Off the shelf ... and into business practices: developing financial policies that work.

• Author: Kavanagh, Shayne

Financial policies are guidelines for operational and strategic decision making related to financial matters. Financial policies identify acceptable and unacceptable courses of action, establish parameters within which a government may operate, (1) and provide a standard against which a government's financial performance can be judged. (2) As such, financial policies are a critical component of the management of a government organization.

However, public managers often find themselves disappointed with the extent to which financial policies are embraced by the governing body and staff. After their adoption, financial policies sometimes become nothing more than "shelf paper;" that is, they do not become an integral part of the organization's business processes. In other cases, governments may avoid adopting policies altogether for fear of the commitment those policies entail.

This article is intended to help public managers develop and implement effective financial policies. (3) Specifically, the article will provide an overview of the various dimensions of financial policies, the process used to develop policies, and the characteristics of effective policies.

THE DIMENSIONS OF FINANCIAL POLICIES

Financial policies are most commonly considered in terms of functional areas; for example, most finance officers are familiar with investment policies, debt policies, and operating budget policies. While this is certainly one useful approach to conceptualizing financial policies, this article considers financial policies along four alternative dimensions:

* Formal versus informal

* Policy versus procedure

* Accountability versus flexibility

* Actionable versus philosophical

As we will see, each of these dimensions has specific ramifications for the implementation of financial policies.

Formal Versus Informal. Governments can establish both formal and informal financial policies. Formal financial policies are those that are written down in an authoritative document and are typically approved by the upper echelons of the organization, usually by the governing body. Conversely, informal policies are de facto policies that have either evolved over time as the result of past practice or are simply unwritten rules promoted and practiced by an individual with influence, such as the finance director for matters of debt issuance. GFOA strongly recommends that governments develop and adopt formal financial policies. Consider the following advantages of formal policies:

* Formal policies usually outlive their creators, thus promoting stability and continuity. Formal policies also secure the buy-in of important stakeholders, since these same stakeholders are typically involved in their creation. In addition, stakeholder participation increases the likelihood that the actors in financial decision making will abide by a common set of rules.

* Formal policies can increase efficiency by standardizing operations. This eliminates the need to continually reinvent responses to recurring situations.

* Credit rating agencies look favorably on formal policies such as capital improvement policies, which can bolster bond ratings and thus reduce borrowing costs.

* Formal policies educate decision makers who may not have a background in government financial management. Many public officials, especially elected leaders, do not have expertise in the field of government finance. Financial polices can help inform officials of sound financial practices, increasing the likelihood that these practices will be followed.

* Formal policies promote long-term and strategic thinking by framing policy options and setting forth goals. For instance, if a revenue policy were to stipulate that no more than 25 percent of total revenues could be derived from a single source, then long-term strategic planning could focus on ways to maintain revenue diversity against this benchmark.

* Formal policies can be subjected to regular reviews in order to incorporate the latest thinking and best practices in the profession.

Informal policies can play a useful role in acclimating governments to the idea of financial policies in general, and they permit governments to determine which types of polices work and which do not before the policies are formalized. Governments that are hesitant to formalize financial policies might try to reach an internal consensus to use informal policies for a defined length of time before either formalizing or discarding those policies.

Policies Versus Procedures. Whereas financial policies are guidelines for financial management decisions, administrative procedures cover the detailed steps needed to accomplish business processes. Administrative procedures are an important complement to financial policies because they ensure that day-to-day activities are in line with financial policies. While administrative workers often find financial policies to be esoteric, they can usually relate to administrative procedures that...