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Financial Administration – An Overview

Posted in Finance Articles, Total Reads: 2491 , Published on January 19, 2014

Financial Administration contains 2 words Finance and Administration. The word finance means monetary resource and administration means to organize and manage human efforts for greater objective. Thus, Financial Administration refers to making money available to multitude branches of an organization, entity, office etc. Day-to-day activity of these organizations depends on availability of funds, for government owned companies it has even greater significance as it has a direct effect on the welfare. Hence, it has been rightly stated by Llyod George that “Government is finance, take out finance, there is no government.”

Just as a mother (as a manager of the house) needs money (finance/fund) to run the house, government as a manager of Country need finance to run the country. The government gets its finances through taxation, fees, charges etc. Since the revenue being raised is public money, it can be safely assumed that finances being provided to government on condition that the money raised from society will be spent for public purpose. Government raises money from a plethora of sources to meet maintenance, development as well as running expenditure of public administration. Overall financial administration is a term which encompasses following characteristics:

(1) Preparation of the budget, i.e., of the estimates of the revenue and expenditure for

The ensuing financial year,

(2) Getting these estimates passed by the Legislature called ‘Legislation of the


(3) Execution of the budget i.e., regulation of the expenditure and raising of revenue according to it,

(4) Treasury management, i.e., safe custody of the funds raised, and due arrangement for the necessary payments to meet the liabilities; and

(5) Rendering of the accounts by the executive and the audit of these accounts.

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According to L.D. White, “Fiscal management includes, as its principal sub-divisions, budget making followed by the formal act of appropriation, executive supervision of expenditure (budget execution), the control of the accounting and reporting system, treasury management and revenue collection and audit.” So far, the best known machinery for fiscal management is the budget system.

The current trend is toward efficiency and professionalism in financial administration. In this two steps are outlined. One, the government has to be efficient in expenditure and must levy reasonable tax. Two, the government has to form well thought out policy for overall economic development. Moreover, in order to assist the government more and more private participation through PPP, BOT, BOOT model are being thought of. Hence, in future government activities will shrink and there will be less demand from the society to pay tax. As a result we are going to witness the policy of ‘state minimalism’ when the full efficiency of both the government and private sector will be realized. Third world countries have been advised by the world bank and international funding agency to minimize governmental activity by sharing, giving responsibility to the private sector. This will surely help to reduce large scale burden on government and government can in future perform with much efficiency in the remaining areas like social sector. Overall this new approach will lead to societal and economic development.

Budget is a tool of management, it is an instrument to achieve good governance, instrumental behind economic reforms and is reflected in the financial health of the country. Budget is a document which incorporates not only the revenue and expenditure but it also shows the picture related to the past, present and future of the country in financial aspect. Through budget government can change socioeconomic society in the country. Government can initiate structural, procedural and behavioral reforms in an organization. Budget not only determine the internal organizational culture but also the external environment. Therefore, it is essential to formulate budget following specific principals.

• A balanced budget between revenue and expenditure

• Gross not the net budget

• Should be prepared by the executive

• Capital expenditure should be separated from the current

• Yearly budget

Traditional budget: Traditional budgeting is accounting-oriented and it refers to a list of all planned expenses and revenues (is also known as line item budget, incremental budget, deficit budget, legal budget). Traditional budget is divided into items and generally prepared by the line agencies. Incremental because generally prepared by marginal adjustment to the previous budget, Legal because the emphasis on the legality of the financial transaction, deficit because revenue more than the expenditure. This budget will not give opportunity to examine the performance of the government and the accountability of the government because the emphasis is more on the legality of the transaction. This type of budget maintains the pace of development but ignore efficiency and accountability part and if it is not controlled then it results in inflation.

Performance budget: according to investopedia.com “A budget that reflects the input of resources and the output of services for each unit of an organization. This type of budget is commonly used by the government to show the link between the funds provided to the public and the outcome of these services.” Decisions made on these types of budgets focus more on outputs or outcomes of services than on decisions made based on inputs. In other words, the distribution of funds and resources are based on their prospective results. Performance budgets give priority to employees' commitment to produce positive results, especially in the public sector.

Zero based budgeting (ZBB): called survival budget, rationalization of all provisions every year and examination of the program or responsibility from scratch. ZBB is a control technique as every function within an organization is analyzed for its needs and costs in the present year without considering previous year’s expenditure, so in this each budget start afresh irrespective of its past. Peter Pyhrr defined ZBB as an operational planning and budgeting process which require each manager to justify his entire budget request in details from scratch (hence zero basis). Each manager should state why he should spend any money at all. This approach requires that all entities be identified as a decision package which would be evaluated by systematic analysis ranked in order of importance.

• Zero-based budgeting starts from a "zero base" i.e Each budget starts afresh.

• No budget is based on past expenditure.

• Pre justification needs to be given for any budget allocation i.e. each activity is considered as new hence budget is linked to the need and result.

• It is based on present situation thus avoid any blanket increase or decrease in the budget over the previous year thus prevent inflation.

• Thus it encourages managers to look for alternatives, remove wastage and slack.

• ZBB is a complex process. In this near term benefit may override the long term advantage besides internal politics may take its toll.

Gender budgeting: It is a part of the gender mainstreaming strategy. It started in Australia in 1980’s and by 2002 around 60 countries experienced gender budgeting. Gender budgeting always lays emphasis on the gender perspective at various stages of budget development. In contemporary world there is a realization that ‘center of development‘ lies in the empowerment of women. Therefore countries have been tackling gender related issues in a systematic manner by gender budgeting.

European Parliament resolution on GB (P5_TA (2003)0323) regarding the definition of the term it reads: "... Gender Budgeting [is] the application of gender mainstreaming in the budgetary Process; this entails a gender-based assessment of budgets, incorporating a gender Perspective at all levels of the budgetary process and restructuring revenues and Expenditures in order to promote gender equality.” Economic policy is responsible for the socioeconomic development of the country. Under it comes the monetary policy, fiscal policy, agriculture policy, income policy, industrial policy, commercial policy and price policy .

Monetary policy plays a vital role in a developing economy like India. Its objective is to control the flow or supply of money, often focusing on interest rates like Liquidity adjustment facility- Repo and Reverse Repo, CRR, SLR etc. for the purpose of economic growth and stability. The other goals include relatively Stable Prices, Controlled Expansion Of Bank Credit, Promotion of Fixed Investment, Restriction of Inventories, Promotion of Exports and Food Procurement Operations, Desired Distribution of Credit, Equitable Distribution of Credit, to Promote Efficiency, Reducing the Rigidity and low unemployment.

Monetary Policy is related to the availability and cost of money supply in the economy in order to attain certain broad objectives. The Reserve Bank of India keeps control on the supply of money to attain the objectives of its Monetary Policy. Monetary policy is one of the economic policy. Monetary Policy according to investopedia.com is “The actions of a central bank, currency board or other regulatory committee that determines the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault (bank reserves)”. Monetary policy can be of two types expansionary or contractionary in nature. An expansion policy means to increase the supply of money in the market by lowering the interest rates. This is done to give impetus to economic development and lower unemployment. While in contractionary policy, the supply of money in the market is decreased by increasing the interest rates.

According to investopedia.com, meaning of the term fiscal policy stands for “Fiscal Policy is the means by which a government adjusts its levels of spending in order to monitor and influence a nation's economy.” Government spending policies that influence macroeconomic conditions. These policies affect tax rates, interest rates and government spending, in an effort to control the economy. Basically Fiscal policy deals with the taxation and expenditure decisions of the government. It is the sister strategy to monetary policy with which a central bank influences a nation's money supply. These two policies are used in various combinations in an effort to direct a country's economic goals.

Fiscal Policy is formed by the central government. Its prime objective is to see that its three pillars (viz. public adebt, public expenditure, public revenue) is in proper shape. Fiscal policy deals with the taxation and expenditure decision of the government. It is composed of several parts like tax policy, expenditure policy, investment or disinvestment strategies and debt or surplus management.

The various objectives of fiscal policy are:

• To achieve a desirable price level

• To achieve desirable consumption level

• To achieve desirable employment level

• To achieve desirable income distribution

• Increase in capital formation

• Price stability and control of inflation

• Development by effective Mobilization of Resources

• Efficient allocation of Financial Resources

• Reduction in inequalities of Income and Wealth

• Balanced Regional Development

• Development of Infrastructure

• Foreign Exchange Earnings

These objectives can be effectively reached only if public expenditure, taxation, borrowing and deficit financing are effectively used.

This article has been authored by Nilaya Mitash Shanker and Kshitiz Vohra from DoMS, IIT Roorkee

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