..................................................................... 187Figure 21: Format for projected monthly cash flow statement .................................................................. 188Figure 22: Format for status report on examination of accounts .............................................................. 189 -9-
  10. 10. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh1 INTRODUCTION1.1 Purpose of this manualThe primary purpose of this manual is to explain the concepts and define the policies and proceduresabout good practices of financial management for ULBs of M.P. A secondary purpose of the manual is todevelop the capacity of Urban Administration Development Department (UADD) and the ULBs to adoptand implement these policies and procedures.1.2 Target group of usersThis manual is intended for all municipal employees involved in financial management of a ULB.Particularly, these may include:1. Senior decision makers including senior administrative officers such as the Commissioners/ Chief Officers, department heads, elected representatives, as well as the Mayor-in-Council (MIC).2. Accounts officers, municipal engineers and administrative officers who are the key people involved in many of the processes related to financial management of a ULB.3. UADD of GoMP who would be involved primarily in monitoring, supervision and facilitating financial management process in ULBs.1.3 How to use this manualThis manual does not give detailed instructions on the course of action to be taken in every situationarising due to financial management. Instead, it outlines the basic policies, principles, procedures andgood practices observed in Indian or non-indian ULBs based on which decisions should be made.The manual is intended to act as a guide which will facilitate the municipal employees to successfullyunderstand and implement the best practices on financial management.1.4 Structure of this manualThe manual is structured into two parts.• Managing financial framework – Budget (formulation, implementation & evaluation) is the most important tool for managing financial framework and all other systems are aligned to it. It is most effectively managed by having a system of short-term and long-term financial management. Short- term financial management mainly includes cash management, receivables and payables management and short-term debt management, whereas, long-term financial management consists of formation of capital investment plan and long-term debt management. -10-
  11. 11. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh• Performance enablers - Apart from this there are certain systems that act as performance enablers for managing the finance framework. These include Asset Management, Costing, Procurement, Internal Control and Financial Management Information Systems.The chapters of this manual have been framed keeping in the mind the above mentioned structure. Thefollowing table provides the sequence of chapters in the manual.Table 1: Structure of the Financial Management Manual Number Name Category Chapter 3 Budgeting Chapter 4 Capital Improvement Plan/Capital Budgeting Chapter 5 Cash Management Managing Financial Framework Chapter 6 Receivables and Payables Management Chapter 7 Debt Management Chapter 8 Asset Management Chapter 9 Expenditure Management Chapter 10 Costing Chapter 11 Internal Control Performance Enablers Chapter 12 Financial Management Information Systems Chapter 13 Financial Analysis Chapter 14 ProcurementApart from the above, a set of Annexures are appended to this manual, which provide formats for some ofthe areas of financial management. These include:• Annexure 1: Formats for budgeting• Annexure 2: Formats for asset management• Annexure 3: Formats for FMIS -11-
  12. 12. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh2 INTRODUCTION TO FINANCIAL MANAGEMENTFinance has a unique and important place in personal, public, institutional and social walks of life. In orderto be successful in these walks of life, all of us need to augment and utilise financial resources efficientlyand in a sustainable way to ensure future flow of resources. Therefore, all decision-makers need to knowhow to manage finances of their institutions/ organisations.Financial management attempts at optimising output from the given input of funds. In a country like Indiawhere resources are scarce and there is enormous demand for funds, proper financial management is ofutmost importance.2.1 Defining financial managementFinancial management in simple terms means the entire gamut of managerial efforts devoted to themanagement of finance (both its sources and uses) of an enterprise (organisation/ institution/ public bodyetc.). It is the management of the finances of a business/ organisation in order to achieve its financialobjectives. Taking a business as the most common structure, the key objectives of financial managementwould be to:• Create wealth for the business,• Generate cash, and• Provide a return on investment keeping in mind the risks that the business is taking and the resources invested.It can be observed that traditionally, the basic objectives of Financial Management were the maintenanceof liquid assets and maximisation of the profitability of the organisation. But now it has undergone achange. Today, the ultimate objective of financial management is maximisation of wealth.The objective of wealth maximisation holds good for public bodies’ financial management also. Publicbodies or any governmental form of organisation exists not for ‘profit maximisation’ but for ’wealthmaximisation. In order to improve the overall standard of living of people or society, the governmentneeds to maximise wealth and then to ensure equal distribution of the wealth generated. Thus, publicbodies are expected to attain the objective of wealth maximisation through judicious allocation andutilisation of resources. In order to achieve this objective, public bodies must run their finance function asper modern financial management methods, as the discipline of financial management strives for ’wealthmaximisation.2.2 Need for financial management in ULBsIn the past two decades, India has witnessed a phase of rapid urbanization. This has resulted in mosturban settlements facing shortfalls in provision of urban services such as, housing, water supply, -12-
  13. 13. Manual on Good Practices of Financial Management for ULBs of Madhya Pradeshsewerage and urban transportation systems. In addition to the growth in demand for urban services, poorfunctioning of municipal bodies has made the problem even more acute.In order to meet these and other growing challenges, the Government of India (GoI) introduced specialpurpose schemes such as the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) that intendto enable municipal bodies to meet these challenges by providing a fresh impetus to urban reforms. Asthe infusion of funds from these schemes is expected to increase municipal budgets, it is important thatULBs have sound financial management systems and procedures in place to ensure that these publicfunds are used efficiently and transparently.Hence ULBs require sound financial management systems to ensure that funds are effectively managedand efficiently utilised.2.3 Financial management processThe whole financial management process can be viewed from three angles:• Creating financial framework• Managing financial framework• Performance enablersThe creation of financial framework basically deals with three aspects namely financial policies, financialanalysis and financial planning. These three aspects form the core of financial framework for any ULB.After the creation of financial framework, the second most important aspect is managing this framework.Budget (formulation, implementation and evaluation) is the most important tool for managing financialframework and all other systems are aligned to it. Short-term financial management mainly includes cashmanagement, receivables and payables management and short term debt management. Long-termfinancial management consists of formation of capital investment plan and long-term debt management.Apart from this there are certain systems which act as performance enablers for managing the financeframework. These include Asset Management, Costing, Procurement, Internal Control and FinancialManagement Information Systems.The following figure depicts the financial management process. -13-
  14. 14. Manual on Good Practices of Financial Management for ULBs of Madhya PradeshFigure 1: Financial management process Enabling Performance Creating Financial Managing Financial Framework Framework Short term financial management BUDGETING Financial Management Financial Management Information System Financial Policies •Cash Management Internal Control •Receivables and payables management Operating Budget Financial Analysis •Short term debt management Long term financial + management Financial Planning •Capital Improvement Plan Capital Budget •Long term debt management Asset Management Costing Procurement -14-
  15. 15. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh3 BUDGETING PRACTICESThis section of the manual discusses various concepts, principles, techniques associated with budgeting,and provides the policies related to budgeting, the budget preparation process followed by the budgetreview mechanism.3.1 ConceptsBudgeting is a statutory activity for all urban local bodies (ULBs) in India. It acts as a powerful tool toallocate limited resources among competing priorities. It is a local government’s plan to allocate itsfinancial resources for a specified period including all planned revenues and expenses.A ULB budget typically includes:• Planned activities, projects, and services;• Estimates of the resources or revenues available; and• Estimates of public expenditure necessary to finance planned activities.3.1.1 DefinitionsOperating/ revenue budget: It is a plan for the on-going day-to-day operational expenditures of the ULBand the proposed means of financing for a specific period (usually one year).Capital budget: It is a plan of proposed capital improvements and the means of financing them, usuallybased on the first year of a multi-year capital improvement programme and typically enacted as partof the complete annual budget, which includes both operating and capital outlays.Extraordinary budget: It is a part of the capital budget, but contains receipts and payments which do notamount to income and expenditure for the ULBs. For example, deposit receipts and payments, advancesgiven and adjusted, etc.Poor budget: It is a budget which is sensitive to the needs of poor people or which tries to correct its biasin resource allocation for the alleviation of poverty by stipulating a certain percentage of resources for thepoor. For example, in normal practice, a budget fails to show sensitivity towards the needs of the urbanpoor in resource allocation and special needs of the poor get neglected.Gender-based budget: It is a budget which is sensitive towards gender or which tries to correct genderbias in resource allocation by stipulating a certain percentage of resources for one gender. For example,in normal practice, a budget fails to show sensitivity towards the needs of women in resource allocationand special needs of women get neglected. -15-
  16. 16. Manual on Good Practices of Financial Management for ULBs of Madhya PradeshParticipatory Budgeting: It refers to the adoption of alternative practices for local budget managementaimed at encouraging people’s participation in the allocation of municipal public resources. Suchpractices are believed to promote greater efficiency in the allocation of resources by forcing planning andtransparency into decisions on expenditure. Increasingly, municipal bodies all over the world haveintroduced such practices and there is increasing global recognition for the significance of such anapproach.3.1.2 Objectives of a budgetA budget is prepared with the objectives of controlling, managing and planning the financial resources ofan organisation. Each of these objectives are discussed in detail below.1. ControlAs a control document, a budget defines the legal and policy constraints within which the managers of aULB can operate. These constraints include determing:• Permissible expenditure by each ULB;• Purposes for which expenditure can legally be made (such as salaries, maintenance, and loan charges); and• Collection of tax resources and non-tax resources (i.e., revenue functions).Control is a significant objective governing the preparation of budgets in ULBs, although its achievementis drastically impaired by a number of systemic weaknesses. To achieve the objectives of control, thebudget needs to be supported by effective accounting and auditing systems.2. ManagementAs a management document, a budget sets targets that ensure the achievement of an efficient andeffective delivery of urban services. To enable the budget to be a fully effective management tool, theremust be a clear relationship between budgetary inputs (such as personnel and equipment) and expectedoutputs, defined in ULB performance measures (such as the number of square metres of road to berepaired, etc.). Such a relationship enables departmental heads to use the budget as a device to managetheir staff.3. PlanningThe preparation of a budget provides a major planning opportunity for a ULB, which wants to address itsgrowth and development needs through judicious use of its limited financial and personnel resources.Each year, the budget defines the anticipated revenues of a ULB and outlines the blueprint for itsexpenditure.3.1.3 Constituents of an ideal budgetA ULBs budget should cater to the interests of various users such as politicians, administrators, ULBmanagers, employees, representative groups such as NGOs/ CBOs, analysts and the public at large. A -16-
  17. 17. Manual on Good Practices of Financial Management for ULBs of Madhya Pradeshbudget should meet the requirements of these varied user groups and yet should not become unyielding,bulky or ambiguous.An ideal budget document should be:• A policy document: As an operating plan for a local government, the budget document should propose, identify and clarify policies. These are generally adopted by the governing body during the year and are referred to or summarised in the budget message.• A financial plan: The budget process is the primary mechanism for promoting solvency, efficiency and rational collective choices regarding the distribution and use of the assets and resources of a ULB.• An operations guide: The budget provides a framework for operations of a ULB. It must go beyond purely financial dimensions to deal with the functions of different parts of the organisation and the number and levels of employees.• A communication device: A budget is a focal point for residents, taxpayers and constituents, and, therefore, should be made plain and simple. Therefore, sufficient efforts should be made to use simplistic narratives, charts or graphs to convey the meaning and impact of the budget to people who are not familiar with government finances.• Scrupulous: A budget should be able to stand up to scrutiny by competing interest groups.• Holistic: A budget should be holistic in approach and should not neglect some areas or over or under-emphasise others.3.1.4 Budgeting techniquesA number of budgeting techniques have evolved overtime in order to achieve diverse objectives. Thesetechniques have met varying degrees of success in different countries. Whereas, some of thesebudgeting techniques are more advanced, each budgeting technique offers distinct advantages and has,at the same time, certain limitations. It is for an organisation to select one or more budgeting techniquesthat are appropriate to its activities and budget classification.3.1.4.1 Line-item budgetingThis method of budgeting is also referred to as incremental budgeting. Under this approach, budgets arejustified on the basis of proposed expenditures by line-item, or object class. The base budget is usuallynot justified, but only the additions (or increments) are questioned. It is noteworthy that ULBs in MPcurrently develop their budgets on a line-item basis.A simplified example of line-item budget is presented in the table below.Table 2: Example of line-item budget for a ULB -17-
  18. 18. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh Budget Request Line-item Base Budget (INR) Increments (INR) (INR) Salaries 50,000 + 6,000 56,000 Travel 25,000 + 14,000 39,000 Equipment 40,000 - 10,000 30,000 TOTAL 1,15,000 + 10,000 1,25,000The base budget is equivalent to either:• The current year’s budget, including adjustments; or• The current year’s actual expenditures, usually estimated to the end of the fiscal year; or• The last year’s actual expenditures.The base budget is different from the current service budget, which is the anticipated cost of continuing aprogramme at the present levels, without policy changes or enactment of new laws. Mathematically, thecurrent services budget (CSB) can be expressed as follows:CSB = Base Budget + Unavoidable Cost IncreasesIncreases in unavoidable or fixed costs such as employee costs or dearness allowances may mean that itwill cost more to deliver the same level of services currently being provided. It is important for the budgetoffice to provide directions to the line departments to enable them to estimate fixed cost increases.No matter which budget development approach a government uses, its budget is usually translated into aline-item budget for the purpose of budget execution and control, with allocations to object classes.Advantages and disadvantagesThe primary advantage of the line-item approach is that it is easy. Whereas, the primary disadvantage ofusing the line-item approach is that it does not provide essential information.Table 3: Advantages and disadvantages of line-item budgeting Advantages Disadvantages 1. It is an efficient way of enhancing the 1. It is only concerned with inputs and not allocation and control of funds since it mirrors outputs. Thus, it is difficult for decision-makers the accounting system. to find out the results of their allocation decisions and what the public gets for its money in terms of services and outputs. 2. There is no need for extensive Management 2. It is difficult to develop a current services -18-
  19. 19. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh Advantages Disadvantages Information System (MIS) since information budget, as the present level of services is not pertaining to service levels, unit costs and known. Decision-makers do not know what programme output is not required to develop they get for their additional resources the budget. allocated to a programme: same level of service; higher level of service; or, less service. 3. Incremental budgeting is consistent with the 3. It does not provide any information to fact that many programmes are stable and do decision-makers about alternative ways of not change dramatically from year to year. accomplishing an objective and reveals little about a ULB’s priorities. 4. It is developed by using the estimates of direct costs only and, therefore, indirect costs are completely ignored. 5. It is characterised by budget control techniques, which do not provide sufficient flexibility to programme managers to achieve results. 6. Line-item budgeting is usually accompanied by ‘across-the-board’ approach to allocation decisions. Budget additions or deductions are distributed among all departments on a percentage basis, thus, failing to take into account the changing needs and priorities of the departments.3.1.4.2 Programme budgetingProgramme budgeting focuses on the decision-making process; particularly on problems of data andanalysis. Its first effort is to introduce a rational ordering of inputs and outputs, in which the initialemphasis is laid on the identifiable outputs, that is, major objectives of the governmental process. It thenattempts to order the inputs, that is, governmental activities created by manpower, material, real estate,etc., so that comparisons among wide ranges of alternatives are feasible and meaningful.Programme budgeting attempts to measure programme effectiveness and programme results in aquantifiable manner. It starts with clear, quantifiable and measurable programme objectives for allactivities. Programme budgeting can be defined at two levels:1. The way in which the budget is organised (by programme); and2. The way it is justified (on the basis of programme results).This method of budgeting provides a method for organizing activities into programmes (activities orservices with a common goal), identifying alternatives for achieving each goal, determining the costs andbenefits for each alternative, and selecting the right alternative to maximize benefits. Since total cost and -19-
  20. 20. Manual on Good Practices of Financial Management for ULBs of Madhya Pradeshperformance levels are what matter — not the cost of each line item — budgetary allocations can beprovided “lump sum” by programme rather than in traditional department line items. Programmebudgeting is often accompanied by various kinds of performance measures.On the basis of the above explanation, the following characteristics of programme budgets emerge:• It discloses the full cost of a programme regardless of the number of organisational units involved in performing the function.• It attempts to measure the actual outcomes or programme results of a service or programme.• It uses ‘programme elements’ as the basic budgetary classification scheme instead of departments.• It provides for consideration of alternate service delivery options.Programme budgeting is feasible only if measures are quantifiable and specific. Measures utilising termssuch as ‘improve,’ ‘strengthen’, and ‘coordinate’ are impossible to quantify and are too general. Becauseof these deficiencies, they do not provide a means of holding agencies or managers accountable forresults. Consider these three possible programme measures for a maternal and child health programme:3. Measure A: Improves health of infants4. Measure B: Improves health of infants by 20 percent5. Measure C: Decreases infant mortality by 10 percent in 3 yearsMeasure A is not useful because it is not quantifiable, and is, therefore, not measurable. Measure B isquantifiable but it is not specific as to what is meant by the phrase ‘improves health of infants.’ How wouldan improvement in the health of infants be measured; Measure C is the best because it is bothquantifiable and specific. Therefore, in Measure C, it is possible to conclude whether the programmeachieves the desired outcome or fails to achieve it.Sample programme measuresThe following programme measurements may be used:1. Public Works a. Increase in the useful life of the infrastructure; and b. Decrease in the average downtime of the government’s equipment.2. Health Services a. Decrease in infant mortality rates; b. Decrease in the percentage of children classified as malnourished; c. Decrease in dental diseases; and d. Increase in the average lifespan of population.3. Public Safety -20-
  21. 21. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh a. Number of structures saved from fire; b. Decrease in crime rates; and c. Decrease in traffic-related fatalities.4. Audit a. Rupees saved as a result of audits; and b. Number of audit findings successfully addressed.5. Tax and Revenue a. Number of tax returns accurately processed; and b. Additional revenue from tax compliance programmes.Advantages and disadvantagesTable 4: Advantages and disadvantages of programme budgeting Advantages Disadvantages 2. It leads to a rational allocation of resources 1. It is inherently difficult to quantify programme and is particularly useful in making decisions results or programme effectiveness. Even if about alternative ways of accomplishing an output and/or programme results can be objective. measured, it may not be possible to know whether a result was achieved due to the programme or because of another factor. 3. It provides information on the total resources 2. Programme budgeting may ignore the need to allocated to programmes (information not control expenditures by assigning available in other budgetary techniques). responsibilities to departments. 3. The costs of trying to measure programme effectiveness may outweigh the advantages and usefulness of the information. 4. Information about resources allocated to the programmes could only be obtained by reorganising government departments in line with the programme areas, which is time- consuming and not always feasible. 5. In order to effectively implement programme budgeting, budgetary personnel must be specially trained and must have the time to conduct programme audits, which is a costly affair and municipal bodies may not be able to afford it. -21-
  22. 22. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh3.1.4.3 Zero-based budget (ZBB)Peter A. Pyhrr at Texas Instruments pioneered the concept of Zero-Base Budgeting (ZBB) in 1969 as atool for planning budgeting and controls. In this system of budgeting, organisations do not take budgetallocation in past years for an activity as granted while preparing their budgets and start from zeroallocation. Budget-making under this technique starts from zero instead of treating the current budget asthe base or the starting point. In this system, existing programmes and activities are reviewed andexamined in as much detail as in the case of newly proposed ones.DefinitionIn the words of Peter Pyhrr, ZBB is “an operating, planning and budgeting process, which requires eachmanager to justify his entire budget requisites in detail from scratch (hence zero basis). Each managerstates why he should spend any money at all. This approach requires that all activities be identified asdecision packages, which would be evaluated by systematic analysis ranked in order of importance.”ZBB is a formalised system for deciding whether a programme should be operated at a minimum,reduced, current or increased level. Priority rankings are assigned to all decision packages from thehighest to the lowest; packages are ranked either in or out of the budget. Decision packages must bediscrete, that is, they must be stand-alone and not rely on the other parts of the budget.Illustrative exampleAssuming that the base budget for the Public Works (Roads Maintenance Division) is INR 24 lakhs, anexample of a budget request prepared using the ZBB format is shown below.Table 5: Example of zero-base budgeting S.N. Decision Package Cost (INR) Total Budget (INR) 1. Only Maintenance 24,00,000 2. Resurface 5 kilometres of road + 3,00,000 27,00,000 3. Resurface 5 more kilometres + 2,50,000 29,50,000 4. Reconstruct bridge on Beach Road + 1,75,000 31,25,000Decision-makers can choose any, all, or none of the decision packages. If only decision package two ischosen, then a total of five kilometres of road will be resurfaced. If decision packages two and three arechosen, a total of 10 kilometres of road will be resurfaced. If all the decision packages are chosen, 10kilometres of road will be resurfaced and the bridge will be reconstructed.Advantages and Disadvantages -22-
  23. 23. Manual on Good Practices of Financial Management for ULBs of Madhya PradeshTable 6: Advantages and disadvantages of zero-base budgeting Advantages Disadvantages 1. It enables decision-makers to make rational 1. ZBB requires agencies to justify every element allocation decisions across programme and of their budget every year. A good idea in organisational lines (for example, is it more theory, but in practice, this proves to be too important to resurface five more kilometres of cumbersome, time-consuming and involves road or build three more classrooms?). huge paperwork and is easy for managers to manipulate. In most places, ZBB has died of its own weight. 2. It has the advantage of being more realistic 2. It is unrealistic and a waste of resources to than either performance budgeting or justify the existence of programmes every year; programme budgeting on its own. few programmes are eventually terminated as a result of the ZBB process. 3. ZBB provides a systematic way to consider 3. The process is susceptible to games: various alternatives to accomplish an departments may put essential services in objective. lower-ranked decision packages, knowing that decision-makers will put them into the budget. 4. ZBB offers a systematic mechanism for 4. Decision units may not coincide with the deciding on the proper level of a programme. classification system used by the accounting For example, the Public Works budget might system, making it necessary to carry out have three decision packages for resurfacing complex crosswalks between ZBB and the a road. accounting/ appropriation structure.3.1.4.4 Target-based budgetingIn this type of budget, each department is given a maximum amount or target for budget request foraccomplishing minimum levels of service. Targets are based on revenue estimates for the coming fiscalyear and adjusted for any changes in priorities communicated by governing body members. The morecomplex part of target-based budgeting involves estimating each department’s current services budget.Generally, the current services budget is the department’s current year appropriation plus or minus someadjustments (i.e., one-time purchases, etc.). Once established, the target is typically set at somepercentage of the current services budget — for example, 95 per cent for lower priorities in the currentyear or 105 per cent for higher priorities. Although target-based budgeting includes some elements ofZBB, it greatly reduces conflict and the use of subjective judgment since departments know up front theirprobable level of funding for the next year.3.1.4.5 Performance budgetingIn India, the first step towards the introduction of performance budgeting was taken by the EstimatesCommittee of the first Lok Sabha, as early as in the year 1954. The Administrative Reforms Commissionalso recommended a phased introduction of performance budgeting in government bodies. Since then,the Government has been making efforts to introduce performance budgeting in more and more of itsoperations. -23-
  24. 24. Manual on Good Practices of Financial Management for ULBs of Madhya PradeshPerformance budgets relate the input of resources to the output of goods or services in a quantifiableformat. Under this approach, budgets are based on measures of work and cost necessary to carry out acertain level of activity. Budgets are based on unit costs and service expectations. At the end of the year,a performance analysis is conducted to compare actual work performed with budget estimates.Performance budgets provide information with regard to the efficiency and productivity of public services.Efficiency is a measure of the cost to provide a unit of service, while productivity is the measure of theinputs required to produce a unit of service against a cost standard.In order to make performance budgeting work, the following three conditions are necessary:• It must be possible to develop and measure the units of service for governmental activities;• The accounting system must provide information about costs; and• Management Information Systems (MIS) must provide information about the level of service provided by each activity.Performance measuresAt the heart of performance budgets are performance measures. Performance measures reflect output,i.e., how much service is provided. It is important to understand the distinction between performancemeasures and performance standards. While considering performance measures, the key question is:what is being counted. While considering performance standards, the key question is: how much or howmany should be produced or served per rupee or per employee.IllustrationExamples of performance measures and corresponding performance standards for various functions ofULBs are shown in the table below.Table 7: Sample performance measures Performance Measures Performance Standards Public Works Kilometres of road resurfaced INR 1,00,000 per kilometre MW of electricity delivered INR 0.09 per kW Health Services Number of outpatients treated INR 20.0 per patient per day Number of Inpatients treated INR 100.0 per patient per day Public Safety -24-
  25. 25. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh Performance Measures Performance Standards Number of food samples taken 10 samples per food inspector per day Number of fires fought 10 fires per fireman Environmental Protection Agency Number of water quality inspections INR 65.0 per inspection Number of land use permits reviewed INR 500 per permit reviewed Tax Revenue Number of tax returns processed INR 175 per return processed Number of tax audits conducted INR 2, 500 per tax audit Finance and Accounting Number of cheques drawn INR 4.5 per cheque Number of vouchers processed 500 documents per vouchers staff per yearAdvantages and DisadvantagesTable 8: Advantages and disadvantages of performance budgeting Advantages Disadvantages 1. Facilitates rational allocation decisions in 1. It is difficult to develop performance measures accordance with the desired level of service. for all government services, especially for For example, if it costs INR 25 lakhs to re- government functions which do not provide surface one km of road, and decision-makers services directly to the public such as financial, want 5 km of road to be re-surfaced, INR 125 legislative and general administrative functions. lakhs must be budgeted in the public works function for road re-surfacing. 2. Makes it possible to hold government officials 2. Developing and maintaining a system of and organisations accountable for their collecting performance data may be costly and performance. time-consuming; in some cases, it is not worth the expense. 3. Fosters a cost consciousness among 3. Performance budgets are generally programme managers, especially if incompatible with existing accounting systems, organisations are organised into cost centres which do not measure cost of service ex ante. and as many services as possible are treated Cost information is usually available only ex as direct costs. post (after the costs are incurred), and is not always reliable. -25-
  26. 26. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh Advantages Disadvantages 4. Programme output does not equal programme effectiveness. Measurement of service levels and work output do not always reveal information about programme effectiveness or programme results.3.1.4.6 Outcome BudgetingOutcome budget is a pre-expenditure instrument, which helps in realizing the performance through clearlydefined outputs/ outcomes, as compared to the current system built around post–expenditure scrutiny.Outcome budgeting is about clearly articulating outcomes of each and every capital work and linking suchexpected outcomes of development works or expenditure to the financial outlays in budget beforeundertaking it for implementation. It is a logical extension of performance budgeting and gets facilitated ifthere exists performance budgeting in a ULB. Performance budgeting links physical targets to financialoutlay but may or may not provide information about outcomes planned or expected on completion of thework or expenditure. Typical examples of outcomes are given below:• Construction of Elevated Storage Reservoir (2ML) for water supply, will serve a population of 12,000 @ 170 LPCD with a daily supply 4 hours. The numbers of new connections can be quantifiable depending on the pipe network size.• Laying of sewerage pipe of diameter 150mm of length covering a particular area, will provide proper sanitation facilities for sewer connection for households in that particular area. The number of new sewer connections is quantifiable.• Construction/ completion of a school building is the output, whereas increase in the literacy rate is the final outcome where an increase in enrolment would be an intermediate outcome.• Provision of public tap – it can quantifiable with the number of households that could use the service3.1.4.7 Gender BudgetingA gender-responsive budget is a budget that acknowledges the gender patterns in society and allocatesmoney to implement policies and programmes that will change these patterns in a way that movestowards a more gender equal society. Gender budget initiatives are exercises that aim to move thecountry in the direction of a gender-responsive budget.Gender budget initiatives are known by a range of different names. They have, for example, also beenreferred to as ‘women’s budgets’, ‘gender-sensitive budgets’, and ‘applied gender budget analysis’.Gender Budgeting is based on the modern idea that budgeting is not simply an accounting orbookkeeping exercise. Instead, budgeting is a key part of the planning and implementation process. -26-
  27. 27. Manual on Good Practices of Financial Management for ULBs of Madhya PradeshGender budgeting is not the only tool that can and must be used if equality and empowerment are to berealised. Gender Budgeting is, however, an essential tool because, unless sufficient money is allocated toimplement all the other tools and strategies, they will not be effective. The Five Step Framework for Gender Budgeting Step 1: An analysis of the situation for women and men and girls and boys (and the different sub- groups) in a given sector. Step 2: An assessment of the extent to which the sectors policy addresses the gender issues and gaps described in the first step. This step should include an assessment of the relevant legislation, policies, programmes and schemes. It includes an analysis of both the written policy as well as the implicit policy reflected in government activities. It should examine the extent to which the above meet the socio-economic and other rights of women. Step 3: An assessment of the adequacy of budget allocations to implement the gender sensitive policies and programmes identified in step 2 above. Step 4: Monitoring whether the money was spent as planned, what was delivered and to whom. This involves checking both financial performance and the physical deliverables (disaggregated by sex) Step 5: An assessment of the impact of the policy / programme / scheme and the extent to which the situation described in step 1 has been changed, in the direction of greater gender equality Source: UNIFEM-UNFPA Gender Responsive Budgeting and Womens Reproductive Rights: Resource PackExample of Gender Budgeting -Gender Budgeting is not about simply dividing government money 50-50 between men and boys on theone hand and women and girls on the other. A simple 50-50 division may look equal, but it is often notequitable, or fair, because the needs of women and men and girls and boys may be different. Instead,Gender Budgeting looks at every part of the government budget to assess how it will address the differentneeds of women and men, girls and boys and different groups of women and men, girls and boys. Forexample, in the area of health, male and female people will have similar needs in respect to influenza andmalaria. But women will have greater needs than men in terms of reproductive health.A municipal body to begin with can adopt a policy of reserving 10 to 15 % of its development budget forwelfare of women and illustrative items under this budget could be • Construction of adequate and appropriate toilet block for Girls in all municipal schools; • Construction of adequate and appropriate toilet block for women throughout the city; -27-
  28. 28. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh • Construction and running Health care centres for women in each area; • Construction and operations of hostels for working women; • Construction and operations of shelter homes for destitute wormen, etc3.1.4.8 Multi-year planning budgetsMulti-year planning budgeting refers to a process designed to ensure that the long-range consequencesof budget decisions are identified and reflected in budget totals. In practice, this usually means that multi-year planning estimates for revenue and expenditures are shown for each programme beyond the budgetyear.For some governments, the annual budget is the vehicle for the implementation of multi-year (usually five-year) strategic plans. In this sense, long-range budgeting means integration of planning and budgetingprocesses. Decisions about public investments and programme expansion are made as a part of themulti-year planning process, and not as a part of the annual budgetary process.3.1.4.9 Participative budgetingIn India, there is growing awareness about the need to introduce such processes, particularly among civilsociety organizations. JNNURM scheme has mandated for State Governments to put in place ‘CitizensParticipation Law’ to facilitate citizens’ participation in urban governance. In light of this, adoption ofparticipative budgeting by the ULBs has become important.From a socio-political viewpoint, the process of participatory budgeting is an embodiment of the ideals ofdecentralized urban governance, namely transparency, accountability and the participation of the publicat large in identifying their needs and determining how these can be fulfilled. From a managerial ortechnical point of view, ‘participatory budgeting’ provides the link between financial planning and theplanning for infrastructure and services in the cities.3.2 Good practices of budgeting3.2.1 Preparing a budget1. Budgeting should be a continuous process: Budgeting is a 365-day activity. As soon as a budget st comes into force on 1 April of a particular year and actual figures become available in the month of May, a ULB should start the process of budget preparation for the next year. As part of this process, a ULB should forecast major revenue and expenditure items for next year’s budget.2. Budget forecast should be based on stated assumptions and methodology: The forecast along with its underlying assumptions and methodology should be clearly stated and made available to participants in the budget process. These assumptions and methodologies should also be provided as references in the final budget document. -28-
  29. 29. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh3. ULB should analyse the variances between previous forecast and actual amounts: The variance analysis should identify the factors that influence revenue collections, expenditure levels, and forecast assumptions. This will help improve future forecasting.4. Use of Budget Information Data Sheets (BIDS) for budget preparation: A ULB should use BIDS to collect information for preparing its budget. Using BIDS facilitates efficiency and cost audit as actual figures can be compared in a disaggregated manner to find out precisely the cost of overrun or cost inefficiency. Formats for collecting data in the form of BIDS are provided in Annexure 1. These are sample formats and ULBs are encouraged to develop BIDS for each important receipt and payment item on these lines.5. Use of Assets Management Plan (AMP) for budget preparation : Like BIDS a ULB should use AMP to assess funds needed for maintenance of the assets on scientific and preventive basis and then use financial figures coming out of AMP to formulate it annual maintenance budget. AMP is in a generic way one type of Budget Information Data Sheet.6. The budget document should clearly define the basis of accounting used for budgetary purposes.3.2.2 Capital budgeting1. Capital budget should be prepared as part of annual bugeting process: A ULB should prepare and adopt a formal capital budget as part of its annual budgeting process.2. Capital budget should be drawn from the multi-year capital improvement plan: The capital budget should flow from the multi-year capital improvement plan. Presentation of capital budget should include a summary of the multi-year capital improvement plan.3.2.3 Budgeting techniques1. Line-item budgeting should be used for preparation of revenue budget with the conservative incremental approach.2. Performance, participatory and outcome budgeting techniques are recommended for the formulation and administration of the capital budget.3. Budgeting for poor, gender budgeting, functional budgeting, budgeting on geographical basis (zone/area-wise budgeting) etc budget techniques should be used for segregation and presentation of budget in multi-dimentional manner.3.2.4 Implementing/ administering/ controlling the budgetHaving prepared and adopted the budget the next important aspect of budgeting is administering thebudget. Administering the budget is linked with several short term and long-term financial managementaspects. It is linked with cash and working capital management, bills receivables and payablesmanagement, inventory management for short-term financial management and long-term debtmanagement, assets management and implementation and revision of Capital Investment Plan, etc., forlong-term financial management. Following good practices have been observed for improving budgetimplementation. -29-
  30. 30. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh1. Budget should be contingent on resource mobilization: In government parlance, budget is a legal authorization. As a result, once budget allocations are approved, the departments are free to utilise their allocations fully, even if the receipts are not realised as per targets. The expenditure mechanism assumes independent existence. Thus, by not making its expenditure contingent to actual receipts, ULBs enhance their budgetary deficit. In fact, a local body can control negative aspects of deficit financing by judiciously linking and making its expenditure contingent to resource mobilization. Instead, ULBs should make their budget expenditure contingent on their actual receipts and accounts or the finance officer should issue every month (in the light of actual receipts) a benchmark for undertaking expenditure by the departments. For instance, a year opening circular may allow departments to spend 10% of the budget in the month of April and cumulatively 20% in the April to June quarter. After that, the Finance Officer of ULBs could issue monthly and quarterly expenditure benchmarks at the beginning of every month on the basis of actual receipts in the past months. In summary, departments should not get automatic clearance to spend budget allocations once they are passed and they should be required to seek permission to use full or part of it in the light of actual receipts.2. Departments to obtain prior financial approval before spending budget approved: It would not be sufficient to make budget contingent on revenue realised. Its implementation requires a system of financial approval before starting procurement process (before administrative approval to the expenditure) by a competent authority, and then, after completion of procurement process, but, before issuing work order or purchase order. This system is a logical extension of making budget contingent on revenue realised. Under this budgetary control system Head of the Department must obtain financial approval to expenditure from Accounts/ Finance department of the ULB before starting procurement process and then before issuing work or purchase order for all the capital expenditure and certain operation and maintenance expenditure (as specified by the Commissioner of the ULB). Accounts/ Finance Department should maintain budget control register and uni-number system for giving number to approved expenditure files.3. Budget should be bifurcated into monthly cash and working capital budgets: In order to make expenditure contingent upon revenue realised and to implement system of prior financial approval to expenditure, annual budget of the ULB should be broken down into monthly cash and working capital budgets. At present, budget preparation is viewed as an annual activity. Financial managers need to change this mindset. A budget can be for one week or even for a day. For a detailed discussion on adopting cash and working capital budget see Chapter 5 of this manual.4. Budget administration to include management of inventory, assets, receivables and payables: The budget administration should include management of inventory, assets, receivables and payables. These sub-systems, except receivable management, constitute expenditure system. Like expenditure provided in the budget should be contingent on the revenue realised, the operation of these expenditure sub-systems should also be contingent on the revenue realised and should not work on a stand-alone basis. The Accounts Department of the ULB should decide through a system of prior financial approval to expenditure on when and how much inventory should be purchased or how much operation and maintenance expenditure should be undertaken or the extent of project works expenditure that should be undertaken in the light of revenue realised and availability of funds. -30-
  31. 31. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh3.2.5 Monitoring and evaluating the budgetIf the above-mentioned good practices are followed rigorously, the need for a formal review mechanism isreduced. However, the following good practices should be followed for monitoring and evaluating abudget.1. Budget should be prepared using a budget coding structure: A ULB budget should be prepared using a budget coding structure as prescribed by the government. Adherence to budget coding structure would ensure that all the items are properly recorded and classified. This in turn captures all types of financial information within a ULB. If the discipline of classifying receipts and payments is not adhered to, then the entire database can get distorted and the quality of decision-making, based on the data, becomes poor.2. Budget Variance Report (BVR) to be used as a crucial budgetary control tool: ULBs should also prepare a Budget Variance Report that could be used as an important budgetary control tool. BVR analyses the positive and negative variances of actual vis-à-vis budgeted receipts and expenditure items. In other words, a BVR provides information on fast-moving and slow-moving receipts and expenditure items. Positive variance should be analysed for reasons. For instance, a ULB has collected more property tax than the budgeted amount in a particular ward. The reasons for the same should be analysed and replicated. Negative variance should be analysed for reasons and cost control measures should be identified. For instance, the increase in maintenance expenses or finance charges would indicate lack of planning or implementation follow-up.3. Performance benchmarks (standards), indicators and measurement system: For monitoring and evaluating budget the ULB should have pre-defined set of performance benchmarks (standards) to compare actual performance against budgeted performance, performance indicators to measure performance and institutional structure to run performance measurement system. Revised budget and next year’s budget should get improved in the light of learning from budgetary monitoring and evaluation exercise. Budget performance analysis report should be submitted quarterly to Mayor or Chairman in Council for information and discussion and should be released as a public document.3.3 Policies recommended for adoption3.3.1 Frequency and timingEach Municipal Corporation in MP shall prepare and adopt an annual budget of income and expenditureof the ULB before the last day of February in the preceding accounting year for the next accounting yearin the manner and form as prescribed in Madhya Pradesh Municipal Accounts Manual, July 2007. In thisregard, the Commissioner shall prepare estimates of income and expenditure and present before the thMayor-in-Council, on or before the 30 day of November in the preceding accounting year forconsideration, modification, and approval, as appropriate.3.3.2 Basis of preparation1. Each Municipal Corporation in MP shall integrate performance measures and productivity indicators with its annual budget. In this regard, Municipal Corporations shall adopt the systems of performance -31-
  32. 32. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh budgeting and outcome budgeting for preparing, and approving estimates of all types of capital expenditure except loan repayment in the manner and form as prescribed in MPMAM.2. Each Municipal Corporation in MP shall adopt system of participating budgeting for preparing, estimates of operating and capital expenditure except salary, debt charges, loan repayment and any other statutory expenses in the manner and form as prescribed in MPMAM.3. Each Municipal Corporation in MP shall adopt the systems of Gender Sensitive and Pro-Poor Budgeting. For this purpose, a Municipal Corporation shall segregate relevant budget items and allocations into two separate main budget heads, viz., (1) ‘Providing Services to Women, Children, and Senior Citizens’ (for gender sensitive budget) and (2) ‘Providing Basic Service to Urban Poor’ (for pro-poor budget).3.3.3 Conservatism in revenue estimationIn order to maintain a stable level of services, each Municipal Corporation in MP shall use a conservative,objective, and analytical approach when preparing revenue estimates. The process shall include analysisof probable economic changes and their impacts on revenues, historical collection rates, and trends inrevenues. This approach should reduce the likelihood of actual revenues falling short of budget estimatesduring the year and should avoid mid-year service reductions.3.3.4 Fiscal control1. Each Municipal Corporation in MP shall ensure fiscal stability and the effective and efficient delivery of services, through the identification of necessary services, establishment of appropriate service levels, and careful administration of the expenditure of available resources.2. Each Municipal Corporation in MP shall adopt and maintain a balanced budget. For this purpose, expenditure deferrals into the following fiscal year, short-term loans, or use of one-time revenue sources shall be avoided to balance the budget.3. Each Municipal Corporation in MP shall operate on a current funding basis. Expenditures shall be budgeted and controlled so as not to exceed current revenues plus the planned use of fund balance accumulated through prior year savings.4. Each Municipal Corporation in MP shall project future operating costs associated with new capital investments and will include them in the operating budget forecasts.5. Debt or bond financing shall not be permitted to be used by any Municipal Corporation in MP to finance current operating expenditures.3.3.5 Presentation and formats3.3.5.1 Budget coding structureEach Municipal Corporation in MP shall prepare its annual budget using the six-digit coding structure asprescribed in the Madhya Pradesh Municipal Accounting Manual (MPMAM). The prescribed codingstructure shall have three levels of codification – first level representing function group, second level -32-
  33. 33. Manual on Good Practices of Financial Management for ULBs of Madhya Pradeshrepresenting function description and the third level representing cost centre. Each level shall have a two-digit code. The codification structure is described below.1. First level represents the obligatory and discretionary functions of the ULBs under the Madhya Pradesh Municipal Corporation Act, 1956 and the Madhya Pradesh Municipalities Act, 1961. This is known as the “Function Group". Functions shall represent the various functions or services carried out by the local body. Account Heads shall represent the nature of the income or expenditure.2. Second level represents the particular type of service under a function, known as "Function Description".3. Third level represents a particular ”Cost Centre” code, which provides the service.Refer to Annexure 4 of the MPMAM for detailed formats as prescribed in MPMAM on coding structure.3.3.5.2 Budget categoriesThe budget of a Municipal Corporation in MP shall be divided in three distinct categories – Revenue(operating) budget comprising operating income and expenditure; Capital budget comprising capitalincome and expenditure including loan repayment and Extra-ordinary budget comprising receipts andpayments on account of deposits from people and advance given and recovered. These three broadbudget types shall then be sub-classified under functions performed by the ULB followed by the sub-functions or different departments of the ULB.3.3.5.3 Budget layoutBudget layout refers to the budget forms that will be used for final preparation and presentation of thebudget. Each Municipal Corporation in MP shall follow the method of bottom-up budgeting as prescribedin the MPMAM. Also, Municipal Corporations shall use the forms prescribed in the MPMAM for presentingbudget information. The table below provides the names and references of these forms as prescribed inthe MPMAM. It is noteworthy that the forms prescribed here relate to the final presentation of the budgetand not initial data collection by various departments.Table 9: Forms prescribed in MPMAM for budget layout Name of the form Description BUD 1 Summary Budget Estimates BUD 2 Abridged Major Account Head Wise Budget BUD 3 Revenue Income Budget Estimates BUD 4 Revenue Expenditure Budget Estimates BUD 5 Capital Receipts Budget Estimates BUD 6 Capital Expenditure Budget Estimates -33-
  34. 34. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh Name of the form Description BUD 7 Detailed Revenue Expenditure (Department-Wise) Budget Estimates BUD 8 Detailed Capital Expenditure (Department-Wise) Budget Estimates3.3.5.4 Ease of presentation and transparencyWhile presenting the budget, each Municipal Corporation in MP shall ensure that budget information ispresented in a way that facilitates policy analysis and promotes transparency and accountability.3.3.6 Closing balance of budgetThe budget shall be so prepared as to provide for a closing balance, which each Municipal Corporation inMP shall maintain at its credit at the end of the year and the amount of which shall be not less than thelimit prescribed in the [MP Municipal Finance and Accounts Rules].3.3.7 Review and revision1. The Commissioner of each Municipal Corporation in MP shall perform a mid-year budget review and analysis based on actual information for the [first six months] of the accounting year (April to September) and prepare revised estimates of income and expenditure of the Municipal Corporation for the current year. The analysis of the mid-year budget review shall be submitted to the Council for approval.2. Each Municipal Corporation in MP shall be permitted to revise its budgets only [once] during a particular accounting year.3. Each Municipal Corporation in MP shall prepare a Budget Variance Report (BVR), as prescribed in the MPMAM. The BVR shall be prepared by each Municipal Corporation on a [quarterly] basis. A copy of the BVR shall be submitted to the Urban Administration and Development Department.3.3.8 Other policiesEach Municipal Corporation in MP shall project revenues and expenditures for the next [three] years andshall update the projections annually.3.4 ProceduresThis section provides a detailed step-by-step discussion related to the budget process.3.4.1 Step 1- Development of budget policies and toolsThe Commissioner of the ULB is responsible for developing various budget tools, the set of rules andprinciples as well as the forms and guidelines to regulate the budget preparation and implementation -34-
  35. 35. Manual on Good Practices of Financial Management for ULBs of Madhya Pradeshprocess. These documents must be circulated within each department of the ULB before starting thebudget preparation process. These documents must include:• Policies — Principles or financial policies are needed to guide budget preparation. Department managers should be encouraged to use this information to reassess the benefits of current service activities as well as justify requirements for any new and/ or expanded services. These policies may be formed keeping in mind the expected financial situation in the upcoming financial year.• Budget Calendar — A calendar or detailed time/ event schedule that identifies due dates for budget- related activities; steps to be taken during budget preparation; the person or group responsible for each step; and the date on which each step must be completed. The following figure shows a sample budget calendar.Figure 2: Sample budget calendar Identification of works for next year budget in consultative manner Identification of works for next year budget in consultative manner Preparation of draft budget by various department heads Preparation of draft budget by various department heads April to April to September September Finalization and Submission of budget by Commissioner to Mayor-in-council Finalization and Submission of budget by Commissioner to Mayor-in-council October to October to November November Final adoption of budget estimates and approval by mayor-in-council Final adoption of budget estimates and approval by mayor-in-council December-March December-March Implementation of Budget by getting administrative approval to each work, tendering, Implementation of Budget by getting administrative approval to each work, tendering, contracting and implementing them contracting and implementing them Implementation Implementation year around year aroundWhereas, the Madhya Pradesh Municipal Corporation Act, 1956 and the Madhya Pradesh andChattisgarh Municipalities Act, 1961 provide the dates for submission, approval and adoption of budget ofa ULB, a Budget Calendar should not be confined to these end result dates. Budgeting is a 365-day stactivity. As soon as a budget comes into force on 1 April and actual figures become available in themonth of May, the repective ULB should start the process of budget preparation for the next year.The period between May and September should be used for the identification of major O&M works andcapital works for the next year through consultative process and then preparing design and estimates ofthe probable projects. Therefore, by the time primary budget preparation process starts in November, theULB would be ready with the list of projects for the next year’s budget.Similarly, during the period October to December, the ULB should take stock of projects undertaken in thecurrent year to identify the projects that can be completed before end of current year in March and theprojects that can spill over to next year’s budget. Also, during this period, a revised budget should beformulated and presented separately. Therefore, when the budget is put together in January, the ULBclearly knows its revised revenue and expenditure, the expenditure that would spill over to next year and -35-

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