Unit 4 Basic Framework & Mechanism of Financial Management

Introduction
In the first three units, you have learnt how to identify sources of school funds, budget for and secure the funds. Financial management, amongst other things, involves recognising and respecting authorities, regulations and practices governing the receiving, keeping and spending of funds. In this unit you will learn about the basic framework and mechanisms of finan­cial management and gain experience in applying appropriate financial management practices and skills.

Individual study time: 4 hours

Learning outcomes
By the end of this unit you should be able to:

describe the basic framework of financial management
state the authorities, rules and regulations governing school funds and the receiving and banking of school funds
plan a school budget and understand the system of monitoring it throughout the year
describe the practices for book‑keeping in schools and the use of inventories
outline safeguards for the security of school funds.

Basic framework of finance management

Activity 4.1
Before you proceed to look at Unit 4 in detail, please revise Units 2 and 3 by looking back on the sources of funds for your school budget and answering the following questions. If you are not currently a Headteacher, please discuss with your own Head or one from another school.

1) How much funding did you secure from each source?
2) Which source was most reliable? Why?
3) Over what period did the funds come into the school?
4) Is the amount collected more or less than budgeted?
5) If less, how and when do you envisage filling the gap or achieving your planned target?
6) Are your priorities still the same?

Comments
You will realise that funds coming into a school are not entirely certain and are often not adequate. They do not arrive all in one go but are spread throughout the year and often have to be claimed. If you do not do this you will not receive the funds. To manage these limited funds, the school head, as a public employee and the accounting officer, must be guided by the basic framework and mechanisms of financial management.

Framework for managing school funds

Comments
Your answers in the above activities are likely to bring out and include the issues outlined in the following paragraphs.

Activity 4.2
1) Considering the school you have chosen or your own school, identify and describe the framework in which you or the head manages the school funds.
2) How flexible are you or the head in deciding what to spend funds on and under what circumstances?
3) How free are you to make purchases?
4) What are the national as well as school financial policies within which you or the head operate?
5) How do you or the head allocate funds and operate budget headings (votes)?

KEEPING ACCURATE FINANCIAL INFORMATION
You are expected to keep complete and accurate financial information and to present this information properly. This information should include sources of revenue and accurate entry of expenditure, avoiding all errors with no omissions. Proper presentation further demands that you always put any required financial information under the correct heading and in the correct place.

The information should be arranged under broad headings, both in an Income Account and an Expenditure Account. We have provided for you an example layout which you may wish to use. However, you will not need all of the budget headings and you should choose only those that are appropriate for your situation. The Ministry of Education will have a format for you to use, so this is just as an illustration. This will enable you to compare costs of the range of services offered by the school within a year and from year to year.

Activity 4.3
Below you will find an example of a budget plan laid out as income and expenditure accounts. It contains most of the headings (votes) which one might need to use in a school and many more.

Select from these headings the ones which you feel might be appropriate for your school. If you do not see the ones you need, add your own ones to the bottom of the list in each section.

Draw up a budget structure for your own school or a fictitious one if you wish. For the sake of this exercise, assume a total income of GY$25 Million. Allocate the funds to the various headings. The accuracy of the funds you allocate to each heading is not essential. However, you must ensure that the budget balances and that the totals for the income and expenditure accounts are the same. Remember that this is not actual income and expenditure at this stage, but merely a forecast.

You will not need to complete the first section of the expenditure account “Staff Costs” as this will be dealt with by the MOE and the Teaching Service Commission. However, if you wish to do the exercise as Head of a Private School which pays its own staff costs, you will need to increase the income account allocation considerably to cover these costs.

To see these charts you will need to view the PDF version by going to the side bar on the right.

Comments
Although the above format may be different and more complex than you may be required to do with the Ministry of Education, it provides you with a good overview of the expenses incurred in Guyanese schools. Some of these will only apply to large primary or secondary schools and some may be needed only for the future as accounting systems and financial accountability becomes more and more complex on a yearly basis.

Whatever the case, it is essential that the budget balances and, where the providence of the income is uncertain, that there is flexibility within the expenditure account if the income is not received. For example, we can only estimate the fundraising power of the PTA and a change of chairperson could easily mean a loss of considerable revenue. Flexibility to make changes, knowledge of costings and understanding of basic accounting procedures are the important requirements of any budget preparation.

FLEXIBILITY AND FREEDOM WITH RESPONSIBILITY
In managing school funds, you should enjoy some financial freedom and flexibility to enable you to consider a range of options. This demands a high sense of responsibility in order to use the freedom and flexibility effectively.

VIREMENT (SWITCHING EXPENDITURE)
In a school with a well‑organised financial management system, virements can be applied. A virement is when you make the decision to transfer funds between two budget headings (votes) where there is excess money in one and a need for funds in another. Under this system you, as the head of the school, will agree with the funding authority (MOE, Regional Department or governing body) to switch expenditure between one heading and another if they so wish and if need be.

This depends on how you have prioritised the school services.

PURCHASING FREEDOM
It is important for you as the head to enjoy freedom of purchase. Lack of purchasing freedom restricts the freedom of schools as consumers and delays the purchasing process. However, regulations must be followed in order to achieve value for money. For example, estimates of purchase costs must be obtained in order to get the best prices and to avoid fraudulent practice.

FINANCIAL POLICIES
The school should have financial policies to guide the financial administra­tors and managers. These policies will assist financial control and regulate the processes of receipting, keeping, withdrawing and expending funds. However these policies should not clash with the official national policies on school finances.

PROPER ALLOCATION OF FUNDS
To manage the school finances you should be conversant with what each department has and what it needs. Involving teachers, heads of depart­ment and level heads in this process is very important.

Authorities, rules and regulations governing school funds
It is important that you are equally conversant with the authorities, rules and regulations that should guide you in the effective handling of school funds. You will be provided with the latest versions of these on your appointment as a headteacher.

Grants

Activity 4.4
Grants are funds that government or other non‑government organisa­tions give to run schools. Reflecting on your school situation:

1) List the various sources of grants you receive in your school.
2) What activities or items are financed from grants in your school, whether from the MOE or other sources?
3) Who decides how to spend the grants?

Comments
Guidelines on the management of grants are contained in the rules and regulations of the Ministry of Education. Schools with governing bodies or private schools will have their own regulations which will fit in with standard accounting practices. Relevant government authorities will determine the level of grants and their purposes.

You will certainly be required to provide the relevant authorities in good time with information that will allow them to determine the level of the grants for your school.

It may be, also, that you will have less flexibility than you would like in how you spend the money allocated to you. However, all good accountants are flexible and creative and can be so as long as they operate within the regulations.

PTA or community group funds

Activity 4.5
1) Does your school receive Parent Teacher Association funds?
2) If so, how are PTA charges levied and controlled?
3) What items are financed from PTA funds in your school?
4) What other community groups contribute funds to your school?

Comments
Your answers might have included the following:

§ PTA funds are not controlled or allocated by the MOE or the school.
§ They include funds that are voluntarily paid by parents as decided in the general meeting of the PTA.
§ The funds are levied for the purpose agreed upon by the members of the association but approved by the school management committee or governing board.

Since you are the day‑to‑day manager of the school, the responsibility for collecting and banking this money rests upon you, and you are account­able to the executive of the committee and the electorate. The parent teacher management committee controls the PTA funds by ensuring that the money is expended in the manner and for the purpose agreed upon by the members of the PTA and approved by the leadership team or the governing body of the school.

Other funds

Activity 4.6
1) List other sources of funds for your school.
2) Do you declare funds from extra sources to school authorities?
3) Who decides on their use?
4) Do you include them in your budget?

Comments
All funds obtained from other sources are controlled by the school authorities from the moment you receive them. You are the accounting officer of the school for these funds. In fact the funds are accounted for twice. Firstly, by the organisation which donates them, following their own internal regulations, and secondly, once you have received them, by the school accounting system following the regulations of the MOE. All such funds must be declared, whatever their source.

The use of the funds would normally be decided upon in partnership between the donor and the recipient school as both have an interest in the future development of the school. It may not be possible to include them in your original budget as you may not know about them or you may only have an estimate. However, budgets are revised and updated throughout the year as funds become available and such donations must be included in the income account and an allocation made in expenditure account or the school’s contingency fund. However, excessive use of the latter would not be good practice as it may lead to an under-use of school funds.

Please Note: In the following pages you will find a number of examples of forms which are commonly used in accounting procedures. They serve only as examples and, although the principles will be the same, they may differ from those you are currently required to use in the Ministry of Education.

Receiving and banking of school funds
It is clear that funds coming into the school must be retrieved according to set procedures and kept safely. A receipt book is one of the commonest books of account. It is used in the process of receiving funds into a school.

Receiving funds

Consider how you officially receive money in your school and the kind of information you record about the funds received.

One copy would be issued to the person making payment. Typically in a school, funds are received in cash, cheques, or drafts. These monies must be received properly and kept safely. A receipt book is designed for receiving cash or cheques. A receipt must be made or written out immediately on receiving the cash money or cheque, the original should be sent or given to the person(s) who has/have made the payment and another would be retained by the school.

A receipt is used in a school to:

§ acknowledge receipt of cash or cheque in settlement of any payment, including school fees in a private school.
§ provide proof to the school that payment has been made for whatever purpose.
§ provide information for the cash book.

It bears the following basic information:

the name of the person who paid the funds
the name of the person who received the funds
date received
purpose of the funds
type of funds (cash, cheque, etc.)

If money has to be kept before banking, it must be under lock and key or in a safe to avoid theft or damage by fire, etc.

Banking
The head of the school must organise that all school funds should first be banked and then withdrawn as and when necessary. You should avoid using cash before it is banked as much as possible. This leads to confusing accounting procedures which are difficult to follow both for the school and auditors.

There are strict regulations on the use of school bank accounts and you should refer to these alongside this unit. The school can hold as many accounts as found necessary by the financial authority or the governing body. It is always advisable for a school to deposit its excess revenue on fixed deposit accounts which generate higher interest. Each account usually has two or three authorised signatories, two of whom must sign a cheque before the bank can honour it. It is common practice that the headteacher or chairman of the board of governors or management committee in a private school are signatories. These signatories are usually introduced to the bank by the responsible officer.

The following are some of the bank accounts that can be opened and used by schools:

1) Current accounts (of various types) which have deposit books both for cash and for cheques. Cheque books are used for withdrawals or transfer of deposits. It is rare that interest is paid on this kind of account.
2) Savings accounts on which regular interest will be paid. This will vary according to national and international markets.
3) Fixed deposit accounts, where the customer is only allowed to withdraw the money after a fixed period.

Withdrawing funds
Funds are withdrawn using a withdrawal form or a cheque book. A typical withdrawal form and a typical cheque are shown below

To view copies of the withdrawal slip and the cheque you will need to go to the PDF version by going to the side bar on the right
Book‑keeping
To facilitate accountability, keep records and to enhance planning and overall financial performance, the school must keep clear and accurate infor­mation of all its financial transactions. This is called book‑keeping.

Comments
Your list of books should have included those in the list below. In many countries, financial accounting systems have been computerised. However, the principles and procedures are much the same. The advantages are that the system will produce at the touch of a few keys, many financial reports which will assist you in managing your funds.

Activity 4.7
1) List all books of accounts which you should be using in your school.
2) Which of these are used in handling

the receiving of funds;
the withdrawing of funds;
expenditure;
balances?

VOTE BOOKS
This is a book in which records of items and amounts of money approved to be expended from any budget heading e.g. fuel or educational consumables, are kept. This book should be consulted before spending is undertaken, as it is a safeguard against overspending in any one area. You will check if funds are available before agreeing new expenditure. It is also important to remember any commitments for future months that you may have agreed to but have not recorded (e.g. future fuel bills). When using a computerised system, the software will not allow you to spend money if the funds are not available and will record commitments, thus not allowing you to overspend.

VOUCHERS
Before payments are made, vouchers have to be written. A voucher explains the reasons and authority for the expenditure. A school should have and keep vouchers showing the details of financial transactions in the school.

LOCAL PURCHASE ORDER (LPO)
The LPO is used for identifying and authorising local purchases agreed for in the school. This is an agreement made between the school and a supplier that the school is ready to purchase the item at an agreed price. The LPO book should always be kept in a very secure place to avoid fraudulent activity. However, it is not acceptable to use only one supplier (unless there is no other).

A system of competitive tendering should be in place especially when purchasing large items or expensive services. In other words, suppliers will be allowed to submit estimates of their costs for certain goods or services. Taking into account quality, you will select the one which provides the best value for money. It is also essential that you or anyone involved in the finances of your school declare any interest in local businesses that may be school suppliers.

CASH BOOK
This is the book where all cash transactions are recorded each day.

GREEN BOOK/PETTY CASH
Money which is paid out for official purposes is recorded in the green book or petty cash book. Receipts for all purchases must be supplied by the purchaser claiming the money.

CHEQUE BOOK
A cheque (see above) is a written order directing the bank or bankers to pay money as stated on the cheque. One should insist on obtaining receipts for any payments made by the school. Where official receipts are not available it is advisable to use petty cash vouchers to serve as written statements supporting the expenditure.

JOURNAL
It is very important for a school head to record all financial transactions in the journal. The journal has to be written every day. This is the first step of the accounting cycle of the school.

FINANCIAL LEDGERS
These are the books where the head of the school posts the information provided in the journals. The purpose of ledgers is for recording the finan­cial transactions of a school as they occur. See details in Unit 5.

TRIAL BALANCE
This is the list of all the accounts used by the school. It is used to summarise the effect of all transactions on the school accounts and show how each account is being used. Trial balances help heads know the balances of each budget heading and whether the school's records match those of the bank. Also they help check whether budgets are being adhered to, especially if they are being operated by others in the school. It is the overview of the state of finances at any given point of time.

FINANCIAL STATEMENTS
These are the regular statements made by the head to convey information on the financial position of the school at a particular time. Often they are presented for discussion to the Ministry of Education or the trustees in a private school or the board of governors in a board school.

BALANCE SHEET
This is the financial statement produced at the end of the school year which shows the financial position of the school. The normal practice is that the head of the school submits the balance sheets to the authority that approved the school budget or the board of governors where there is one.

INCOME STATEMENT
The income statement summarises the extent to which profits or losses in an account are occurring. In it, receipts (revenues) and expenditures are compared in order to project the profits or losses. It is also prepared at the end of the financial year. In a school, needless to say, losses are unacceptable unless an overspend has been approved by the financial authority.

DEBTORS BOOK
This is a record of the outstanding debts of the school by individuals or companies. Considerable effort must be made to ensure that these debts are paid.

GENERAL STORES INVENTORY BOOK
This is a book where records of consumable items, equipment and tools are kept. The purpose of this inventory book is to enable the school administration to keep track of school property and plan for the future supply of such property whenever needed. The items should be clearly arranged. Provision should be made to record both acquisitions and disposal of items. The head has to ensure that no items are stolen or sold out and that an item which should last one month does in fact do so.

In this book acquisitions and disposals resulting from deployments in equipment are posted from books of inventories. This is often called the asset register and generally records capital equipment in the school e.g. computers, TVs, furniture, CD players

Security of funds
Care must be taken to ensure that monies received into the school are safely handled and expended only by authorised persons as officially planned.

Receiving funds
Reflect for a moment on how you keep your cash within the school and what safety

Comments
Cash or sensitive books of accounts must be kept under lock and key and, if possible, in a strong safe to guard against fire, theft, burglary, forgery and pests.

During banking
Ensure that you carefully fill in banking forms and retain and file copies of the deposit forms.

Also note:

BANK STATEMENTS/BANK RECONCILIATION
These must be received on a monthly basis and compared with what is in the ledger and these must agree. In other words the account of the bank and your own accounts must be the same and must balance. This is called a bank reconciliation – reconciling your own accounts with the bank statements. Any discrepancies which you consider to be the fault of the bank must be reported to the bank manager immediately.

BANK STAFF
The school secretary should avoid getting used to one bank staff member doing everything as this encourages forgery, or complicity.

STOP PAYMENTS
Once a cheque book is misplaced or has some pages missing, an immediate report should be made to the bank to stop payment, otherwise the money can be used fraudulently.

Withdrawal of funds and prevention of forgery
It is essential that you protect yourself and other staff in the school from accusations of fraud. This is done by following procedures to the letter. It is very easy to ignore certain rules when operating an account within a busy school. This would be foolhardy. You will be advised, therefore, to follow the procedures below to avoid this.

CHEQUES
Ensure that you keep to the following procedures when writing cheques.

When you write the figures in words on a cheque, there should be no space in between the words. Any space left at the end of the word 'only' should be covered with one ruled line. Computerised systems will write the cheques for you on your own pre-designed stationery.
The amount in figures and all parts of the cheque must be clearly written.
The following figures should be watched carefully as they can easily be forged: 9, nine(ty) 8, eight(y) 7, seven(ty) 6, six(ty) 4, four(ty).

Change of signatories should be communicated to the bank immediately.

Any alteration on the cheque must be countersigned. by both signatories. However, where the alteration involves altering both the amount in words and in figures, a fresh cheque should be written and the wrong one cancelled.
The counterfoil must be countersigned by both signatories and the amount on the cheque must agree with the amount on the counterfoil.
It is important to write at the back of the counterfoil the reason for the withdrawal.
The cheque book and all important accounting documents and banking documents must be kept under lock and key by the responsible officer.
Under no circumstances must any cheque be signed when blank as this can be stolen and used in forgery.
Every time a cheque is written the remaining cheques should be checked and must also be used in their serial order. Watch out for cheques taken from the back of the book!
For cash cheques both the face and the back must be signed by both signatories and must bear the title of account on both sides. The person receiving the cash must have his/her name and identity written by him or her and signed at the back of the cheque.
A school cheque should normally require at least two signatories ‑either the head of school or deputy and the person concerned with school book‑keeping, in other words, the school secretary.

USING CARBON PAPER
All financial papers should be signed directly and not on a carbon, as an unscrupulous clerk can put some blank vouchers in and the officer will sign.

SIGNING WITHOUT SECURITY
No voucher or cheque should be signed without first scrutinising it. Signing when one is too busy or too tired can encourage lack of security.

SIGNATURES
Signatures should not be so simple that they can easily be forged. Many people keep two signatures ‑ one for bank purposes and one for other duties.

SAVING ACCOUNTS
The person depositing should ensure that the balance written in the passbook, as sometimes the passbook may be posted when actually the deposit slip has been destroyed and money taken. Periodically the balance in the passbook should be compared with that on the bank's ledger card. However, this is becoming less and less necessary as computerised systems in banks are being operated.

Summary
We hope that, having worked through this unit, you will be much more familiar with the procedures of financial management within a school and the responsibilities of the headteacher to ensure sound financial systems which not only keep track of all funds going in and out of the school’s account but also enable the headteacher to plan effectively for the best use of those funds.

Some of the principles are:

School funds are managed within specific guidelines from the Ministry of Education and a framework which you must be familiar with and follow meticulously.
The use of school funds must be clearly linked to the school improvement plan (SIP) which drives improvement in the school
School heads must be able to receive and bank school funds properly.
An accurate projection of spending in the form of a budget must be drawn up at the beginning of the year.
Regular monitoring of that budget must take place and necessary adjustments made.
All possible care should be taken to ensure security of funds.
School heads should seek to protect themselves and those for whom they are responsible from any accusation of malpractice or fraud by ensuring open and transparent accounting which follows the guidelines.