FINANCIAL MANAGEMENT

1. FINANCIAL MANAGEMENT Budgeting

2. DOP as a Commercial Department • The Department of Posts has been categorized as a commercial department by the Ministry of Finance • The Government of India, too, needs to make profit on its investments in commercial departments. • The DoP at present is given budgetary support in order to fulfill the USO to meet the social commitment of the Government of India to connect and communicate with the remotest corner of the country. • For any commercial organization the financial health is of prime concern.

3. CONTD… • The Department is, therefore, required to earn returns (profits) on investments made. • Any capital invested must, therefore, show a rate of return for the investor.

4. System of Accounts of DOP • Accounts of DOP form part of general accounts of the Government of India; • Accounts of DOP are built on the same general plan of accounts of the Government of India; • DOP Receipts & Expenditure are recorded under various Major Heads-suitably divided & sub divided as per nature of transactions.

5. General outlines of Accounts Part IPart IIPart III Consolidated fundContingency fundPublic A/Cs RevenueCapitalDebt DebtDep.Remitt. [Pub. Debt/Loans & Adv.] ReceiptsExpenditure Charged PlanNon Plan Voted New Activity/Existing SchemeEstablishment

6. Consolidated fund of India • Consolidated fund of India-two divisions: • Revenue consisting of receipt head & expenditure head • receipt head-deals with the proceeds of taxation and other receipts classed as revenue. • expenditure head-deals with the expenditure met there from.

7. Consolidated fund of India • Capital ,public debt and loans. • Capital comprises of receipt head and expenditure head. • Receipt head deals with the receipts of a capital nature which can not be applied as a set off to Capital expenditure. • Expenditure head deals with the expenditure met from borrowed funds to increase assets.

8. What Is Budget? Anticipated receipts and estimated expenditure within a given period of time, usually a year

9. Significance of Budget • Instrument of Policy • Allocate scarce resources to competing claims • Sets expenditure priorities of Government and hence reflects values • Budget reflects the organizational structure • Establishes accountability and financial control • Management tool • Integration of Budget and Planning • Issue of structural rigidities

10. Economic Relevance of Budget • Economic impact of government expenditure/ methods of raising resources • Major fiscal policy document of the Government- as also industrial, monetary and financial sector policy • Announces taxation measures or reforms which have far reaching economic impact

11. Constitutional Provisions- 1 • Taxation only by legislation (Art 265) • Expenditure only by specific appropriation (Arts 114 and 204) • Annual Financial Statement (Art 112/202) • Estimates of receipts and expenditure out of the Consolidated fund • Presented to the legislature for voting • By the President/Governor

12. Constitutional Provisions- 2 • Article 266 defines “Consolidated Fund” • All revenues • All loans (including treasury bills, W&M Advances) • All repayments of loans • Any expenditure out of Consolidated fund only by specific appropriation • Charged and Voted Items of Expenditure

13. Constitutional Provisions- 3 • Contingency Fund (Art 267): • Imprest amount with President/Governor • To make advances for unforeseen or new service items of expenditure • Amount determined by law • Recouped by subsequent authorisation • Public Account (Art 266(2)) • All other public moneys not part of Consolidated Fund • No authorisation by legislature needed

14. Divisions of Consolidated Fund • REVENUE ACCOUNT • RECEIPTS- Current Income including Taxes, Fees, Fines, Interest and Dividends • EXPENDITURE- which does not create assets • CAPITAL ACCOUNT • RECEIPTS- Sale of Assets, Borrowed Funds and Accumulated Cash Balances • EXPENDITURE- Creation of new assets • PUBLIC DEBT- Market Loans, Inter-Governmental Loans etc.

15. Structure of Accounts Classification • Six tier classification • Sectors/ sub-sectors • Functions- Major heads • Programmes- Minor Heads • Schemes/ Organizations- Subheads • Sub-schemes- Detailed heads • Objects • Sub-classification of objects

16. Why a six-tier classification? • Enables budget to function as a management tool: • Enables a review of Government operations • Review of sectoral allocations • Linkage between outlays and functions, programmes and schemes • Item-wise control of expenditure

17. Budget Formulation: Organizational Steps Issue of Budget Circular Preparation of revenue and expenditure estimates by agencies Review and consolidation of agency requests by competent ministries Transmission of ministry requests to central agency Negotiations between competent ministries and central agency PREPARATION OF DRAFT BUDGET Cabinet approval of draft budget Final budget submitted to Legislature for approval

18. Preparation of Budget • Responsibility of the executive wing of the Government • Issue of the Budget Circular- by the Finance Ministry • Contains instructions on how to prepare estimates for different items • Outlines Expenditure policy • Formats are circulated • Strict adherence to time limits laid down

19. Preparation of Budget - 2 • Government Accounts are in simple cash book format - merely record the transactions in the year in which they occur • Receipts Estimates • Based on trends • State of the economy • Inflation

20. Preparation of Budget - 3 • Expenditure Budgeting • Estimates to be prepared by respective Government Departments • Incremental Budgeting • First Charge to on-going schemes and committed items • Justifications for increased outlays Back

21. Preparation of Budget - Role of Finance Ministry • Aggregation of the Receipts & Expenditure • Inclusion of New Schemes • New taxation measures • Final iterative exercise • Ensure prioritization amongst sectors • Accommodate “sensitive” items • Keep overall deficit under check • Window dressing- deliberate under-funding or over-estimation

22. Presentation of Budget • By the Minister in charge of Finance to the lower house of the legislature • Annual Financial Statement • Demands for Grants • Other explanatory memoranda • Finance Bill • Appropriation Bill • Vote on Account- when needed

23. Execution of Budget • Expenditure can be incurred only with: • Valid sanction by the competent authority • Adequate appropriation • Appropriations are communicated to concerned after Appropriation Act is passed • Competent officers issue sanctions within appropriation • Expenditure on items not included in the budget - New Service Procedure or Supplementary Appropriation

24. Shortcomings of Existing Budgetary Practices • Inefficiencies and wastes of earlier years carried over into subsequent years • Alternative methods or the option of not continuing the activity is not evaluated • Funds available for new initiatives- very limited • Paucity of resources forces arbitrary cuts leading to inflated budget requests • Lack of sense of ownership in concerned departments

25. Shortcomings (contd) • More focus on current RE than BE • Classification quirks deprive crucial sectors/ activities of funds • Cash based accounting gives misleading picture of financial status • Budget is input driven and does not measure outcomes • Obsession with financial accounting at the cost of proper utilisation

26. BUDGETARY PROCESS Establishment of goals, objectives and policies Appraisal and evaluation Development of programmes Execution of the budget Allocation of resources

27. COMPONENTS OF ACCOUNTS IN DOP BUDGET • Revenue Receipts & Recoveries • 1 Postal Operations • 2 SB & CC • 3 Recoveries • Total (A) • Revenue Expenditure • 1 Salaries & Wages • 2 Pension • 3 Others • Total (B) • Revenue Deficit (B-A) • Capital Expenditure (C) • Total (Budgetary Support ) Deficit = (B-A+C)

28. Financial Performance of the Department of Posts • over last few Years

29. The reality! INDIAPOST’s deficit YEAR DEFICIT (in crore) 02-03 1364 03-04 1375 04-05 1382 05-06 1210 06-07 1250 07-08 1511 08-09 3593 09-10 6641 10-11 6346

31. Revenue & Expenditure 2010-11 Other receipts includes charges on sale of PP form, pp fee stamps, CRF etc. Other expenditure includes Audit & Accounts, Pension charges, Stationery & printing

32. EXERCISE- CAKE CUTTING

33. discussion led by trainer : • expenditure is larger than revenue – Ask them what do they make out of this? Action what do we need to do to increase our revenue, what are the options to make the small cake bigger?, making the big cake smaller? Ask them what are the implications of both options • What are the biggest source of expenditure – point out to the large portion of the bigger cake. Ask what can we do about that? How about doubling our productivity? ? How will computerisation help ( reduce back office work more persons can serve customers) • What are the biggest sources of revenue? How can we increase our income? Out of 1,55,000 post offices more than 80% of our post offices are in rural areas and more than 1,25,000 are BOs. How can we make a contribution to increase revenue. Note : Recommended for trainers who have participated in this exercise earlier.

34. REVENUE Revenue & Expenditure 2010-11 Unit 1.3

35. EXPENDITURE

36. NON-PLAN REVENUE EXPENDITURE • Salary , Wages & Pension Largest component

40. Objectives of Financial Management ?

41. Financial Management - Objectives • To achieve the ideal operating ratio/ Expense Coverage Ratio:- • By controlling/minimizing the revenue expenditure, • By achieving revenue targets and preventing the Revenue pilferages, • By maximizing the revenue collections/ recoveries from other organizations for the services rendered to them, • By properly implementing the opportunities of new schemes/services introduced from time to time.

42. Expense Coverage Ratio • Expense Coverage Ratio helps to arrive at a conclusion as to whether there is a commercial gain or loss; • Expense Coverage Ratio is worked out with ‘Net Working Expenditure’ and ‘Net Revenue’.

43. How to calculate ECR?

44. Cont…. Unit 1.3

45. Expense Coverage Ratio • ECR = Net Revenue receipt x 100 Net Working Expenses Where : • Net Revenue receipts = Gross Revenue receipts (-) Refunds; and • Net working expenditure = Gross working expenditure less depreciation and recoveries. • Figure of more than 100(ECR)means a profitable state of business

46. Operating Ratio • Operating Ratio = Net Expenditure Net Revenue Where : • Net Revenue receipts = Gross Revenue receipts (-) Refunds; and • Net working expenditure = Gross working expenditure less depreciation and recoveries. • Operating Ratio of less than 1 indicates profitable state of business.

47. Exercise 2.4B.1 • Trainees to do the questions given in the exercise

48. BUDGETTING HEAD OF ACCOUNTS - Postal Receipts, & - Expenditure

49. Primary Units of Appropriation • Six tier classifications have been introduced in the Detailed Demands for Grants: Major Head - 4 digits (Function) Sub Major Head - 2 digits (Sub Function) Minor Head - 3 digits (Programme) Sub Head - 2 digits (Scheme) Detailed Head - 2 digits (Sub Scheme) Object Head -2 digits (Primary unit of Appropriation)

50. EXAMPLE Major Head – 3201 – Postal Services Sub Major Head – 02 – Operation Minor Head– 003 – Training Sub Head – 01 – Operational Training Detailed/Object heads (01) Salaries (02) Wages (03) Overtime Allowances (04) Pensionery Charges (06) Medical Treatment (11) Travelling Expenses (13) Office Expenses (14) Rent, Rates & Taxes (21) Supplies & Materials (26) Adv. Sales & Publicity. (28) Payments for prof. Service (50) Other Charges (64) Write off / losses