What Is Financial Planning and Management in Public Sector?

source: cloudfront

Governments must deliver public services while staying within a sustainable financial framework.  To do that long-term, they must manage public money efficiently since more than revenue is needed to meet the general population's needs.

This is why robust financial planning and management systems are required at every step of a budget cycle from its conception to execution and includes procurement, financial management, and internal audit.

Financial planning broadly denotes all aspects of economic life, whereas; wealth management is typically done for individuals or institutions with high net worth.  A financial planner creates a blueprint of future financial goals while considering the current scenario. 

Financial planning is creating a budget for an organisation that helps it save and spend according to a set standard that is profitable. 

There are some crucial components of planning finances.

3 Components of Financial Planning

The essential aspects of planning finances include the following-

• Financial Strategies and Goals: Mapping objectives and goals are a necessary element of financial planning since they help the organisation to achieve what it needs to.
• Risk Analysis: Devising a plan to handle the risk factors of money management will boost finances. 
• Debt Management: Effectively handling debts will make an organisation self-sustaining. 

Financial management is the strategic planning, organising, controlling, and directing of the monetary undertakings of an institution.  It also includes the application of management principles to the financial assets of an organisation. 

Financial management has certain elements.

3 Elements of Financial Management

Certain factors dictate how an organisation manages its money, such as-

• Financial Decisions- This involves raising capital from different sources, such as bank loans, equity shares etc., to generate returns. 
• Investment Decisions- This includes fixed asset investments, also known as capital budgeting. 
• Dividend Decisions are related to net profit distribution, which has two parts: dividends for shareholders and retained profits. 

Planning the finances of a public institution and managing it effectively has many upsides.

The benefits of a sound public financial planning and management system are manifold, creating the right path for achieving an organisation's monetary goals and objectives.

Here are some ways it helps an organisation:

• Ensures a steady flow of funds for the organisation to function efficiently on an everyday basis and in the long run.
• Lays out a structure for effectively allocating and utilising the money the institution receives. 
• Burden of debt can hamper long-term financial interests, whereas effective money management can reduce or eliminate debts. 
• Efficient planning and management provide a public organisation with the opportunity for better risk diversification. 
• With skilful planning and management, an institution can improve its value and profitability, leading to cost reduction. 
• An essential function of financial management and planning is that it provides financial stability to an organisation.

Although financial planning and management have straightforward objectives, it is often challenging to implement them.  The goal is to take the resources of complex organisations and utilise them to yield maximum benefits. 

Here are the reasons why financial planning and management is crucial in the public sector:

1. Ensuring the Availability of Funds

The chief objective of creating a financial plan is to ensure funds are always available, whether for long-term or day-to-day expenditures. 

Along with availability, it also specifies where the money comes from, which is especially important when managing public funds.

2. Avoiding Unnecessary Resource Collection

3. Framing Financial Policies

Making and implementing policies regarding lending, borrowing, cash control, etc., are a significant part of financial planning in public organisations. 

Since financial management is an integral part of fiscal management, it has the following objectives.

4. Maintaining cash Supply

5. Ensuring Good Return on Investment

6. Optimum Utilisation of Funds

Allocated to public organisations aims to promote welfare and development.  Checking to ensure those funds are used effectively is one of the chief goals of managing finances. 

Alongside fulfilling all the objectives, a sound public finance management system must ensure certain qualities.

Managing and effectively utilising public resources can often be a difficult task.  However, a well-functioning system can overcome the challenges if it includes the following factors.

• Financial planning and management in public organisations require a well-organised finance ministry with a solid administrative and legal network that can effectively exercise its role.
• Public financial control systems that are cost-effective control internal audits and include financial management across the overall administration process. 
• An independent audit institution supported by a legal network that can perform high-quality audits that impact the public sector's functioning.

In recent years, public organisations have undergone various changes in size and complexity.  As a result, managing finances has become challenging, and it requires a greater level of planning, control, and analysis skills which guide the organisation's future course.

Financial planning and management in public institutions is a vast department with intricate functioning which requires a professional approach to function smoothly.  However, even after careful planning and monitoring, public organisations often need help with accountability and poor implementation of policies which management can fix with careful monitoring.