Public financial management is the process wherein a governmental unit or agency:
1. Employs the means to obtain and allocate resources and/or money, based on implied or articulated priorities; and
2. Utilizes methods and controls to effectively achieve publicly determined ends.
Two important elements are emphasized: efficient raising of resources, and wise and accountable use of funds to achieve the highest quality end products possible. Though the definition does not stress time and uncertainty (and the literature seldom articulates these concepts), both have particular importance to the field of applied public financial management. So defined, public financial management is viewed not as a staff specialty concerned only with controlling government or agency funds but as an integral part of management.
In general terms, public financial management comprises three main activities:
1. It determines the scope and content of fiscal policies. This is a process in which an agency, a community, or relevant political leaders set forth programs and provide the appropriation or resources required to accomplish their objectives. (Issues such as employment, inflation, borrowing, taxation, and revenue raising are considered and resolved.)
2. It establishes general guidelines and standards to ensure that funds are spent honestly and wisely to achieve publicly determined purposes.
3. It provides organizational structures and controls to effectively carry out fiscal duties and responsibilities.
Traditionally, the main financial management components include budgeting, taxation (revenue raising), accounting, treasury management, purchasing, and auditing.
Changing Orientation in Financial Management. The financial crises experienced by governments have led to increased interest in financial management at all levels of government. While the traditional emphases on control and compliance (conforming activities to laws, rules, and procedures laid down by the purchasing, accounting, auditing, and budget systems) are still important, new critical concerns have emerged. These concerns can be stated as a series of questions, including the following:
1. What indicators would permit us to assess the fiscal health of a governmental unit?
2. What is the most effective approach for forecasting revenue and expenditures?
3. What are the best methods for effecting cutback management while balancing the needs and demands of the community?
4. What methods are used to evaluate the adequacy of financial management systems in:
- Permitting managers to anticipate financial problems, and
- Allowing managers to solve them before they reach critical limits?