CONCEPT, THEORY, AND MODEL IN FINANCIAL MANAGEMENT OF EDUCATION INSTITUTION Definition and characteristics of financial management Elements in financial management Basic concepts and terms in financial management Theory and model related to financial management

CONCEPT OF FINANCIAL MANAGEMENT management activity that is concerned with decisions on how to procure funds, of an organization's financial resources, disburse and give account of funds provided for the implementation of educational programmes. Pengurusan kewangan dalam pendidikan adalah berkaitan dengan pengagihan dan penggunaan sumber kewangan oleh institusi pendidikan bagi memenuhi tujuan penyediaan perkhidmatan pendidikan dan pencapaian kejayaan pelajar. (Odden & Picus, 2004). DEFINITION OF FINANCE Finance address the ways in which individuals, business, business entities and other organizations allocate and use monetary resources over time - investment - loan, debt, bond DEFINITION OF MANAGEMENT Management is the organizational process that includes strategic planning, setting objectives, managing resources, deploying the human and financial assets needed to achieve objectives, and measuring results.

MANAGEMENT FUNCTIONS Planning Organizing Staffing Directing Controlling CONCEPT OF FINANCIAL MANAGEMENT financial management is defined by Pandey (1995) as that management activity which is concerned with the planning and controlling. financial management is concerned with decisions on how to procure, expend and give account of funds provided for the implementation of the programmes of an organization. In educational institutions, financial management refers to that management activity that is concerned with decisions on how to procure funds, of an organization's financial resources, disburse and give account of funds provided for the implementation of educational programmes.

THE PURPOSE OF FINANCIAL MANAGEMENT IN EDUCATION The funds are utilized in the most effective and efficient manner. To assist educational managers and administrators to keep a record of their stewardship in financial matters. Supervision of cash receipts and payments and safe guarding of cash balance. The raising of funds and ensuring that the funds so mobilized are utilized in the most effective and efficient manner. This is based on the fact that resources are scarce and so heads of educational institutions should ensure optimal utilization of funds. To assist educational managers and administrators to keep a record of their stewardship in financial matters for the benefit of the government, the proprietors or the governing council of the institution. It is, also, the supervision of cash receipts and payments and safe guarding of cash balance. SCOPE OF FINANCIAL MANAGEMENT IN EDUCATION (a)The procurement and raising of funds. (b) The allocation of financial resources to different educational institutions. (c) The effective utilization of funds. (d) Supervision of cash receipts and payments. (e) Safeguarding of cash balance.

School business administration contributes to teaching and learning by providing information and services that speak to questions such as: What are educational needs that have business implications? What are the nature and cost of each feasible alternative to meet a given educational need? What is the most efficient means to provide each alternative? What is the cost-effectiveness of each alternative (to what extent does each alternative meet the educational need, and how does this equate to the expenditure involved)? What is the relative priority of each expenditure decision to all of the other expenditure decisions in the school system?

EDUCATIONAL FINANCE education finance as the process by which tax revenues and other resources are derived for the establishment and operation of educational institutions as well as the process by which these resources are allocated to institutions in different geographical areas. (Ogbonnaya, 2000) Any aspect of raising and spending revenue for educational purposes education finance is one of those subjects which lie on the border line between economics of education and education law. It is concerned with the income and expenditure of authorities of educational institutions and with the adjustment of one (income) to the other (expenditure). Ogbonnaya (2000) described education finance as the process by which tax revenues and other resources are derived for the establishment and operation of educational institutions as well as the process by which these resources are allocated to institutions in different geographical areas.

SCOPE OF EDUCATION FINANCE (a) Financial concepts like imprest, payment vouchers, finance virement, authority to incur expenditure, Bank statements, cash management and financial control. (b) Taxation (c) Budget (d) Classification of government expenditure. (e) Types of cost analysis - current versus capital cost, recurrent and capital expenditure. (f) Role of government and non-government agencies in the funding of education. (g) Sources of funds and problems of finding educational programmes

THE ROLE OF ECONOMICS IN EDUCATION POLICY RESEARCH (BREWER ET AL, IN LADD & FISKE, 2008) Economists are interested in how society organizes and uses resources to produce various types of knowledge and skills through formal schooling and distributes them to various groups in society. Economics is a framework for helping understand the behavior of individuals and organizations in allocating resources How much education should an individual acquire? How should education be produced and allocated by a society? Can we be more efficient in organizing the production of education? Economics is defined as “ the study of allocation of scarce means to satisfy competing ends” (Becker as quoted by Walberg and Bast, 2003, p. 182 Economist study how individuals, organizations, and society employ time, money, and effort. In the case of education, economists are interested in how society organizes and uses resources to produce various types of knowledge and skills through formal schooling and distributes them to various groups in society. Economists begin an explanation of observed phenomena by building a theory or a model in order to simplify reality and highlight key characteristics. A model contains a set of assumptions, and yields predictions, ceteris paribus (all other things being equal) Economic theories are built on three basic foundations: Scarcity – assumption that individuals and society will never have enough resources to completely satisfy their unlimited wants. Rationality – people’s ability to make decisions in a systematic and purposeful way. Optimizations – either profit or goal maximization in reference to organizations or utility maximization in reference to individuals.

COMPONENTS IN FINANCIAL MANAGEMENT (Garner 2004) Management structure Programs, services and institution activities Budgeting Financial system that manage budgeting and accounting

FINANCIAL MANAGEMENT OF PUBLIC SCHOOLS IN MALAYSIA Entities involved (Malaysia Treasury, Accounting General Department, National Audit Department, Financial Division Ministry of Education) Activities in managing school finance School organizational structures related to school finance (PTj, committee of school finance) Concept of public financial management Financial regulations

3 ACTIVITIES IN FINANCIAL MANAGEMENT FOR EDUCATION INSTITUTIONS Obtained financial resources Budgeting administration Generating income Implementing educational programs/projects/activities Procurement Payrolls Managing asets Controlling financial resources Managing cash and debts Preparing financial reports Disposal, Loss, and write-of, Auditing

SCOPE OF PUBLIC FINANCIAL MANAGEMENT IN MALAYSIA Expenditure management Accounting management Revenue collection and deferred revenue management Supplies and asset management Preparation and presentation of financial report and annual report for federal statutory body

EVALUATION IN FINANCIAL MANAGEMENT Cost-benefit analysis The process of weighing the total expected costs vs. the total expected benefits of one or more actions in order to choose the most profitable option Cost-effectiveness Cost-effectiveness relates effectiveness to the cost incurred – greater effectiveness for the same or low additional cost, or the same effectiveness at lower cost.

ISSUES IN SCHOOL FINANCE Discuss in a group, identify main problems in financial management at your school. Explain the impact of the problems on teaching and learning proses for your school. Elaborate steps need to be taken to rectify the problems

5 CONCEPTS OF COST The nature of costs Costing Opportunity cost Cost classification Cost characteristics of school THE NATURE OF COSTS ‘Costs’ is resources foregone to acquire other human or physical resources to achieve an objective. (eg: people, premises, time within the school day or personal time, intangible resources - morale, health, motivation, energy of teachers, students Non-financial costs : teachers time, students’ travel, students’ earning foregone, students’ nutrition, home electricity, vandalism COSTING Costing is the art of measuring the consumption of resources in financial terms Costing of inputs is much easier than costing of processes or outcomes Costing is also difficult because it is often by no means clear which resources should actually be included. OPPORTUNITY COST The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action. http://www.investopedia.com/terms/o/opportunitycost.asp Opportunity cost refers to what you have to give up to buy what you want in terms of other goods or services. When economists use the word "cost," we usually mean opportunity cost. When economists refer to the "opportunity cost" of a resource, they mean the value of the next-highest-valued alternative use of that resource http://www.econlib.org/library/Topics/College/opportunitycost.html The next-best alternative use for these resources Eg: A PTA tells a headteacher it has some money for the purchase of microscopes. The head accepts with gratitude, although feeling that a higher priority would be to expand the basic equipment in one of the laboratories.

COST CLASSIFICATION Cost information needs to be organised into a pattern before significance can be read into it. Direct and indirect costs Prime and subsidiary costs Variable and fixed costs Controllable, sunk, and idle costs Unit costs DIRECT AND INDIRECT COSTS Direct costs are costs that can be easily identified with a cost centre (it is responsible for its own budget and that all expenditures incurred by it are debited to it). Indirect costs are costs that cannot be so identified and have to be apportioned (overhead). PRIME AND SUBSIDIARY COSTS Costs between resources related to a school’s prime educational function and those relating to its subsidiary administrative, transport and catering functions. The division of total school costs into such categories, with percentages for each, is important. It makes it possible to monitor the percentage over years and see if the proportionate and actual expenditure on the subsidiary categories is shrinking or rising.

Variable and fixed costs Controllable, sunk and idle costs Variable costs are those that change in proportion to the quantitative changes in the processes of the industry Fixed costs are those that remain unchanged for a given period of time, despite fluctuations in the volume of the activity undertaken. It is particularly important at a time of falling rolls, when a number of costs may remain completely or relatively fixed, and so squeeze the finance available for variable costs CONTROLLABLE, SUNK, AND IDLE COSTS Who controls costs? Budgetary responsibility is aimed at identifying the person who has the most effective cost control over the item concerned. Costs may not really be controllable because expenditure cannot be reduced or recovered – sunk costs. Costs may not be fully controllable because premises or other resources are underused – idle costs Variable and fixed costs Controllable, sunk and idle costs

Unit costs Unit cost of education UNIT COSTS Unit costs = (Total costs) / Number of units Cost per unit is a measure of a company's cost to build or create one unit of product Units can be students, classes, schools, courses, time, hours, lessons or days UNIT COST OF EDUCATION The ability to calculate costs for a unit or measured amount of a product or service is important in many aspects of budgeting and cost management. In the open and distance learning sub-sector, unit costing is necessary for the following tasks: to determine appropriate fee levels (where cost recovery models are used); to compare costs of alternative ways of delivering a particular course; to carry out an Activity-Based Cost analysis; and to compare costs of an ODL institution with those for conventional education. http://wikieducator.org/Cost_and_Financing_in_Open_Schooling/Unit_Costs:_Determining_costs_per_student,_per_course_or_per_programme Unit costs Unit cost of education

COST CHARACTERISTICS OF SCHOOL (KNIGHT, 1993) Most schools are ‘non-profit’ organisations. Schools are service organisations and perform a social as well as an economic function. School cost structure are very stable Schools work within a very slow cycle. School unit costs tend to rise when education become more technical and science-centred. Schools are very labour-intensive School calendar cause high costs Schools are constrained by legislation, regulations, policies and attitudes that have often developed without consideration for costs, and yet which considerably affect them.

6 KEY CONCEPTS FOR EFFECTIVE FINANCIAL MANAGEMENT (Knight, 1993) Economy Efficiency, cost-efficiency Effectiveness, cost effectiveness Cost/benefit analysis Productivity Value for money ECONOMY Economy careful use of resources, frugality and good housekeeping. It implies the avoidance of expenditure above a reasonable minimum or of a speculative sort Only relates to expenditure, and not to its use Eg: repair of equipment rather than a new purchase Purchase of equipment only after thorough survey of the market and negotiation of discount EFFICIENCY, COST-EFFICIENCY Efficiency The fullest possible attainment of specific objectives or standards A heating system which brings all rooms to the desired temperature; A security system which detects intruders effectively A clerical system which collects payments for hire of school premises promptly

Cost-efficiency Effectiveness Cost-effectiveness Cost-efficiency Relates efficiency to its cost. More cost-efficient – greater efficiency at the same cost or the same efficiency at lower cost Eg: A new boiler which provides the same heat more economically Reduced expenditure on an administrator rather than a teacher to administer school examinations Preventive maintenance of buildings which avoids long-term maintenance costs EFFECTIVENESS, COST EFFECTIVENESS Effectiveness is the fullest possible attainment of the goals and objectives of the school. Improved performance, possibly against performance indicators, such as improved examination results or test scores (but only if this is not caused by some external factor such as improved quality of student intake) Improved student attitudes and behaviour; Better parent and community relations Improved school environment Cost-effectiveness Relates effectiveness to the cost incurred – greater effectiveness for the same or low additional costs, or the same effectiveness at lower costs. Expenditure on promotion of the school bring increased enrolment; Purchase of a minibus brings expansion in educational visits and off-campus learning Peer tutoring improves student performance with little extra cost. Cost-efficiency Effectiveness Cost-effectiveness

Cost / benefit analysis is a systematic approach to estimating the strengths and weaknesses of alternatives that satisfy transactions, activities or functional requirements for a business. It is a technique that is used to determine options that provide the best approach for the adoption and practice in terms of benefits in labour, time and cost savings etc. (David, Ngulube and Dube, 2013). The CBA is also defined as a systematic process for calculating and comparing benefits and costs of a project, decision or government policy (hereafter, "project"). CBA has two purposes: To determine if it is a sound investment/decision (justification/feasibility), To provide a basis for comparing projects. It involves comparing the total expected cost of each option against the total expected benefits, to see whether the benefits outweigh the costs, and by how much.[1] Cost / benefit analysis

Productivity Value for money PRODUCTIVITY increasing outcomes for each unit of input (RM, teacher hours, student hours) Higher school productivity implies one of the following Cheaper education, the same for less cost Increased education, more for the same cost Speedier education, the same in less time Concerned with the quantity and quality of educational outcomes that result from a given investment resources. The research focus on estimating an “education production function” that links school inputs to educational outcomes and identifies the impact of changes in inputs (e.g., teachers on student outcomes (e.g., achievement as measured by test scores) Issues: What should schools produce and how should we measure the quality and quantity of the “product”? Should we focus on basic functional competencies or critical thinking skills? Will standardized tests suffice to measure progress and if so, what sort of test? What about civic responsibility, economic self-sufficiency, cultural awareness What are the inputs to the production of education? Purchased inputs: teachers, school buildings, books Nonpurchased inputs: donated goods and services VALUE FOR MONEY How much does this cost? Is it good value for money? Is this was my business, would I spend my money like this? Productivity Value for money