Robust Financial Management in the Public Sector (RFM)
A necessity not a choice
What is robust financial management ? Firstly, we can define “robust” as follows:
“Robustness is a characteristic describing a system’s ability to perform effectively while its variables or assumptions are altered. In general, a system is robust if it can handle variability and remain effective” (Investopedia)
Public financial management refers to “the collection, management, and expenditure of public finances throughout an economy. The core objective of public financial management is to improve citizens’ lives through better management of public money.” (International Federation of Accounting)
Combining these definitions, we can state that robust financial management in the public sector should be focusing on achieving the 4Es – Economy, Efficiency, Effectiveness and Equity in the use of public funds. This is in line with New Public Management (NPM) theories. NPM seeks to improve public sector management generally, including increased flexibility and transparency. This can be a challenging objective when public funds are limited, and the demands are high. Therefore, it is important that all organisations in receipt of public funds take every opportunity to ensure they implement a system of robust financial management. This will allow sustainable and flexible approaches that can provide the agility to meet these challenges.
This article seeks to identify some of the most important areas organisations should review in order to address any weaknesses in their approach to robust financial management. There are three categories that should be examined:
- Knowledge, capability, and competency of all staff tasked with responsibilities around financial management. This includes not just budget holders, managers, and finance staff, but also anyone who has a direct input in expenditure or raising income. Often there is an assumed knowledge which may not be present, and a lack of training and development in this area at all levels.
- Internally systems and controls supported by adequate policies and procedures. These will include division of duties; adequate computer systems and access to financial information; protocols around procurement; authorisation; and financial decision making. Whilst most organisations have policies and procedures, these are not always disseminated sufficiently, nor are staff evaluated on their knowledge of these. This can lead to errors and poor financial management decision making.
- Stakeholder management, effectiveness, and control. Most public bodies have a wide range of stakeholders to ensure transparency, accountability, and oversight. These can be internal and external, ranging from political appointees; trustees; and regulators, through to contractors, suppliers, and end-users. The influence of these stakeholders can affect the way the 4Es are achieved and may direct financial management behaviours.
This review process should ideally be undertaken objectively, and using a third party may be beneficial. Having examined each of the above in detail, organisations should develop an action plan to address the areas that do not meet required benchmarks.
To provide organisations with some specific points needed to develop robust financial management systems and strategies, we will be producing further articles covering each of the above points in detail. This overview will be of interest and benefit to any organisation that wishes to become more robust in the way it manages public finances.