PFM is the process wherein the Govt. unit or agencyEmploy the means to Obtain and allocate the resources/money based on implied and articulated prioritiesUtilize methods and controls to effectively achieve publically determined ends

It determines the scope and content of fiscal policiesIt establishes general guidelines to ensure funds are spent honestlyIt provides organizational structure to effectively carry out fiscal duties

Both the sectors finance operationsEffectively manage the flow of fundsSeek debt fundsLarge purchases require competitive biddingHave systems of employee pension plansHave unions

DifferencesEnd objectivesRaising of resourcesNo payment for services under the govt.Quasi public agencies render services on break evenNFP agencies with heavy deficits may become bankrupt

Specify goals: what is wanted ?(Priorities, policies/Need of the people/companies/ Industries)Quantify benefits (measure the wants)Maximize benefits The primary objective is to maximize benefits for any given set of resources

Planning- defines goals and priorities Programming- selects activities to achieve goals Budgeting- develops the work plan and allocates resources to achieve goalsFinancing- seeks financial resources to execute the plan

Controlling-ensures carrying out of activities according to work plan - Purchasing -Accounting -Auditing -ReportingEvaluating-assesses the utility and congruence(Similarities) between stated goals and achieved results

Specifically, the Main Components/elements of PFM are:

- Financial Planning: revenue and expenditure analysis is essential for planning - Control: measurement & evaluation of program activities - Cash Management: minimize opportunity costs

Forecasting- approximation(Estimate) are used for planning and measuring variancesInvestments- in securitiesFinancial Analysis Cost Analysis includes expenditures, human resources, and time

Budgeting- a control tool to assure accountability , financial integrity(honesty), and legal compliance Debt administrationAccounting and reportingFinancial Management Information systemPerformance evaluation

In brief, pfmSeeks to satisfy the needs within the financial constraintsAllocates resources and tracks performanceKeeps scores and presents to users of informationManages risk and uncertainty, and Plans finance, identifies sources of fund

CFO -Plans -Prepares budgets -Reports -develops for measuring programs

Governing body -determines fiscal policy - Approves the budget -Adopts revenue and expenditure authorization measures - Holds the CFO accountable

Decentralized system of fin. decision making: Fin activities separately administered by separate units Centralized financial Decision making - Financial functions under one unit - Promotes policy integration - Integrated decision making - Minimizing divide responsibility

Guidelines for organizing Fin Adm - Standards for effective leadership - guidelines for effective operation( promoting co ordination, minimizing duplication), effective use of resources - ways of measuring accountability to citizens( financial discipline, clear line of responsibility, capacity to implement policies, opportunity for citizens to participate in budgets) - Use of information technology and world class fin. practice.

Financial PlanningBudget preparations and expenditure controlDevelops accounting systems and procedures Reporting for Financial management-control performanceMaintenance of asset control system

Investment ManagementFinancial Liaison Staff TrainingFiscal health analysisSuggest ways of expanding resourcesNegotiate in trade union contracts

Practices useful for a world class financial organization - develop a control system to achieve accountability - exhibit strong leadership - training to change organizational culture

Continually examine the ability of the fin. organization to meet its missionEliminate inefficient practices and use outsourcing Continually organize finance function to add value (integrate mgt function)

Design FMISRe engineer existing practicesOrganize financial data for user needsAssemble a finance team with skillsBuild a finance organization that attracts best talents with career opportunities

Financial Condition: The ability of an organization to meet its financial obligations (Or ability to finance services on a continuing basis). The organizations ability to pay its obligations determines a good/bad FCThe ability to pay is commonly called solvency in finance.The four levels of solvency are: cash solvency, budgetary solvency, long term solvency, & service solvency

The ability to generate sufficient cash to pay for current liabilities (Cash Solvency)The ability to collect sufficient revenues to pay for expenditures/expense (budgetary solvency)The ability to pay off long term liabilities (long term solvency)The ability to financially support a desired level of services ( service solvency)

Cash flow problems: generally due to one or more of these conditions - Billings are not frequent enough or occur at the wrong time of the year in relation to expenditure demands. - Cash collections are not occurring fast enough - Unpaid (receivable) amounts are increasing

Causes of budgetary problems: - problems with budget estimates -Change in conditions affecting actual revenue or expenditure levels. - weak control over revenue,expenditure, or information system - increase in expenditure at a faster rate than revenue -use of non recurring exp for that of recurring nature - decisions taken with lack of cost effectiveness - external factors (state or federal mandates, natural calamities, reduction in population/industry, weak economy)

Causes of long term solvency problems the same causes of budgetary problems, Plus, - deteriorating infrastructure and fixed assets -inadequate funding provisions for LTL -failure to properly account for LTL - lack of proper planning/budgeting for multiyear obligations(Compultion / responsibility)

Causes of service level solvency problems: chronic budgetary problems result in cuts to essential services. In addition, - stagnant or shrinking tax base - lack of revenue growth - deteriorating infrastructure -budget inflexibility - inadequate cost accounting system

Features to be considered in evaluating FCPhysical condition of the local infrastructure such as roads, etcReliance for financial assistance on other organizationsPension liabilities, especially unfunded obligationsImpact of inflation on fixed costs of govtAbility to pay off debts

Improving financial condition: - the less advanced the fiscal stress, the easier the fix . Early detection & correction are important. Periodic financial condition analysis can be an effective tool for early detection of negative fiscal trends

Traditional fin. statements are insufficient as a basis for evaluating the financial health of communities.

Information relating to data such as reliance on outside revenue sources, uncontrollable revenues, per capita income trend, physical-plant replacement etc is not found in financial statements.

How to measure fin. Condition?A good financial condition measure should satisfy at least three criteria - A measure must assess a specified element of financial condition ( measurement validity) - the elements used should be consistent & objective( measurement reliability) - the measure and supporting data should be affordable to obtain ( measurement affordability)

Elements to be considered in monitoring FC:

the state of the national economy,(GDP) local business and economic conditions(WPI/CPI) population (Per Capita Income) employment (Backlog) Indicators are used to evaluate financial conditions.

Indicators are quantified changes about the environment, organizational, and financial factors.Select indicators that are suitable for the govt and interpret their significance.Financial indicators can provide snapshots of per capita ratios, revenue collection efforts, expenditure levels, results of operations, fund balances, and cash level

E.g of indicators:Expenditure per capita: Exp/populationHow much money is spend on per person by the governmentLiquidity :Cash/current liabilitycash ratio of 1.00 and above means that the COuntry will be able to pay all its current liabilities in immediate short term

Employees per capita: employees/population"The employment population ratio is the best measure of labor market conditions.It should be above 50 %Depreciation: Depreciation exp/depreciable assetsDebt service: Debt service/Net op.revenueReceiving a ratio of less than 40% means that the potential borrower has an acceptable level of debt.

Important Terms Fixed costs: personal costs & debt serviceIntergovernmental revenue Once the ratios are obtained, they can be compared to internal or external benchmarks. Internal benchmark may be set by policy (e.g. Tax % on total tax to be collected).External benchmarks are stds set by convention or practice. (Industry norms)

Trend analysis is another tool for identifying the causes of fiscal problemsIt indicates whether the most recent year is the continuation of an upward or downward trend.A multiyear analysis can identify those years that were unusualPeer comparison makes comparisons of similar financial organizations (Wer/Wer)

NFPs need to : replace assets, finance expansion, build up reserves, though there is no profit.When there is no surplus, the fund balance has to be used. NFPs goal is to provide service. Therefore the ratios have to be interpreted in the context of the agencys missionMake sure that the future generation is not robbed by present generation (e.g. massive borrowing)

I. Revenue and expenditure per capita 1. Gross Revenues Population 2. Gross Expenditure Population 3. Recurring Revenues (Gross Rev.- Onetime rev) Population Less revenue per capita coupled with more expenditure per capita shows the inability of govt to maintain service. A decrease in ratio (3) shows dependent on irregular revenues

2) Fixed Costs : Personal Services and Debt Service ratios 1. Salaries and Fringe Benefits Gross Expenditures 2. Debt Service Expenditures Gross Expenditures 3. Salaries and Fringe Benefits + Debt Service Gross ExpendituresThe higher the ratio, the less flexible the officials are to respond to economic changes

3. Long-Term Debt Long Term Debt PopulationIncreased levels of debt can mean that the govt officials have a decreasing level of flexibility in how they allocate resources (pressure on Govt)4. Public Safety= Public Safety Cost Gross Expenditures(often one of the most costly service areas in a country).

4. Liquidity Ratios

LR provides indicators that reveal the extent of an agencys ability to meet current and matching obligations. Liquidity measures the gap between the current need for cash to settle outstanding obligations as they become due1.Current Ratio: = CA/CL (2)2. Quick Ratio: = QA/CL (1)3. Average collection pd = 365 Receivable turnover

Tigris Shop is a retail store that sells outdoor skiing equipment. Tigris offers accounts to all of his main customers. At the end of the year, Tigris 's balance sheet shows 20,000 Birr in accounts receivable, 75,000 Birr of gross credit sales, and 25,000 Birr of returns. Last year's balance sheet showed 10,000 Birr of accounts receivable.

The first thing we need to do in order to calculate Tigriss turnover is to calculate net credit sales and average accounts receivable. Net credit sales equals gross credit sales minus returns (75,000 25,000 = 50,000). Average accounts receivable can be calculated by averaging beginning and ending accounts receivable balances ((10,000 + 20,000) / 2 = 15,000).Finally, Tigris accounts receivable turnover ratio for the year can be like this.

Stronger cash: increase tax/ user charge rates, changing billing cycles (timing and/or frequency), improving collection efforts, shifting payment schedules, improving interest earnings and borrowing cash Better Budgeting: improving budget accuracy, improving structural balance, monitoring results throughout the year, controlling costs, improving internal controls and using cost-benefit analysis

Continued Health: . Multi-year financial plans and long-term capital plans are essential for long-term fiscal health. Quality Service: Long-term strategies needed to help restore service quality include expanding the tax base, developing new revenue sources, investing in infrastructure, improving budget flexibility, planning strategically and accounting for service costsOther non-local revenues should also be sought.Work with other governments to obtain additional state aid, federal aid and sales tax revenues

Cost benefit analysis assesses the economic feasibility (Practicability/Possibility) of a program or policy, or an activity. It rationalizes decision making by examination of objectives and the cost and benefit associated with the programUseful to judge the economic value of a program or choose one program among many alternatives (equivalent to capital projects in budgeting)Steps:1. Predict costs and benefits of a project

2.Compare the cost with benefit: this requires conversion of future values of costs and benefits to present values3.Find the Net present Value (NPV)4.A project is economically feasible when its NPV is positive If all projects produce positive NPV, the one that has larger positive NPV should be chosen Issues: needs achievable project objective Objective should be measurable Benefits must be converted to monetary gain

Tangible Benefits=1,10,000

The system starts to show a positive return during its second year of operation. The internal rate of return is calculated as follows: Cumulative PV Benefits + Costs / Cumulative PV Costs= 133,686 / 348,938= 0.383 This represents an IRR of 38.3% over the expected lifetime of the system, or 7.66% per year.

BE Analysis is employed in public sector that are client oriented airlines, hospitals..Variable and fixed costs are two key elements in determining BEP of a project or program.BEP is determined by using; Revenue- VC- FC = 0Or, BEP = Fixed cost Contribution margin/unit Contribution margin= revenue VC per unit

Defining revenue Revenue is the amount of money that is brought into a company by its business activities (Sales).In the case of government, revenue is the money received from taxation, fees, fines, inter-governmental grants or transfers (Zoological Park), securities sales, mineral rights(Coal,Gold)and resource rights, plus any sales(Sim Card/Air ticket) that are made.

Public sector economic activities(Sys of Production) include:1. Provision of Public goods and services (Electricity etc)2. Allocation of Resources: Distribution of Wealth(resources), Stabilization, and growth. Certain goods may be discouraged/encouraged3.Correction of market imperfections: When private sector monopolizes, the govt. may take over (E.g, Public utility service)

Budget depends on the capacity (how much) to taxA representative tax system should assess the level of personal income, the value of retail sales and the value of property to compute fiscal capacity. The average tax rate for each base is computed by dividing the total revenue derived by the total value of the base. Revenue Concepts;Revenue Measure: is legal authorization to raise revenueBase: is an event on which revenue is collected. E.g. income, salesBase Measurement: Bases have to be measured to determine the amount of revenue

Exemption(Exclusion) It is a release from an obligation or something excluded from revenue base. Eg.Tax exemp. for NFPsDeduction(Reduction): is an adjustment in a Base. Eg.TA, charity donationsRate: Face rate Vs Effective Rate.Revenue Liability: Adjusted Base (after deductions) X rateCredit: is almost a deductionRevenue Structure: It is a relationship of different elements. E.g. Gross Base-deductions = Adjusted base, Adj.BaseX rate = Reve. Liability, Rev. Liab Credit =Adjusted revenue liability

Functions of govt revenue include: Efficient(Right time) generation of resources Fairness in the distribution of tax burdens(Logic-Luxurious Items))Major Taxes: Income Taxes, taxes on goods and services, property taxesNon tax revenues: user fee, user charge, fiscal monopoly(VAT Import Export duties etc) and utility revenue

Examples of user fees include highway tolls, parking charges and national park entry fees.

User Charge:Water Supply,Sanitation etc

Rev Adm includesFinding the base(Eg Income), Placing a value on that base, Determining a revenue rate; Actually collecting the revenue, Monitoring collection procedures, Handling complaints or appeals, Enforcing revenue collectionManaging Revenue1. Determining Revenue needsRevenue requirement is based on expenditure plans.Consider the following: Political Philosophy(DevelopmentPoverty Ele.Green Revolu)Community growth and development

- Expanded and new programs(Metro etc)Population characteristics and trendsTax base components (Deductions/Exemptions)Stability of revenue (Tax Dept.)Tax efforts (Tax Collection Centers/Employees)2. Fair(Business not too high or too low) and equitable distribution(FDI) of tax burdens : Apply ability to pay.3. Revenue rate on the base must be responsive to economic growth.(Demand=Supply)4.Ensure revenue productivity5. Revenue neutrality (Same as 2)

6. Easy to comply Revenue System7. Revenue collection & cash mgt: Accelerate collections and make sure that adequate cash is available on time.8. Maintaining controls over collections: Keep up-to-date taxpayer records, make collection and accounting separate 9. Enforcement of collection: Controlling delinquency(Uncaring), Discovering non payers, Auditing Taxpayers

GuidelinesFees(Zoo) and charges should cover the cost of serviceDesign policy to limit the use of one time revenue source.Identify unpredictable(Gift/Wealth tax) revenue sourcesAdopt a policy on revenue diversification(WiFi/Data usage,land line)Institutionalize multiyear projections (Telecom, electricity)Monitor the periodic analysis of revenue sourcesEvaluate the rates and basePeriodically examine exemptions to assess the lossObtain consensus(agreement) on the revenue forecast employed to estimate budgetary resourcesPrepare a revenue manual.

StepsEstablish the base year, identify the collectionProjection of revenue growth trend and identification of revenue sources characteristicsOutline the operating policy that makes the base for revenue forecast(Eg 2000)Validate the assumptions on which revenue forecast is made (Same trend)Select a forecasting methodUp date the forecasting methodMake collections consistent with the projected revenue

Methods:1.Expert Opinion Method: Experts in different fields such as Economics, Accounting, Law etc will be requested to estimate the revenue2. Nave Forecasting: The revenue of the most recent prior year is expected to be realized next period3. Best-Guess: A few experts forecast the revenue based on their education and experience. They may use different methods 4. Consensus Forecasting : A group of individuals and Research firms collectively agrees on revenue yields

This consensus forecast includes data from numerous research firms as Mercom wanted to present a combined view, which better predicts the movement of the markets with multiple insights and market knowledge. With the world energy markets currently at a turning point, a lot may change in the next three months - Mercom predicts that it will be in a positive direction for solar.

5. Delphi Forecasting: The Delphi Method is an example of a qualitative technique where a group of experts gets together and reaches a consensus on what will happen in the future. A questionnaire is sometimes used to facilitate the process. Two disadvantages of the Delphi Method are low reliability with the consensus and inability to reach a clear consensus.

6. Time Series Model: It depends on the recent past for projecting revenue. It is based on historical data with equally spaced time intervals. By graphing historical data the pattern of a revenue source will be identified

6.Trend Analysis (Based on Historical Date): The analyst calculates the rate of change for one time period to the next or an average rate of change. This rate will then be applied to the most recent revenue yield to compute the revenue for the next year Change () = P2-P1 P1 where P1 the base period, and P2 the following periodAverage rate of change =(Pn-P1/P1) n , where P1 the base period, Pn indicates each following period, and n total periods in the data set

7.Moving Average: This allows the number of past periods to be added. For a 3 yr Moving Average, the collections of three years (20, 25, 30000) will be added and the total will be divided by 3. When the next yrs figure is available(45000), add the recent 3 amounts and divide it by 3

Planning: the process of deciding in advance what is to be done and how It involves determining overall missions, identifying key result areas, and setting specific objectives as well as developing policies, programs and procedures for achieving them. (Kast and Rosezweig). - a pre requisite for effective financial management. Strategic Planning: the process of identifying public goals and objectives, and deciding on the resources to be used to attain them.

Eg:Goal: Directly provide nutritious meals for the homeless of Addis Ababa Objective:Interpretation: Adequate supply of nutritious food for the homelesss for Goal 1:To cover 50000 homeless people of Addis AbabaTo provide them meals in packets at 100 places two times a dayTo motivate School teachers to complete the taks on time

Strategy:Lobby Organization and use the money to achieve the ObjectivesTake a homeless person to dinner

The emphasis in strategic planning is From a broad mission statement, to statements of more specific goals and objectives consistent with the organizations mission to more explicit policies and implementing decisionsStrategic planning will be realized only through management planning. Mgt Planning involves: design projects and programs to attain goals,

Mgt planning the link between strategic planning and actual performance. Operational planning: setting standards for the use of specific resources and on performance tactics to achieve overall goals of the strategic plan.

Financial planning process Involves three major cycles: Planning cycles, cash management cycle, and management control cycle(1) Planning cycle: involves (Broader Area) Preparing budget Planning for capital(Funds/resource etc) facilities,Debt financing and how are we going to administer debt,Analyzing costs by cost benefit and cost effectiveness analysis (fixed/variable/controllable/uncontrollable/investment/ etc)

(2) Cash mgt cycle involves (Narrow Area)Analyzing revenue and expenditure Classify revenue sources and expenditure based on public service assessment (historical data may be used)Forecasting cash flow ( cash budget preparation/time of availability of cash)Cash mobilization (accelerating collection, control of disbursement, avail credit facilities)Planning for investments (high return, low risk, easy convertibility, security selection)Conducting financial assets analysis ( how new programs are funded, meeting operating expenses, adequacy of working capital)

(3) Mgt control cycle involves: Use of accounting ( financial accounting, fund accounting, and cost accounting) for greater economy, efficiency, and effectiveness

Expenditure Forecasting; No single accurate approach for expenditure forecasting

The normal procedure is projecting the cost of current service based on population change, inflation, staff, capital cost(Debt.), and government policy. The base for future service and provides continuity

Expenditure forecasting ContThis requires: Analysis of the major components: personnel services ( the highest cost on govt. sector); materials, supplies, and equipment; capital improvements (financed by outright purchase, by borrowing, or a combination of the two)Forecasting expenditure using standard costs: Commonly used approachProcedures:Identify the cost item (E.g. personnel) Develop standard cost ( the most desired cost to complete an activity) Develop a budget based on the std cost Make changes for services etc

Procedures..Budgeting - A road map showing where the organization is going (Public and Private Org)The word is derived from the French word bouge meaning leather bagThe most common policy document at all levels of govt. It, - records the goals and objectives, - defines govts total service efforts, - measures performance, impact, and effectiveness

Budget is a complete plan expressed in financial terms. It includes estimates of the : - Services, activities and projects to be carried out - Expenditure requirement - Resources A budget provides the legal base for spending and accountability. Revenue and expenditure information is in structure to facilitate monitoring(Watch/Observe), evaluation, and control of financial resources

Objectives of budgeting

Allocating scarce resourcesRaising revenueStabilizing the economyHolding operating agencies accountableControlling expendituresFacilitating the transfer of intergovernmental fundsAchieving planned goalsManaging programs

Be conservative: Build in a safety factor by tending to underestimate your income and overestimate your expenses. Consult other people in setting a budget:(Experts) Budgeting requires teamwork . The task of budgeting should be split and allocated among those individuals who have the best chance of knowing what expenditure is likely to be needed and what income is reasonable to expect. Allow plenty of time: Budgeting is not an activity that is completed in a few hours. A good budget may be worked on for several weeks if not months, adding and changing figures as new information comes to light.

4. Excellence in documentation: the budget strive to produce documents that can be read and understood by anyone. Useful again in a year's time when the budgeting process begins again 5. Equitable(Reasonable) and responsible allocation of resources -a balanced approach to spending decisions - Balanced approach to allocating limited resources - Shared sacrifice among state agencies and functions of government - Minimize additional cuts in human services, which already have been cut disproportionately6. Maximize available revenue -to ensure all reasonable resources are available

Budget should be comprehensive 1. Include all estimates of revenues and expenditures. 2.Exp. financed by external loans & grants Such expenditures should be budgeted in the same way as other govt expenditures It is advisable to have one authority (MOF) to deal with loans and grants.3.Extra-budgetary funds These are special funds organized under special arrangement. E.g. Emergency Fund. These may not be shown in the budget so as to avoid budget cuts and budget execution problems.

However, it is better to have a link with the national budget so as to make the payments only through the treasury single account.4. Off-budget expenditures These are expenditures that are paid not through the budgets. E.g. Extra Budgetary Funds (EBF), Expenditure financed by external loans5. A) Tax Earmarking : EBF may be financed by earmarked(specific) revenues (road fund, energy fund).

5.B) User Charges : These are charges for quasi-private goods. The spending agencies that collect the revenue are free to retain a portion of the revenue.6. Social security funds Normally, SSF is included in the budget. If not, their budget should be annexed to the budget of the central govt and presented to parliament.Other Forms of Govt Activities with Fiscal Impacts. Quasi fiscal activities: These operations undertaken by the govt banks include interest rate subsidies, support to ailing industries, payment of govt debts etc. (in budget or as annex)

2. Govt liabilities and contingent liabilitiesExplicit liab. & commitments such as salaries, pensions, debt etc Explicit and contingent liabilities(Related with Explicit) are legal obligations triggered by a discrete (Separate) event that may or may not occur.Implicit Liab. : expectations such as roadImplicit & Contingent lia. : are non legal obligations. E.g. the govt is expected to intervene in case of natural calamitiesLong term obligations except multi year legal liabilities(Which is in continuation) are not budgeted.

3. Loan guarantees: given by the govt for loans taken by the agencies. At least the budget should show it as a contingent liability4. Govt Lending: made to entities that cannot afford borrowing at commercial terms. Loans should be included in gross terms. Interest subsidies must be budgeted as an expenditure5. Tax expenditures: revenue foregone because of preferential provisions of the tax structure. E.g. exemptions, deductions etc. The direct impact of tax expenditures should be budgeted

Accrual Vs Cash budgeting Accrual: more comprehensive, easier to understand, favored by credit rating agencies, harder to manipulate, comparable and consistent, includes liability disclosure (IMF appreciates)2. Gross Terms: Govt activities (including its business activities), expenditures and revenues should be shown in the budget in gross terms3. Annual nature of the budget (Eg.10 Year Budget) A longer period may lead to uncertainty4) Budgeting treatment of Entitlement programs Entitlement programs or demand-led programs depend on various economic and demographic parameters. Thus, social security payments and debt servicing are authorized under special legislation

Operating Vs capital budgetingOp Budget is an estimate of expenditures (salaries, wages, contractual services, materials, and supplies and other consumables) that must be balanced against the recommended revenue program. -a basis for evaluating competing requirements for limited financial resources. - facilitates the scheduling of workCapital budget : A budget to meet long term needs for public improvements and the means of financing these commitments. (often supported by capital improvement program)

Capital Budgeting is a process used to evaluate investments in long-term or capital assets. Capital Assets have useful lives of more than one year;analysis requires focus on the life of the asset;low-cost, long-lived assets are not usually subjected to the capital Budgeting process;cost often makes it necessary for the organization to finance the asset using long-term financing from capital campaigns, mortgages, long-term loans, leases, and equity offerings.

What are capital assets?They are used in the production or supply of goods and services (productivity criterion), Their life extends beyond a fiscal year (longevity criterion) they are not intended for resale in the ordinary course of operationsTheir treatment as a capital assets is of value (materiality principle)

Why Prepare a Capital Budget?

Since the investments are large, mistakes can be costly.Since capital acquisitions lock the organization in for many years, bad investments can hamper the organization for many years.Since capital assets have long lives, they must be looked at over their lives. Operating budgets do not do that. Value on accrual basis .Since the cash the organization uses to buy the capital asset is not free, managers must include the cost of that money in their analysis.

Characteristics of CB1.Capital Expenditure for Long Period: This long-term commitment adds considerably to the risk of capital budgeting decisions. Most capital expenditure schemes call for a permanent commitment of relatively large sums of money over a number of years. 2.A firms future profitability and growth are linked to the soundness of its capital expenditure policy 3. The capital expenditure budget embraces an organizations plans for replacing, improving and adding to its capital equipment.

4.good estimates of the rate of return on capital expenditure projects presuppose an understanding of the economic concepts that underlie sound investment decisions. 5. Increases the Breadth of Analysis Leading to Decision Making6. As funds are committed over extended periods of time, there is a need for proper forecasting. There is an element of uncertainty and risk which may lie in store for the future. All these factor have to be properly evaluated in the process of forecasting. A proper cost-benefit relationship should also be established.

7. A firm has to assess the capacities of the assets properly before arriving at its long-term decisions. An organization should, therefore, plan and fix the capacities of its assets in which long-term investment is going to be sunk. Capital facilities planningCapital projects should be carried out in accordance with a system of priorities reflecting both public needs and the governments ability to pay. A systematic approach includes the following:1.Careful planning of capital improvements: Sound budgetary decisions/Avoid excess debt commitments

2. Strong citizen participation in the capital facilities planning process3. Intergovernmental cooperation4. coordination among the various departments and agencies 5. Forecast Community Growth And Change

Income levels, household size and other demographic characteristic provide vital information as to facility needs and service expectations. E.g. An aging population needs special health care facilitiesPopulation may be grouped into different categories based on age sex etc. to identify their needs. Programming of CB should be based on priorities.

Steps in developing CBInventory and assess the existing condition of capital assetsDevelop alternative projects to meet short and long term needsSelect alternatives and establish priority 4. Estimate the required resources5. Assess the impact on the govt organizations financial policies6. Establish a monitoring system7. Initiate a replacement and maintenance strategy

Determine the investment needs of the organizationDetermine the investment opportunities that meets the needs of the organizationGather the relevant information concerning the investment opportunities to be evaluatedDetermine the methods to be employed in evaluating the investment proposalsCalculate the results for the methods using the relevant informationDetermine the criteria to be used for deciding whether an investment proposal to be accepted or rejectedDetermine which investment meets the criteria for acceptanceDetermine the means for financing the investment

CB Analysis aims at identifying the projects with maximum social benefit. The process consists of the following steps:Identification of relevant investment alternatives: clearly understand various investment choicesEstimating the cash flow: Consider cash inflows and outflowsSelection of criteria to apply to cash flowArrange data and select projects with maximum social benefits

CB Criteria1. Simple rate of return ( Average rate of return) ARR= Average net income Investment ARR= (Av Cash flow Depr) Investment If ARR is greater than required rate of return, the project is accepted2.Pay Back period : Estimated time required to recover the investment. The project with short payback period is selected

3.Net Present Value: NPV=(CF x Pr. Value Factor) IProject with positive NPV is accepted. If many alternatives have positive NPV, the one which the highest NPV is selected4. Internal rate of return (discounted rate of return): Rate of interest equal to NPV of a series of cash flow payments is equal to zero. If a projects internal return is greater than the cost of capital, the project can be accepted 0= - INV + P1 + P2 + Pn (1+i) (1+i)2 (1+i)n

Purchasing is concerned in public and NFP orgns with the acquisition of all goods and services except those provided directly by employees of an organization.It seeks to procure goods and services to achieve maximum value for the resources expended.

Objectives of purchasing systemMaintain adequate supply of materials at all timesDeveloping measures to evaluate the purchase performance functionWorking individually and collectively with vendors to achieve cost reductionsConducting cost-benefit studies to determine insourcing or outsourcing

Automating procedures to increase efficiencyDevelop training programs for purchasersEmploy team-buying and other techniques for effective performanceArrange for alternative supply systemsUse a benchmarking system to achieve best results

AttributesShould have a purchasing manualHave a purchase requisition systemA purchase order system to communicate commitment to vendors and to accounting and other deptsA list of employees authorized to request purchases with dollar limits

A pre-audit system before issuing the purchase orderA system for evaluating bill-type purchasesA system to speed up overdue ordersA system to locate suppliers who can satisfy purchaser in cost, delivery, quality

Public organizations have to consider..Items to buy: should be based on activitiesProcedures for Buying: A set procedures have to be developed. Public accountability should be paid attentionCost of Purchase: Purchase should be at the lowest cost

Functions of purchase departmentIdentifying an ideal source of supplyDecision making on procurement based on price and marketFollow the legal procedures for purchasingReview the policies and proceduresMaintain strong relationship with vendorsRepresent the orgn in bidding process which includes evaluation of bids

Right Quality : Specifications, standardsRight quantity: Quantity requested and quantity ordered may be differentRight Time: Avoid delaysSource Decision making: right source Price: Discounts have to be checkedPurchasing negotiations:Skill in negotiations

Specify quantitiesPrepare purchase requisitionSelecting sources Soliciting bidsAnalyzing bidsIssuing Purchase orders

Following up purchase ordersReceiving and inspecting goods and servicesMaking payment for goods Storage and Inventory control are also included in the purchasing process

Benefits..It induces lower prices of goodsEncourages the streamlining managementImproves administrative functions through better planning and control, standardization of materials, and improved funding techniques.

Ensure that goods on the purchase order are receivedExamine the goods to see if they have been tamperedCheck damage in the bill or packing slipForward a copy of the receiving report to the accounting dept.

Common Indicators are: - Volume of rejected pur. due to defects - Ratio of price variance to bud.purchase - Adm. Savings from purchase orders - Ratio of purchasing employees and total employees - Reduction in rush orders - Cost reduction

Competitive Bidding Bids are through ad. There may be many suppliersCompetitive sealed proposals Formal ad is not there(No general call) Solicitation of proposals from select group of vendors

Negotiated bids Formal ads may or may not be there Bids are subject to adjustment before final acceptance. Used mainly for professional services Noncompetitive Negotiations Used when only one source exists

Cost of purchasing includes..Purchase costs, Ordering costs, Carrying costs, Stock out costsEOQ : the right quantity of materials to be purchased. EOQ= 2AP/CSafety Stock: guard against late deliveries and such other problems that would occur between the placement of an order and its delivery.

Reorder Point: sum of the average usage during lead-time plus the safety stock.RP=Av. daily usage during lead time + safety stock OR=(Av. Daily usage x Lead Time) + safety StockJIT purchasing: requires accurate inventory information system, highly efficient purchasing, very reliable suppliers and an efficient material handling system.

Reduction in operating costsImprovement of cash flowEnhancement of qualityReduction in inventory obsolescenceImprovement in space utilizationEnhancement of productivity

It involves many interrelated processPlanning: deciding the type of assetsProcurement: Purchasing proceduresOperations and Maintenance (control,preventive and corrective maintenance, monitoring, training of staff to use the asset and record keeping)

4. Replacement Alternatives such as leasing, outsourcing etc should also be considered5. Disposal Keeping used assets is costly Disposal should be at the lowest cost

The central register should contain: Date of acquisitionDescription of the assetAccountability (manager, program etc)Capacity, useful life, warrantiesActual cost, depreciation rateDisposal information such as residual value

CM ensures adequate cash availabilityCM secures yield on the short term investment of cashCM focuses on the conversion of A/c R to cash receipts, the conversion of A/c P to cash payments, the rate at which cash disbursements clear bank account and what is done with the cash balances

CM avoids:Liquidity crisis: when an organization has insufficient cash to meet its obligations Inability to accelerate receivable collections and to depositThe failure to invest funds:

The cash to be held must be determined on the basis of two costs:The opportunity cost of not investingThe cost of collecting and reviewing information required to invest, disinvest, borrow or repay loans.The basic CM problem is to balance these two types of conflicting costs

The attitude of public managers holding sufficient cash is changing due to increasing costs of borrowing and the expansion of activities.Today they minimize cash holdings, accelerate cash inflows & control outflow

Elements of Cash Management: 1. Policy Objectives and Constraints - Policies set the legal guidelines for daily cash management - Within the policies, the cash manager should set specific objectives such as cash levels, desired yield, cash to invest - Constraints include restrictions on money collection, payment, investment by funding agencies etc

2. Forecasting - is the ability to calculate, predict or plan - forms the basis for cash budget - constraints for preparing cash budgets include : (1) ill coordinated revenue and expenditures, (2) heavy cash inflow and idle cash just before the penalty dates

3.Investment Strategy - what to purchase, when and how long, and the mix of securities. - schedules and guidelines for purchasing securities - Indicators to assess the cash managers achievements

4.Bank Relations - Maintain good relations with banks, loan associations, security analysts, dealers in commercial papers - Select a bank on competitive basis - Consider the cost of bank services and the compensating balance requirements

5.Tracking Investments - Maintain investments using an up-to-date tracking system of all outstanding investments. - The system should be capable of providing information on money invested, maturity schedule, yield generated (ing)

6.Cash Flow Planning and Analysis: to manage cash and cash-equivalent current assets wisely so as to maintain adequate liquidity. - Analyze cash flow - prepare cash flow statementsMethods of preparing CF statement: Direct, Indirect

Direct: Divides cash flow into: cash flow from - Operating activities: includes all revenues, fees, and contributions, and all cash paid for resources consumed to provide goods and services., - investing activities: involves acquisitions of long-term assets during a fiscal period.

- Financing activities: reports cash flows resulting from debt.( All cash transactions affecting the balance sheet and income statement are placed in the appropriate categories).Indirect method: cash flow is determined from changes in current assets, current liabilities and other accounts.

CF using Indirect methodNet Income/Surplus.+ Depreciation- Increase in current assets (A/c R & inventory)+ Decrease in current assets (a/c R & Inventory)+ Increase in current liabilities (A/c P)- Decrease in current liabilities (A/c P)= Cash flow from operating activities.

Cash Budget requires identification of specific receipts and disbursements as well as relevant dates.Prepared on a weekly, monthly, quarterly, or semi annual basis usually two supporting schedules, namely a schedule of receipts, and a schedule of disbursement are prepared prior to the cash busget

7. Cash Mobilization a) Accelerating collections: - Mail, Processing, and clearing floats - Cost of float=Amt X Op.costXdays/360 Techniques for accelerating collections: Concentration Banking, Lockbox services, Preauthorized check

b) Controlling disbursements - Timing of payments. - Better control on payments can be made if bank accounts of various local govts are brought to one central account - Consider the disbursement float

c) Controlling bank balances -Avoid accumulating idle cash in banks - Banks should be ordered to send reports on collections and payments daily or at regular intervals - Decide on the extra cash

Monitoring and Evaluation - Important inflows and outflows should be monitored periodically - Evaluate the performance of the cash budget managers - Make sure that the internal control system is strong to control cash

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