Line managers in government departments, municipalities and other public institutions should prioritise financial management and public CFOs should help them with that, argues Dumisani Dlamini, CFO at the National Arts Council of South Africa (NAC).
Dlamini has a wealth of experience in municipal audit committees and as former Senior Finance Manager at SARS. He believes "working for the government gives one a sense of higher purpose". For his Masters of Commerce degree he wrote a dissertation on how to improve financial management in government. In this article he summarizes his conclusions exclusively for CFO.co.za.
"Finance can learn more from line managers while line managers can learn more about financial management from their finance colleagues. The institutionalisation of a culture of financial management is dependent upon finance and line managers having a common understanding and working together to achieve organisational strategic objectives."
Financial Management has become one of the critical functions in organisations in the modern world; the failure or success of any organisation can be influenced by it. The key goal of managing finances is to maximise the value of the owner's financial resources. For the purpose of this article, government is the shareholder or an owner.
South African public finances have been affected by the global financial crisis in recent years. Lower commodity and asset prices as well as automatic stabilizers have caused fiscal revenues to decline. During the second half of 2012 South Africa experienced economic instability, which caused a R16.3 billion revenue shortfall. This necessitated that government reviewed its spending budget in order to maintain a healthy fiscal balance. This balance can be achieved through strengthening financial management, which includes introducing additional controls in reducing growing expenditure to about 2.3 percent in the medium term, which is three years (Gordhan, 2013).
State resources are unable to keep up with the increasing demand by citizens for government services due to financial challenges facing the public sector. The inability to keep up with increasing demand of citizens tends to create a gap between citizens' expectations and services received from the state. This therefore calls for state officials to show greater accountability of funds they manage and for better operational efficiency (Montondon, 1995 cited by Aikins, 2011).
It becomes critical that public sector managers come up with ways to strengthen financial management within the constraints of limited resources without compromising the required quality of services to relevant stakeholders. This can be achieved through introducing measures to improve efficiencies in finance and quality of organisational policies. Finance departments should have staff who possess sufficient skills to assess effective deployment of financial resources eliminating waste and unauthorised expenditure. The finance team should have a capacity to make recommendations that improve performance of finance and enhance operational efficiency (Aikins, 2011).
Financial management is a key function in government, which can help to stimulate economic growth and fiscal balance. South African public financial management comes with its own challenges e.g. poor management of financial records and financial administration systems. Once these key aspects of financial management are not in place, the public institution is placed at risk of under spending, overspending, or theft of allocated funds. Therefore the relevant institution may not meet its strategic objective, which is improving service delivery as the resources are not effectively utilised.
Each government entity needs to keep abreast with regard to financial information, reviewing its process on a continuous basis in order to attain even better financial management and also stay competitive. If this is not achieved the organisation runs a risk of suffering financial losses as some of the processes and systems might not mitigate the financial risk the organisation might be exposed to.
The International Federation of Accountants (IFAC) requires public sector organisations to ensure that there are measures in place that assist in efficient and effective financial management and budgeting, and to have governing bodies that will establish relevant procedures that assist public entities to report on how effectively and efficiently they have used their resources ( IFAC, 2001).
"Finance can learn more from line managers while line managers can learn more about financial management from their finance colleagues."
Financial management is not only a responsibility of a finance department or a CFO, (Shank, 1989) argues that today's competitive business world requires line managers to have immediate access to required financial information like rolling forecasts, channels and services in order to better manage organisational resources year after year.
There is a great need for line managers to prioritise financial management and give it the time it deserves in management, so that in operational meetings they can demonstrate that Operations business units are serious about improving financial management.
Most of the financial management key performance areas (expenditure management, asset, travel, procurement) are included in the performance agreement of finance employees not line managers and operations employees. Some managers prioritise operational functions to the extent that they do not honour monthly meetings scheduled to discuss finance management reports. Partnership between finance and line managers is useful in the daily management of operations, which include asset management, procurement and expenditure management (Baxter and Chua, 2003).
Financial management is a collective responsibility which means maintaining internal control and daily discipline. It is also dependent on competent and committed finance staff. Hoe (2009) is of the view that most organisations expect finance to reduce time spent on processing transactions and spend more time on analysis and reporting which can assist managers take instant and sound decisions. This calls for a fundamental shift in thinking by CFOs moving beyond cost cutting to the creation of value using available financial, technological and human resources (Hoe, 2009).
This shift includes assisting with the management of cost at a planning stage (Shank, 1989). Arthur (1996) and Johnson and Kaplan (1991) view finance's role as being critical in financial management as it is the help by which line managers measure the financial impact of decisions and strategies chosen. This could make a big difference particularly during scenario planning.
CFOs need to transcend from a gatekeeping role to strategic business partnering in order to respond to the modern needs of various business units within their organisations. They need to understand the impact of customer service, cooperation and teamwork and moves away from command and control.
Achievement of tangible business results can be influenced by finance staff particularly finance managers with a solid business alignment. Firstly, finance staff can be of assistance in aligning functions, strategic divisions and regions to realise synergies and improved revenue. Secondly, they can assist management to unleash unexploited management resources through focused, reliable and consistent management reporting. Lastly, finance is better placed to allocate resources against projects of strategic importance through overall business impact monitoring.
CFOs need to understand that they are strategic business partners and should use the management function as an enabler to the achievement of organisation's strategic goals. Therefore there is a need for finance employees to spend time with business units they support to understand their operation in order to support them better, rather than spending time with each other at the Finance department.
Understanding organisational objectives can assist finance to develop better understanding of risks and costs, which can enable finance to work out best possible solution thus maintaining a balance between good financial management and business goals (Iversen and Wren, 1998).
Finance can learn more from line managers while line managers can learn more about financial management from their finance colleagues. The institutionalisation of a culture of financial management is dependent upon finance and line managers having a common understanding and working together to achieve organisational strategic objectives. Coad and Cullen (2006) propose that finance should go beyond normal organisational financial boundaries and be a part of integrated system.