,Chapter 1: The context of managing public money
Objectives
- Differences between private and public sectors
- History of public financial management
o New public management paradigm
- Public value
- Scope of public financial management
o Basic concepts of public sector accounting
Key points
- Public sector is a large proportion of national economies
- Management of public money is different from financial management in the private sector
- Public expectations about proper use of public money are high
- Financial management is a critical skill for public managers
Key terms
- Accrual accounting: system of accounting where transactions are recognized in the
accounting period where the transaction occurred, regardless of when the relevant
payments or receipts are made or received.
- Capital expenditure: expenditure on the purchase, construction, development or
enhancement of assets that will be of long-term benefit to the organization.
- Merit goods: commodities (goods and services) that are valued by the public but excludable
(such as education) and which governments decide to provide because the market would
under-provide them.
- Public goods: commodities (goods and services) which markets would fail to provide and
which are non-rivalrous (use by one person does not restrict the use by others) and non-
excludable.
- Public value theory: theory put forward by Moore that public managers seek to create public
value just as managers in the private sector seek to create stakeholder value
- Revenue/operating expenditure: expenditure that is not capital expenditure
- PBE (Public benefit entities): generic organization that public managers work in or with
(owed by government)
- Public manager: those who are involved in the executive management of PBE’s
What is public money?
- Definition: all the money that comes into the possession of, or is distributed by, a public
body, and money raised by a private body where it is doing so under statutory authority.
- 30% of the Gross Domestic Product (GDP)
- Spent on public goods and merit goods
o Public goods: non-rivalrous and non-excludable
o Merit goods: excludable (government provides for equity, schooling)
What is public financial management?
- Activity of national government
- Objectives
o Maintain sustainable financial position
, o Allocate resources effectively to sectors, ministries, department, projects and
programmes
o Provide public goods and services efficiently
- Transparency and long term
Public value
- Public managers have different specific goals and objectives from each other but they share
the need to spend public money to achieve them.
- Moore’s strategic triangle
- Measuring public value: express the public value created in financial terms or numerical
terms.
Financial management under NPM
- Questions to ask
o Is this spending within the rules?
o Can we afford it?
o Is it value for money?
- Decentralization
- Competition and outsourcing
- More flexible
- Do more with less
Key concepts public sector accounting
- Private sector organisations prepare profit and loss accounts whereas non-profit
organizations prepare either an ‘income and expenditure account’ or a ‘statement of
financial affairs’.
Debit Credit
Operating expenses Income
Capital expenditures Bank account overdrafts
Investments Amounts owed to creditors incl. loans
Cash Accumulated reserves
Stocks
Debts
- Cash accounting: recognize a transaction only when money is paid out or received
o Positive or negative cash balanced at any point in time
- Accrual accounting: when a transaction occurs rather than when payments are made or
received
o Recorded when goods are received
- Capital expenditure: long-term benefit to the organization
- Operating expenditure: everything that is not capital expenditure or income
- Balance sheet: accounting statement that provides a snapshot of the financial affairs of an
organization and is a feature of accrual accounting.
o Final day of the year
- Cash flow statement: explains the change between two consecutive balance sheets.
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