Questions for Discussion

1-1 Solutions Manual for Financial Management for Public, Health, and Not-for-Profit Organizations, 7e Steven Finkler, Thad Calabrese (All Chapters)

Chapter 1

INTRODUCTION

TO

FINANCIAL

MANAGEMENT

Questions for Discussion

1-1. Financial management is the subset of management that focuses on generating financial information that can improve decisions. The decisions are oriented toward achieving the various goals of the organization while maintaining a satisfactory financial situation. Financial management encompasses the broad areas of accounting and finance.

1-2. In proprietary, or for-profit, organizations, an underlying goal is to maximize the wealth of the owners of the organization.

1-3. In public service organizations, decisions are oriented toward achieving the various goals of the organization while maintaining a satisfactory financial situation.

1-4. Accounting is a system for keeping track of the financial status of an organization and the financial results of its activities. It has often been referred to as the language of business. The vocabulary used by accounting is the language of nonbusiness organizations as well.

1-5. Accounting is subdivided into two major areas: managerial accounting and financial accounting.Managerial accounting relates to generating any financial information that managers can use to improve the future results of the organization. This includes techniques designed to generate any financial data that might help managers make more effective decisions. Major aspects of managerial accounting relate to making financial plans for the organization, implementing those plans, and then working to ensure that the plans are achieved. Some examples of managerial accounting include preparing annual operating budgets, generating information for use in making major investment decisions, and providing the data needed to decide whether to buy or lease a major piece of equipment. Financial accounting provides retrospective information. As events that have financial implications occur they are recorded by the financial accounting system. From time to time (usually monthly, quarterly, or annually), the recorded data are summarized and reported to interested users. The users include both internal managers and people outside the organization.Those outsiders include those who have lent or might lend money to the organization (creditors), those who might sell things to the organization (called suppliers or vendors), and other interested parties. These interested parties may include those with a particular interest in public service organizations, such as regulators, legislators, and citizens. Financial reports provide information on the financial status of the organization at a specific point in time, as well as reporting the past results of the organization’s operations (i.e., how well it has done from a financial viewpoint).

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Chapter 1: Introduction to Financial Management 1-2

1-6. Finance focuses on the alternative sources and uses of the organization’s financial resources.Obtaining funds when needed from appropriate sources and the deployment of resources within the organization fall under this heading. In addition, finance involves the financial markets (such as stock and bond markets) that provide a means to generating funds for organizations.

1-7. Yes. Achieving the goals of the organization requires financial planning. Financial management provides information for managers to use in making their decisions. It helps managers by providing information on the likely financial impact of each proposed alternative. It also provides information about financial stability, efficiency, and effectiveness.

1-8. Clearly, we might expect some public service organizations that are proprietary, such as some hospitals, to earn profits. But what about other public service organizations such as charities? They should make a profit as well. Profits provide a safety margin against unexpected costs, provide resources to replace buildings and equipment, and to expand and improve services.

1-9. Federal government (see text Figure 1-1) ◼ Individual income taxes ◼ Social insurance taxes ◼ Corporate income tax

State and local government (see text Figure 1-4) ◼ Sales and gross receipts tax ◼ Federal government ◼ Property taxes ◼ Individual income taxes

Health sector (see text Figure 1-6) ◼ Private insurance ◼ Medicare ◼ Medicaid ◼ Other government programs

Not-for-profit sector (see text) ◼ Private payments for goods and services ◼ Government payments for goods and services ◼ Donations

1-10. Federal government spending exceeded $6 trillion in 2020 and state and local government spending was more than $3 trillion in 2018. In contrast, the GDP was $21 trillion in 2020. For more up to date information, examine the statistical tables of the most recent Economic Report of the President, which is available online.

1-11. The reported surplus includes both on and off budget items. Social security taxes represent an off budget item that until recently raised more revenue than was spent on social security payments.The surplus in this area offset other government losses, and even resulted in an overall surplus for 2 / 4

1-3 Instructor’s Manual to Accompany Financial Management for Public, Health, and Not-for-Profit Organizations

the federal government. This is no longer the case, and, over time, trust fund resources will be used up to provide benefits. As the federal government will not have access to the excess resources from social security, it will have to borrow and increase the total level of federal debt, unless revenues or spending are changed.

1-12. Sometimes gifts come with strings attached. If the conditions of the gift create a burden that the organization does not want to accept, or somehow requires the organization to work in opposition to its mission, it might turn down the gift.

1-13. The World Bank has defined NGOs as "private organizations that pursue activities to relieve suffering, promote the interests of the poor, protect the environment, provide basic social services, or undertake community development" (World Bank Operational Directive 14.70). NGOs are quite similar to the not-for-profit organizations. They are primarily mission-focused rather than profit-focused. NGOs fall into three main categories: community-based, national, and international.

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2-1 Instructor’s Manual for Financial Management for Public, Health, and Not-for-Profit Organizations, 7E

Chapter 2

PLANNING

FOR

SUCCESS:

BUDGETING

QUESTIONS FOR DISCUSSION

2-1. Planning helps the organization by causing its employees to think ahead and anticipate change.This is done by establishing specific goals and objectives, communicating those objectives to the individuals who must achieve them, forecasting future events, developing alternatives, selecting from among alternatives, and coordinating activities. The activities are summarized in a document called a budget. The budget describes what we hope to achieve and the resources that will be used to carry out the organization’s activities.

2-2. The organization’s mission represents its reason for existence. For public, health, and not-for- profit organizations, finances often become a means to an end, rather than the end itself. This mission cannot solely be making profits. Financial management must help balance the focus on profit with the public service elements of the organization’s mission.

2-3. Strategic plans translate the mission of the organization into an approach or set of approaches that will be used to accomplish the mission, and a broad set of goals that need to be attained to achieve the mission. Strategic plans set the organization’s long-term direction. They often do not have specific financial targets. However, they set the stage for the specific, detailed budgets that will be established to achieve the organization’s goals.

2-4. Whereas the strategic plan establishes goals, the long-range plan considers how to achieve those goals. Long-range plans establish the major activities that will have to be carried out in the coming three to five years. This process links the strategic plan to the day-to-day activities of the organization. Organizations that do not prepare a long-range plan are often condemned to only sustain current activities, at best.

2-5. Budgets establish the amount of resources that are available for specific activities. However, budgets do not merely limit the resources that can be spent. They represent the detailed plan that supports the organization’s efforts to achieve its mission, and help the organization determine and achieve its goals and objectives. The budgeting process is one of exploring possibilities.Organizations determine what things they can and cannot do. They examine alternatives and choose those that are likely to yield the best results. They become attuned to possible problems and can work to find solutions. Budgeting forces managers to think ahead, to have clear expectations against which to measure performance, and to coordinate the activities of the organization so that everyone is working toward a common purpose.Budgets are also used to control results. That is, budgets not only create plans, but they are also used to help accomplish those plans. This is done by comparing actual results to the budget.Looking at results, we can assess what needs to be corrected. How good a job did the

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