2. CHAPTER 7 LEARNING OBJECTIVES
After studying the material in this chapter students will:
• discuss factors that can affect financial conditions to
• maintain existing service levels
• withstand economic disruptions
• meet the demands of growth, decline, and change
• compare the following management methodologies and their
effectiveness in fiscal administration
• cash management
• risk management
• procurement
• cutback management
• debt management
3. Measuring Financial Condition
Numerous factors can hinder the process
The nature of a public entity
The state of municipal financial analysis
The character of municipal accounting
practices
Financial Trend Monitoring System
(FTMS)
4. Financial Factors
Revenues
Expenditures
Operating position
Debt structure
Unfunded liabilities
Condition of capital plant
5. Environmental Factors
Community needs and resources
Intergovernmental constraints
Disaster risk
Political culture
External economic conditions
6. Evaluation Questions
Financial factors: Is your government
currently paying the full cost of operating,
or is it postponing costs to a future period
when revenues may not be available to
pay these costs?
Environmental factors: Do the
environmental factors provide enough
resources to pay for the demands they
make?
7. Evaluation Questions Cont’d.
Organizational setting: Do your
management practices and legislative
policies enable your government to
respond appropriately to changes in the
environment?
8. Additional Analysis
Trend analysis is the primary tool that the
system uses.
The user should use graphs, tables, and
other visual tools to show the trends.
Policy statements should be developed to
plan a strategy to manage the areas of
concern.
9. Detecting an Operating Deficit
The budget reserve continues to drop over
several years possibly indicating that
expenditures are exceeding revenues
Frequent short-term or internal borrowing
Selling assets to bring in one-time
revenues used to fund current operating
expenditures rather than for one-time
expenditures.
Accounting gimmicks
Deferment of a payment
10. Cash Budget
Estimate cash receipts for the month
Estimate cash disbursements that will take
place during the month
Subtract cash receipts from cash
disbursement to determine excess or
deficit
Add this balance to the prior month’s
balance to find the projected total cash
balance.
12. Economic Ordering Quantity
Formula
P=b(T/c)+vT+i(c/2)
Used to determine the cash position of the
govt. once the govt. has determined that
funds are available for investment.
Calculate optimal transfer size, number of
transfers, average cash balance, and initial
cash balance.
13. Managing Cash Internally
Use checks as much as possible to pay for
services.
Never write checks payable to cash.
The person writing the checks should not
be used to reconcile the accounts
Checks should be used in numerical order
and signed only by authorized staff.
Maintain firm control over bland and
voided checks.
14. Managing Cash Internally Cont’d.
Use separate bank accounts for each fund
in order to maintain merging of funds.
Sporadically audit petty cash.
All checks should be tied to vouchers or
invoices.
Make sure that the correct check number
is placed on vouchers and invoices.
Cash and checks should be deposited at
least once a day
15. Managing Cash Internally Cont’d.
Use computer technology to facilitate
fund transfers as well as any other
financial transactions.
Negotiate with banks for better rates as
well as services
Take advantage of discounts for prompt
payment.
16. Risk Management
There is a cost associated with risk.
Governments can purchase insurance to
cover the risk or self fund the risk.
Five fundamental elements:
mission identification
risk and uncertainty assessment
risk control
risk financing
program administration
17. Procurement
The government must provide services in
an efficient and effective manner.
The government must secure equipment at
the most reasonable price available.
The government must ensure that the
procurement process is free of fraud and
abuse.
Procurement helps the government to
achieve some of its broader economic
goals.
18. Life-Cycle Cost
Acquisition Cost+Lifetime Maintenance
Cost+Lifetime Energy Cost – trade in
allowance – expected resale value
Other considerations:
trade in value
failure cost
labor cost
expected resale value
19. Cutback Management
Implementing cost cutting reductions in
resources while attempting to maintain
services at their current level.
Results primarily from five things:
problem depletion, erosion of the
economic base, inflation, taxpayer revolt,
limits to growth
20. Cutback Strategies
Budget maximizing
One time drastic cut
Across the board cuts
Efficiency versus equity
Attrition
21. Debt Management Policy
Assures bondholders that debt burdens
and operational debt expenditures will be
controlled.
Provides staff with a framework to work
from assures the legislative body that
proposals meet policy mandates
Assures continuity in financial operations.
A practice that a city can use to strengthen
its credit position.
22. Additional Options
Zero-based budgeting is a future oriented
budget strategy that requires analysis of
current and future expenditures.
Performance based budgeting
concentrates on agency activity objectives
and outcomes rather than the purchase of
resources.
