Finance

Meaning And Scope Of Public Financial Management

Public financial management is among the best category of finance. And you need to know the meaning and the scope of public financial management.

The economic system adopted by a country dictates the extent of roles expected of the public sector. By economic system, we mean an arrangement whereby economic activities in the society are classified according to ownership and control of means of production and distribution. In a free enterprise economy or free market economy, these are in the hands of the private sector while under a central or command economy, they are in government (public) hands.

The government always has set objectives and to achieve these objectives, funds must be properly managed. The public fund manager is therefore left with deciding on the appropriate source of funds to finance public sector programs.

However, we shall this article look into the meaning and scope of public financial management as well as draw a distinction between public financial management and financial management in the private sector.

Meaning Of Public Financial Management

Financial Management (private sector) is defined as a managerial activity that is concerned with the planning and controlling of the firm’s financial resources. It is the management function that is concerned with the effective and efficient handling and utilization of funds and this is in line with the maximization of owners’ wealth.

On the other hand, public sector financial management is that branch of finance that ensures that financial resources are economically obtained, efficiently utilized, and accounted for in the accomplishment of public-sector objectives. It is the managerial function that deals with financial activities surrounding the revenue and expenditure process of the government.

Features Of the Public Sector

The public sector of the economy refers to Federal Government Ministries and departments, State government Ministries and departments as well as Local Government Councils including their agencies like NDLEA, NAFDAC, and parastatals like NNPC. They have common characteristics which include:

1. Lack Of Profit Motive:

The objective of the public sector in providing goods, welfare services, and infrastructure is not to make a profit but to achieve goals of economic stabilization and growth.

2. Service Oriented:

The public sector is predominantly service-oriented. Services such as national defense, streetlights, roads, etc., regarded as public goods are provided by this sector. Such goods cannot be withheld for nonpayment nor any individual be removed from receiving the benefits.

3. Reliance On Taxation:

Taxation is a reliable source of income in the public sector. While the government has the power to impose taxation directly to raise funds, the public corporation receives its share of tax revenue through subventions given to them by the government.

4. Reliance of Legislative Authority:

The public sector derives its existence from legislative enactments such as the constitution, decrees, Acts, etc. Their activities are also regulated by these enactments.

5. Reliance On Budgetary System:

Budgetary system is an indispensable control mechanism in the public sector. The Nigerian constitution provides that the president shall cause to be prepared and laid before each House of the National Assembly at any time in each financial year estimates of the revenue and expenditure of the federation for the next financial year.

Scope Of Public Sector Financial Management

With due cognizance of the definition of public sector financial management, its scope encompasses the rising and uses of financial resources which are geared towards the attainment of government objectives. These objectives include:

1. Price stability in the economy

2. The allocation of resources among the various sectors and redistribution of income and opportunities

3. Employment generation

4. Economic growth and development

All these are concerned with increasing the standard of living of the citizenry. They will be achieved through adherence to principles of financial planning, decision, and control.

Public Financial Management

Distinction Between Public And Private Sector Financial Management

We have earlier defined financial management and public financial management. Under scrutiny, a lot of differences will be seen in the areas as given below:

1. Objective:

The public sector serves the interests of society, as a whole and its financial management is after maximizing the welfare of the people while in the private sector, it aims to maximize owners’ (shareholders) wealth.

2. Decision Making:

In private sector financial management, decision-making rest with the financial manager and other members of the management team while in the public sector, politicians through the executive arm of government and the parliament take responsibility for decision-making. Thus the role of the financial manager here is advisory.

3. Dividend Decision:

A dividend is part of the profit that is paid to shareholders. It is very crucial in the private sector and decision on it is one of the major functions of the financial manager. The public sector is after welfare maximization and the decision on dividend payment to a good extent is inconsequential.

4. Efficiency Of Operation:

There is a great display of efficiency in the management of private sector organizations as opposed to their counterparts in the public sector. Decisions are quickly taken, unlike the public sector where it will follow a lot of write-ups.

Competition is a driving force for the speed and efficiency of operation in private-sector financial management as opposed to public-sector financial management.

5. Non-Profitable Projects:

Financial management in the private sector does not favor the execution of nonprofitable projects while such projects will be executed in the public sector if they will improve the welfare of the people. Profit or loss-making is of primary consideration for the private sector financial manager while little consideration is given to it by the public sector financial management.

6. Cost Of Capital Financial:

Management in the private sector relies heavily on the cost of capital in assessing a project to accept or reject decisions. However, not much regard is paid to it in public sector financial management and its competition is very difficult.

7. Financial Decision:

The financial manager in the private sector plans for and determines the best financing mix or capital structure that will maximize its market price per share.

The financial manager must also know where he can obtain additional funds and at what cost and is mindful of financial and business risks. These to a great extent are not of material consequence in public sector financial management.

Conclusion

The meaning and scope of public financial management have already been narrated. And we believe that you know what it is all about right now.

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