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Financial Administration
Importance of Finance to Administration
Finance is the fuel for the engine of Public Administration.
(Lloyd George â Government is finance.)
Finance and Public Administration are closely inter-twined in three ways. In the First place, most administrative acts have their financial implications. They create a charge (expenditure) on the public exchequer or bring revenues to it. In the second place, financial operations may be designed to develop and promote particular public policies, e.g., tariffs may be so shaped as to afford protection to the home industries, or taxation may be so designed as to promote economic equality by the transfer of money from the rich to the poor. Finally, financial administration raises important issues of administrative organisation and relationships, e.g. what machinery of financial administration there should be, or what the relationship between such machinery and administrative authorities should be, or who should have the last word about a proposed item of expenditure, the financial officers or the administrative officer, and so on.
Financial Administration
Financial Administration consists of those operations the project of which is to make funds available for governmental activities, and to ensure the lawful and efficient use of these funds. Under democratic government the Legislature is the body to vote the taxes and authorize expenditure. Financial administration has to see that the legislature is not asked to place more tax-burden on the people than is necessary, and that the money voted by it for expenditure is used according to its wishes and with due regard to economy and efficiency.
Financial administration falls in to its five well-defined divisions namely-
- Preparation of the budget, i.e., of the estimates of revenue and expenditure for the financial years.
- Getting those estimates passed by the legislature or other competent authority.
- Execution of the budget i.e., regulation of the expenditure and raising of revenue according tom it.
- (^) Treasury management, i.e., safe custody of the funds raised, and due arrangement for the necessary payments to meet the liabilities., and
- Rendering of the accounts by the executive and the audit of these accounts.
(A.W. Hart suggests that to these should be added also a sixth division, namely, retrenchment which, in view of frequent campaigns for economy, has become a normal feature of financial administration.
Machinery of Financial Administration-
Although there are variations of detail from country to country, generally speaking, the machinery of financial administration consists of five parts-
- The legislature
- The central department or department concerned mainly with financial administration.
- The principal Financial Officers in the administrative departments.
- The audit organisation, and
- The committees of the legislature, particularly the estimates Committee and the Public Accounts Committee.
The legislature under a parliamentary democracy performs the following financial functions, namely-
- Appropriation of public money through the annual budget for expenditure over governmental activities.
- Authorisation of taxes or increase in the rates of existing taxes.
- Authorisation of taxes or increase in the rates of existing taxes.
- Authorisation of the public loans, and
- Enforcing the financial accountability of the spending authorities through controlling the accounts.
In most of the democratic countries, these functions are usually concentrated in the lower or the popular chamber of legislature, e.g., the House of Commons in Britain, and the House of People in India.
Money bills can originate only in the lower House. The Financial competence of the upper chamber varies from country to country. It has been reduced to a zero in case of the British House of Lords, and confined to mere making of suggestions in case of the India Council of States. In most of the British Dominions the upper chamber can reject but not amend money bills. In the U.S.A., however the Senate has equal financial power with the House of Representatives, except that revenue bills can originate in the lower House only.
Budget; Concept and forms
Financial Administration operates through the instrument of Budget and encompasses the entire âbudgetary cycleâ, that is formulation of the budget, enactment of the budget. Execution of the budget, accounting and auditing.
The term Budget was first introduced by C.P. Bhambhri in 1773
Importance of financial administration-
Thus budget is a statement of the estimated receipt (revenue and income) and expenditure of the government in respect to a financial year. In other words, it is a financial document of the government as presented to the legislature and as sanctioned by the legislature.
In its current sense, the budget means the plan of the expenditure and of revenue to balance that expenditure, of usually a public authority. We say âUsuallyâ, because private concerns and individuals, also may have their budgets, and we do speak of the budgets of the business concerns, of family budgets of this or that class of people, or of particular persons. The budget need not always be annual. There may be a long âterm budget covering many years, or a short-term monthly or even weekly budget. In public administration, however, we are concerned with the budgets of governmental authorities only and it is almost the universal practice to prepare these budget on annual basis.
Financial year-
The basis of the budget preparation is the financial year, but the date of its commencement are different in different countries. In India, England, and most of the Commonwealth countries it begins on 1st^ April and ends on 31st^ March, but the corresponding dates in the
U.S.A., Australia, Italy, Sweden, etc. are 1st^ July and 30 th^ June, and in France and a number of other continental countries, the 1 st^ January and 31 st^ December
Rough idea on budget time table.
Functions-
- (^) It ensures the financial and legal accountability of the executive to the legislature.
- It ensures the accountability of subordinates to superiors in the administrative hierarchy.
- It is an instrument of social and economic policy to serve the functions of allocation, distribution and stabilisation.
- It facilitates the efficient execution of the functions and service of government.
- It facilitates administrative management and coordination as it unifies the various activities of the government departments into a single plan.
essential for sound budgetary practice. The more important of these principles are the following â
- Normally the Budget must be balanced one, - the estimated expenditure should not exceed the estimated revenue or income. (This is well- known rule of private finance with which every one of us is familiar, i.e., one must keep within oneâs income of one is not to go bankrupt. Public finance differs from private in certain important particulars, especially in the greater elasticity in the matter of revenue which can be increased, when necessary, to meet extra expenditure than the revenue available, would be courting bankruptcy in the long run.)
When the amounts of expenditure and revenue in a budget are equal or nearly so it is called a balanced budget. If the expenditure is less than the anticipated revenue, it is a surplus budget. If the expenditure is more than the estimated revenue, it is called deficit budget. An occasional deficit budget need not cause worry, but orthodox financial credit and stability of the state.
- The principle of the cash basis of the budget means that its estimates of expenditure and income should relate to what is expected to be actually spent or received during the year, and not to liabilities or demands which incurred or which accrue within the year under reference, but are to be met or realised in some other year, (e.g. if certain sums on account of areas of tax relating to the year 1994- 95 are realised in the year 1995-96, they should be shown in the receipt estimates of the letter and not of the former. Same way if the liabilities for any payments was incurred in the former year but was actually met in the latter year, it should be shown in the expenditure estimates of the latter year only.)
The advantages of cash budgeting is that it enables the final preparation of accounts of financial year to be done soon after its close, but its drawback is that it does not reveal the true financial picture for that year.
- The third principle of budget making is that the distinction between recurring expenditure and income on the one hand, and capital payments and receipts on the other, should be maintained, and the two should be shown in two separate parts of the budget known as the current or revenue budget and the capital budget. Receipts form loans, deposits, sale proceeds of property etc. are occasional and not recurring, and so are also, on the expenditure side, capital outlay on works, debt payment, paying back the deposits etc. The consequence of not keeping recurring and the capital items separate would confused the financial picture. Current expenditure might, in that case, be met out of the loans fund and the balance, or surplus might be shown when really there is deficit. So, the revenue and capital parts of the budget are kept distinct and balanced separately, and the overall surplus and deficit is found out by taking both into account. The budget and account rules give detailed instruction regarding what items of receipt and expenditure should be treated as part of the revenue or the capital budget.
- The fourth principle is that budgeting should be gross and not net.
(The term gross operating budget may relate to two things. It may be an outline a company draws up to project gross profit data, which encompasses gross revenues and material costs the business expects to record over a defined period of time. For example, top leadership may direct sales managers to prepare a gross operating budget for the next 12 months or two years.
Read more : http://www.ehow.com/info_8543119_net-vs-gross-operating-budget.html
Net Operating Budget -Drawing on a gross operating budget, a net operating budget may refer either to net income an organization expects to generate over a given period of time or net expense and revenue amounts it expects to records in corporate books. Net income is an important metric that touches on corporate profitability, the perennial criterion investorâs check before putting their money to work and buying equity shares. Consequently, department heads and segment chiefs work to ensure that net operating budget information is accurate and complete -- not faulty data or information that personnel pull out of thin air)
This applies equally to accounting also. Gross budgeting means that all the transactions both of receipts and expenditure should be fully shown and not merely the resultant net position. Neglect of this rule results in the short circulating of financial procedure, laxity of financial control and incomplete accounts. If the department with an estimated expenditure of four lakhs, and receipts of two lakh budgeted on a net basis, it would go to the legislature with the request for grant for two lakhs only. Thus depriving the legislature of its control over half of its expenditure which met its recepts.th an estimated expenditure of four lakhs, and receipts of two lakh budgeted on a net basis, it would go to the legislature with the request for grant for two lakhs only. Thus depriving the legislature of its control over half of its expenditure which met its recepts.th an estimated expenditure of four lakhs, and receipts of two lakh budgeted on a net basis, it would go to the legislature with the request for grant for two lakhs only. Thus depriving the legislature of its control over half of its expenditure which met its recepts.th an estimated expenditure of four lakhs, and receipts of two lakh budgeted on a net basis, it would go to the legislature with the request for grant for two lakhs only.
- The fifth budgetary principle is that estimating should be as close i.e., exact as possible. There should be neither be gross over âestimating or gross under-estimating. If there is over-estimating of expenditure, unnecessary heavy taxation may have to be imposed on the people to raise the amounts. If there is under estimating, the whole budget may be thrown out of gear when it comes to execution. Close estimating is achieved by taking past three yearsâ average figures of receipts and expenditure under various heads as the starting basis, and making appropriate variations due to special circumstances which can be foreseen.
- The sixth principle of budget making relates to itâs from which should correspond to the form of accounts, i.e., the budgetary heads should be the same as those of accounts. This facilitates budget preparation, budgetary control and the keeping of the
