DEPARTMENT OF THE INTERIOR AND LOCAL GOVERNMENT

Governance & Financial

Reforms for Local Government
Unit-Run Water Utilities
SIMPLIFIED FINANCIAL
MANAGEMENT SYSTEM
 Other reasons why
businesses fail
Undercapitalization
Bad business location
Ineffective marketing
Poor accounting and financial management
Employee incompetence
Failure to adopt to the changing times
Ignoring competition
Growing to quickly
Introduction to Financial
Management
 What is Financial
Management
Is concerned with the acquisition, financing, and
management of assets with the attainment of
overall goal in mind.
It is also the art and science of managing money.
Financial management is the most essential
requirement of any organized business or activity.
It is the process of procuring and judicious use of
resources with a view to maximize the value of the
firm. Financial management is interdependent
with other areas of management.
Primary Objective of Business
Financial Management System

Poor financial
management can lead
to extremely damaging
consequences to the
organization
 Hence, good financial
management practices
and a close scrutiny of
the financial
management practices
in an organization can
prove to be the
difference between
success and failure for
any business.
 Investment Decisions

Investment Decisions
includes investment in
fixed assets known as
capital budgeting.

Investment in current
assets is also a part of
investment decisions
known as working
capital decisions.
 Attributes of a Sound FM
Adequate and competent staff
Audit
Internal Control
Reporting
Matching of financial data to output
Filing system

Sound financial management is a critical

ingredient to business success
 Internal Controls

Expanded Small Water Utilities Improvement and Financing (ESWIF) Project

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 What is Internal Control

Internal controls are methods and measures

adopted in a business or organizations to:
Safeguard its assets
Ensure financial information is accurate and reliable
Ensure compliance with all financial and operational
requirements
And generally assist in achieving the business
objectives
 Components of Internal Control
System
Control Environment
Risk Assessment
Control Activities
Procedures and Practices
Information and Communication
Monitoring
 Components of Internal Control
System
Helps align objectives of the business
Safeguard assets
Prevent and detect fraud and error
Encourage good management
Allow actions to be taken against bad
performance
Reduce exposure to risk
financial reporting
 Components of Internal Control
System
Controls to safeguard assets
Controls to ensure financial information is
accurate and reliable
Controls to ensure compliance with financial
and operational requirements
Controls to assist achieving business
objectives
 Components of Internal Control
System
Reliable personnel with clear responsibilities
Separation of duties
Operational from record keeping responsibility
Custody of assets from accounting
Authorization of transactions to custody of assets
Within accounting functions
Proper Authorization
Adequate Documents
 Components of Internal Control
System

Proper Procedures
Physical Safeguards
Bonding , Vacation and Rotation of Duties
Independent Checks
Cost-Benefit Analysis
 Components of Internal Control
System

Judgment Error
Unexpected transactions
Collusion
Form over substance
Management override
 Components of Internal Control
System
Fraud
Bad decision for business
Wrong decisions are made by people ill-
equipped to deal with a situation
Not taking appropriate action in time to
correct errors
Not allocating resources correctly or efficiently
 In Summary Internal Control

Are needed to promote efficient use of assets

Encompass the total business culture,
structure and methods
Encourage positive behavior
Help promote the efficient use of resources
Communicate and educate
 Components of Internal Control
System
1. The accounting procedures and the operations must be
separated.
2. All available proofs of accuracy should be utilized, in order to
assure correctness of operation and accounting.
3. No one person should be in complete control of a business
transaction.
4. Employees (particularly those holding cash transactions) must
be bonded.
5. Employees must be carefully selected and trained.
6. If possible, employees holding sensitive position should be
rotated (such as meter readers, bill collectors, etc).
7. Operating instructions should be in writing.

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 Components of Internal Control
System
Cash Receipts
1. The collecting officer should be familiar with the laws and
regulations affecting his/her work.
2. No disbursements should be made from cash receipts.
3. Employees holding cash transactions should not have access to,
nor responsibility over the records related to cash (such as
subsidiary ledgers for accounts receivable).
4. Adequate records should be maintained and financial reports
regularly prepared and submitted.
5. Reconciliation of banking transactions should be done by persons
other than those responsible for the handling of cash receipts and
deposits.
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 Components of Internal Control
System
Cash Receipts (cont.)
6. Control over cash, should be established immediately after it has
been received; collections from customers should be
acknowledged (through issuance of OR) and recorded
promptly.
7. Cash receipts should be deposited intact daily or as otherwise
required by regulations.
8. Safes (cabinet) and other facilities should be provided to insure
protection of cash.
9. Surprise cash examinations should be made frequently as
possible.
10. The Cashier, Collecting officer, as well as other employees
holding cash, should be adequately bonded.
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 Components of Internal Control
System
Cash Disbursements
1. The disbursing officer should be familiar with the
laws and regulations affecting his/her work.
2. Disbursing officers should not have access to, nor
responsibility over, the records related to
disbursements.
3. Officers authorized to sign checks should have no
authority over the accounting records.
4. Checks should be countersigned; the signing and
countersigning of checks should not be made in
advance. 27
 Components of Internal Control
System
Cash Disbursements (cont.)
5. Vouchers should be checked and approved by one or
more individuals other than the disbursing officer.
6. As much as practicable, disbursements should be
made by checks, only minor amounts should be paid
through petty cash fund.
7. Care should be taken to prevent re-use of supporting
papers of paid vouchers. Supporting documents
should be stamped paid after release of the check.
8. The Disbursing Officer, as well as other staff involved in
disbursements, should be adequately bonded. 28
 Financial Reports
It provides a summary of the company or
organizations financial health and its performance
over the most recent reporting period.
It informs owners, board members, stakeholders,
management or regulatory bodies about their
financial position and the financial difficulties that
the company or organization is experiencing
It also shows whether the company or
organization is viable, bankable and how profitable
its is
 Types of Financial Report

Statement of Financial Position /Balance Sheet

Statement of Comprehensive Income/Income
Statement
Statement of Cash Flows/Cash Flow Statement
Statement of Changes in Equity (SOCE)
 What is a Budget

Generally refers to a list of all planned

expenses and revenues.
An annual proposal that outlines the
anticipated revenues and proposed expenses
for the upcoming year.
It is also called a financial plan of future costs
and revenues for a specific period in the
future.
 Purpose of Budgeting

Compare budgeted costs and actual costs at

the same level of activity
To help in controlling cost
To plan product levels
To compare like with like
 Budgets

Should focus resources and activities on goals

What do we need to accomplish the goals
Not how much are we allowed to spend?

Should focus on organizational goals, not local

or departmental/unit goals
 Annual Budget Process

Begins with a review of strategy, goals for the

coming year

Do a SWOT analysis
Respond to SWOT
Updating multi-Year product/profit plans
Set budget targets
Communicate goals and assumptions to lower levels
 Annual Budget Process

1.Budget process flows from the top down to the

lower levels

Organizational goals must be determined

The goals are achieved through activities

Those activities must be supported with resources
 Annual Budget Process

2. Prepare operating (activity) budgets

Organizational goal , typically the sales budget are
communicated to lower levels
Process of estimating the resources needed to
achieve the sales goals begins
Materials, labor, overhead and administrative, etc
Trickle down process
Each area must estimate the resources needed to support the
area above