Finance for Non Financial Public Sector Managers

Chapter 1

INTRODUCTION

Finance is a vital resource for every organisation and it is important that all staff, particularly managers, have an understanding of finance. Often this area remains the domain of a few, and non-financial managers may be excluded from detailed financial issues. This book is therefore written to help managers gain a basic understanding of key financial concepts that affect an organisation’s day to day operations.

The public sector has undergone many changes in recent years with respect to commercialisation and accountability. These changes have included outsourcing, competitive tendering, Public Private Partnerships, and a general increase in public services being delivered by the private sector, to name a few. It is becoming increasingly important for all public sector organisations to demonstrate that they are financially viable entities in their own right. This means that income, regardless of its source, can fully support all expenditure, and that value for money services can be provided to meet the requirements of end users.

Ideally, managers should have some knowledge of finance such that the financial implications of service decisions are correctly taken into account. This book covers the most important aspects of financial accounting, enabling managers to have a greater understanding of the financial information presented to them and to assist communications with colleagues and finance professionals.

The text covers key concepts such as keeping the accounts, understanding financial statements such as income and expenditure, and the balance sheet. It also explains how cash flows are calculated and examines key financial performance indicators.

In addition to providing a practical text with illustrations, the book also incorporates exercises at the end of each chapter to enable readers to practice the techniques covered, and apply the concepts to their work situation. Suggested solutions are provided at the end of the book and the final chapter contains a glossary of key financial terms.

This book is one of a series of Essential Skills for the Public Sector titles. The series aims to assist public sector managers become more efficient and effective in carrying out their important management responsibilities. We consider this book to be an important part of the tool kit for public sector management development.

Chapter 2

KEEPING THE ACCOUNTS

Keeping Financial Records

Organisations maintain financial records to keep account of all transactions, and it is these records which are used to develop the key financial statements. The two main statements produced by all public sector organisations are the income and expenditure account (similar to a profit and loss account for a private sector organisation), and the balance sheet.

The income and expenditure account is a statement showing the surplus or deficit arising as a result of the organisation’s activities over a period of time, for example a year. The balance sheet, on the other hand, provides a statement of assets and liabilities at a particular point in time, for example, the last day of the financial year. By deducting the liabilities from the assets, the balance sheet is able to establish the net worth of an organisation. Both these statements are discussed in more detail in chapters 3 and 4 respectively.

Maintaining proper financial records is essential for the following reasons:

  They provide the basis for the management accounts which are produced on a regular basis, monthly, quarterly, etc.

  They form the basis for the financial statements that have to be produced at least once per year

  They provide a record of what has actually occurred within the organisation in financial terms

  They are essential to ensuring accountability and protection against fraud

  They provide the information required for financial monitoring and control

  They provide an audit trail for each financial transaction that takes place

Financial Transactions

Most organisations now operate some form of computerised financial recording system. Depending upon the organisation’s size, this may vary from a large and powerful integrated real time system which handles far more than just financial data, for example, personnel information, to a system which is used solely for the accounting functions. A very small non-profit organisation, however, may be able to maintain their accounts on a computer spreadsheet. All financial recording systems, regardless of their complexity, are based on basic double entry book-keeping principles.

Double entry refers to the fact that each transaction requires two entries in the accounting system.

Book-keeping refers to the maintenance of accounting records which historically were kept in books or ledgers.

This book will not attempt to cover the theory of double entry book-keeping, however, it will illustrate the process for recording transactions using double entry principles with the following example.

A school has set up a charity account to supplement its income for which separate records are being kept. Each transaction that has taken place is recorded in a red book, such that a set of charity accounts can be produced at the end of the year. The first month’s transactions and the accounting entries that were made are given as follows:

At the end of the month, it is possible to calculate the following:

•   Total income for the month is £1,250 (£500 + £250 + £500)

•   There has been expenditure on a range of items. Depending on the organisation, some of the expenditure would be regarded as capital expenditure whilst others would be classified as revenue expenditure (these terms are explained in Chapter 3)