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Governmental and Nonprofit Financial Management

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The first book to comprehensively discuss both governmental and nonprofit financial management!
Governmental and Nonprofit Financial Management makes it easy for both nonprofit and governmental managers to understand essential governmental and nonprofit financial management topics and their various subfields.
• Understand the similarities and differences between governmental and nonprofit financial management standards and procedures
• Learn multiple cost-saving techniques
• Explore highly technical financial management subfields, from auditing and financial analysis to capital budgeting and risk management
• Use over 40 applications to calculate everything from T-bill yield to lost cash discounts
• Benefit from the in-depth coverage — an excellent primer for the non-accountant
Bonus! Apply what you have learned by completing problems, cases, and report writing exercises at the end of each chapter.

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CHAPTER ONE: Introduction to Public and Nonprofit Financial Management

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This chapter examines the differences and similarities between governmental financial management and nonprofit financial management.

Financial management occurs over three fiscal years. In fiscal year 20X0 organizations budget for the upcoming fiscal year, 20X1. After the fiscal year begins, the budget is executed. Management carries out the governing board’s policy directives. Financial managers ensure that funds are well spent in the amounts and accounts budgeted, account for transactions, invest cash, purchase goods and services, manage inventories, borrow monies for short-term financing and long-term capital projects, and manage risks to persons and properties by means of safety management and insurance coverage. Finally, after the fiscal year ends, local governments and nonprofits engage the services of an independent certified public accountant (CPA) to conduct a financial audit.

Large state, local, and nonprofit organizations typically have sound financial management systems staffed by professionals. However, small governments and nonprofits have small and relatively unsophisticated financial management systems. In 2002, according to the U.S. Census, there were 87,849 local governments, composed of 3,034 counties, 19,431 municipalities, 16,506 townships, 13,522 school districts, and 35,356 special districts. Most of the local governments were small: 53 percent of the counties and 94 percent of the municipalities had populations of fewer than 25,000. Indeed, 49 percent of the municipalities had populations of fewer than 1,000.

 

CHAPTER TWO: Accounting

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Accounting is the process of recording, classifying, and summarizing financial transactions. The receipt and disbursement of funds are accounted for and reported to the governing board, internal management, the public, bond-rating agencies, investors, potential investors, other governments, nonprofit agencies, and the media. Accounting has early beginnings. For instance, cities throughout the Byzantine Empire had to account for a fixed portion of their receipts being spent to repair their walls to protect against barbarians. The constitutional history of England is essentially the story of the struggle for authority to raise and spend public funds.

A well-designed and well-managed accounting system ensures proper stewardship over public funds. Accounting policies and procedures must comply with legal requirements to minimize mishandling or misappropriation of funds. In addition to providing financial control, accounting serves management by linking service outcomes to costs. The accounting system is the foundation for all financial management functions, including:

 

CHAPTER THREE: Budgeting

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The budget is the chief policy instrument, explicitly or implicitly expressing the priorities of the governing board. In contrast to retrospective accounting records, the budget projects the future. At a minimum, the budget controls financial transactions, ensuring that expenditures are made in the accounts and amounts legally authorized. Management monitors expenditures and receipts to ensure that funds are spent according to the governing board’s intent and periodically reports the organization’s financial condition to the governing board.

In addition to providing financial control, the budget is an important planning and management tool. Linking costs to service outcomes, the budget serves as an effectiveness report card. Very much a public document, the budget is of great interest to a wide range of stakeholders, including citizens, community groups, public and nonprofit employees, bond rating agencies, other governments and nonprofits, and the business community.

Governing board members make decisions that underpin the budgetary process, including what the fiscal year will be, whether to balance the budget, whether to adopt a strategic plan, how much to hold in reserve for emergencies, and what accounting basis and budget system to use. The most politically sensitive decisions for government board members center on tax and user fee rates.

 

CHAPTER FOUR: Purchasing

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Purchasing has early roots. A purchase order dating back to around 2800 B.C. was found in Syria. Written on a red clay tablet, the order was for “50 jars of fragrant smooth.”

Purchasing supports the mission of each department by economically buying high-quality goods and services. As with any support agency, tension sometimes exists between purchasing and operating agencies. If goods are not ordered and delivered in a timely fashion, agencies understandably feel frustrated. And if they are frustrated by delays they perceive as unwarranted, agencies might overstock supplies or split purchase orders to avoid the time-consuming bidding process. To avoid inefficiencies, purchasing must maintain a close, supportive working relationship with the agencies it serves. The relationship requires that purchasing have a sound foundation.

The purchasing and material management program should be founded on five cornerstones: (1) well-trained personnel; (2) centralization; (3) laws, regulations, and a manual; (4) an ethics policy; and (5) standardized goods and well-written specifications.

 

CHAPTER FIVE: Cash Management

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Investment returns are an important source of governmental and nonprofit revenues. A cash management program, however, is more than investments. A government or nonprofit needs a close working relationship with its bank and a tight system of control over the collection, deposit, and disbursement of cash.

A cash management program has five components: (1) trained personnel, (2) a cash management policy, (3) cash management systems, (4) sound investment practices, and (5) banking services.

Using personnel with the appropriate level of training is essential. The personnel can be within the organization or outside the organization. Many states contract out their investment function to a professional investment manager, as do large nonprofits with substantial reserves. (See “Selecting an Investment Adviser” later in this chapter.) Large local governments usually have a full-time cash manager, but for most governments cash management is but one of the finance director’s many responsibilities. Unfortunately, cash management training is fairly limited. Though the Government Finance Officers Association (GFOA) conducts seminars, they are often too expensive for most localities to attend. Some state organizations and Institutes of Government also provide training.

 

CHAPTER SIX: Debt Management

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Both governments and nonprofits borrow in the short-term (less than a year) to ease temporary cash flow shortages. Nonprofits borrow in anticipation of grants and donations. Governments borrow in anticipation of the receipt of taxes, bond proceeds, or other revenues. Governments and nonprofits, however, differ with regard to how they fund capital infrastructure, buildings, and major pieces of capital equipment. Governments can issue tax-exempt debt; nonprofits cannot. Instead, nonprofits borrow funds from banks to fund capital improvements. They thus should be especially keen when negotiating the best loan terms with a bank.

The amount of long-term debt issued by governments is staggering. For example, in 2001 state and local governments issued $384.8 billion in long-term municipal bonds. Credit rating agencies rate bonds. The better a bond rating, the lower the interest rate a government pays. Mere hundredths of a percentage point less in an interest rate result in significantly lower interest payments over the life of a bond issue.

 

CHAPTER SEVEN: Risk Management and Pensions

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Risk management identifies and treats risks of accidents, fire, theft, and public liability suits through both risk control and risk-financing mechanisms. An effective risk management program results in a safer working environment, fewer accidents, lower insurance costs, increased productivity, and higher employee morale. Pension management entails wisely investing and managing employee pension assets.

Governments and nonprofits follow the same risk management steps to identify and treat risks. Both form safety committees and purchase common insurance policies. However, some nonprofits have some types of risks that governments are unlikely to face. In particular, nonprofits generally use volunteers more. Moreover, nonprofits that serve the developmentally disabled, seniors in assisted living, and children in residential facilities have particular liability exposures. This chapter discusses the insurance coverages and prevention measures needed for such exposures.

A well-managed risk management program has three preconditions: (1) a centralized operation with trained personnel, (2) a formal statement of policies, and (3) a good recordkeeping system. Governments and nonprofits should centralize risk management duties under a risk manager, who in small governments and nonprofits has other responsibilities as well.

 

CHAPTER EIGHT: Auditing

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After the fiscal year ends, most governments and nonprofits have an independent auditor perform a postaudit of their financial transactions, the product of which is the annual financial report. The annual financial report is an exceedingly important managerial and policymaking tool. A snapshot of a government’s or nonprofit’s financial condition as of the last day of the fiscal year, the financial report is used by a wide array of stakeholders—the governing board, management, bond underwriters, bond rating agencies, employee unions, interest groups, donors, and everyday citizens.

Unlike a financial audit, a performance audit is an evaluation of how well a government or nonprofit agency is performing its work. It is an organizational, not financial, assessment. Though available to the public, a performance audit is more of an internal document than the financial report.

At the federal level, financial auditing is conducted by two organizations. Inspectors general conduct an annual financial audit. Appointed by the President, with advice and consent of the Senate, inspectors general are organizationally located in the agency that they audit, but only the President may remove them from office. Initially, the inspectors generals were chiefly responsible for detecting fraud, but their role increased with passage of the Government Management Reform Act of 1994. Now they conduct financial audits and issue an annual agency financial statement. The Government Accountability Office (GAO), in the legislative branch under the direction of the Comptroller General of the United States, which consolidates the agencies’ financial statements in a single report and may audit agencies at the request of members of Congress.

 

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