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Working Capital Management

Chapter One: Introduction

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Financial Management Reform

 

In 1988 the Government adopted the financial management reform program, a wide-ranging reform package designed to improve the efficiency and accountability of the public sector, thereby improving the efficiency of the economy as a whole. Major components of the reforms are:

                         A change in focus from inputs to outputs and outcomes. In the past, budgets were designed around the purchase of agreed inputs. Departments are now allocated resources to produce Government's choice of outputs, which in turn will contribute to the achievement of Government outcomes.

                         A change in types of appropriation to acknowledge the fact that the Government plays several roles in its relationships with departments. The new system of resource allocation recognises three different departmental/Government relationships: the Government may be a purchaser of goods and services provided by a department; the Government may be the owner of a department; a department may act as an agent for the Government.

                         A clearer accountability structure between Chief Executives and their Ministers and between the Government and Parliament. This system is designed to increase scrutiny so that efficiency in the public sector can be monitored and improved where necessary.

                         Greater delegation of authority to Chief Executives. Chief Executives have been delegated the authority to select the appropriate mix of resources for their departments.

                         A change in the balance date. The balance date for the budgeting cycle has been changed from 31 March to 30 June to allow for the assessment of the major tax inflows before the budget is announced.

                         A change from cash accounting to accrual accounting methods. Accrual accounting recognises the full costs of resources consumed and matches these with the revenue for goods and services produced in a particular period. Previously, departments used cash accounting, which recognised only the cash inflows and cash outflows in a given period. This meant plans and budgets were incomplete.

Two major pieces of legislation have aided the implementation of the financial management reform (FMR) programme. They are the State Sector Act 1988 and the Public Finance Act 1989.

                         The State Sector Act 1988 had two essential purposes. It established a framework for the relationship between Chief Executives and their Ministers. It also created a new industrial relations and employment regime, giving Chief Executives the power to hire and fire staff and to fix salaries.

                         The Public Finance Act 1989 repealed the Public Finance Act 1977 (with the exception of Part II and certain other provisions relating to the Audit Office), and gave statutory effect to a set of financial systems that have been implemented to operate within the framework of the State Sector Act. The Act requires that no expenditure of public money be made without Parliamentary approval, and lays down the information to be provided to Parliament in the Estimates to gain that approval. The Act also provides a new basis for the appropriation and management of public resources and it strengthens the-reporting requirements for the Crown, departments and, eventually, Crown agencies.

Legislative Requirements for Working Capital Management

The Public Finance Act 1989 does not address detailed management issues. There are therefore no provisions which relate specifically to working capital management.

However, Section 33 of the Act makes departmental Chief Executives responsible for the financial management and financial performance of their departments. Good working capital management is a component of good financial management and will enhance financial performance.

Part II of the Act deals with banking and investment activities of the Crown and departments. It is therefore indirectly relevant to the subject matter of this booklet.

Section 49 limits the obtaining of credit to 90 days.

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