Unit 4

Financial Management
Objectives:
The objectives of this topic are the following:
be able to explain some key elements of effective education financing and financial education management.
be able to discuss education financing t macro-level, and to indicate the differences between centralized and
decentralized systems.
as far as the financial management of schools is concerned
be able to discuss the nature of educational institutions as nonprofit
organizations be able to explain how views on education financing are
operationalized develop skills in the management of school finances.4

4.1. Introduction
Education financing at macro-level and financial management at the operational or school level are two important matters in
education financing. The prime concern in education is educative teaching and not a profit or turnover or even high
productivity, or any other ulterior motive. Education financing takes place in the interest of educative teaching.
As in any other social contexts, financial difficulties are being experienced in education at present. Principals are
expected to keep on ensuring that quality teaching and learning are provided while the budgetary provision allocated
to them for that purpose is not sufficient and sometimes non-existent. The object of this topic is to equip principals,
with the knowledge and skills required to understand and cope better with the financial aspects of school management.

4.2. Principles of Effective Education Financing and Financial

Education Management
Principals as financial managers of schools are responsible for school finances. Therefore, they should be well
acquainted with the basic principles of education financing and management.

4.2.1. Accountability

When a person or institution handles funds that do not belong to him/her or it, he/she/it is accountable for that money
to the body that made the funds available. In an education context, therefore, this means that public funds are being
dealt with and this entails the responsibility to account for those funds in a systematic and prescribed manner.
For the school principal this means that he or she must deal with funds in a responsible manner and that he or she will
be accountable to the parents, the governing body, the education departments. The principal should therefore acquire
the skills and knowledge that will enable him/her to satisfy this requirement.
4.2.2. Autonomous control of funds

A balance should be struck between two extremes: absolute control by a higher body and absolute freedom of
decision-making (educational institution).
A funding authority is naturally entitled to demand accountability from its beneficiaries. At the same time, a
management body should not allow a subordinate body so little latitude that it cannot exercise its discretion or
initiative at all. Control measures should never be taken so far that the entrepreneurial spirit and initiatives of
management staff are unduly inhibited.

Effectiveness
Effectiveness implies doing the right things, for example, to make decisions that will prove to be the right decisions in
the long run. Making the right financial decisions means then that decisions should always be made according to
priorities. The following breakdown of a priority classification may help principals in allocating resources.

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Essential expansion: Not implementing these services can seriously prejudice the pubic interest.
Desirable expansion: This includes activities that should be given priority by virtue of the special economic,
social or political advantages they could have for the community.
Useful expansion: Expenditures in this category concern activities that can be dispensed with, but that
should nevertheless be undertaken in the public interest.
Dispensable expansion: In this category fall activities that can be postponed without materially prejudicing
the public interest. Such activities would therefore be undertaken only if money is readily available. If costs
have to be cut this group of services would be the first to be dispensed with.

ACTIVITY 4.1.
To what extent are each of the three premises mentioned above applied in schools or educational
institutions? In other words, how are finances accounted for? How much autonomy does a school have in
the expenditure of funds? How do you go about ensuring effectiveness?

4.3. Education Financing at Macro Level

An education system cannot function without the necessary financial means. Government institutions are primarily
responsible for this financing function with funds obtained from taxes, foreign loans and grants.
The procedures whereby and the degree to which education is financed by the authorities differ from or resemble each
other in accordance with the relevant state forms. Broadly speaking, we can distinguish between centralized and
decentralized state systems.
In centralized system, the national government assumes most of the responsibility for administering education.
Education is usually free and government schools predominate. In contrast, in decentralized education system, there
are local authorities that have complete control over the running of schools. Authority is devolved to the lower level.
However, there is neither absolute centralization nor decentralization. In practice, there can only be mixed forms of
centralization and decentralization of authority.

ACTIVITY 4.2.
a) What are the advantages and disadvantages of centralized and decentralized systems?
b) In your opinion, is the present education system in your country a centralized or a decentralized
system? Why?

The education financing process consists primarily of two components-the generation of funds and the allocation of funds.
A state can generate funds for education in the following ways: different kinds of taxes, state loans, lotteries, and school fees.

The budgeting process can be divided into three phases:

drawing up a draft budget,
approval of the budget
implementation of the budget.

Depending on the system prevailing in a country, the allocation of budget can be made on an item basis or on
programme basis. With the former the amounts allocated to specific goods and services are indicated separately,
whereas with the programme budget specific programmes are budgeted for according to objectives.

4.4. Financial Management in Schools

4.4.1. Schools as Non-profit Organizations

Schools are non-profit organizations; and a non-profit organization has the following features:
Certain goods and services are provided which non-profit organizations cannot or will not provide (for example,
roads, health and education). A non-profit organization therefore has a service motive, which is evident from the
fact that the “consumers” are known as, for example, patients, students or the public, and not as clients.

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The source of income differs from that of profit-making organizations. In the case of schools the state’s
contribution can be as much as 100% and in addition the schools may be reliant on donations and contributions
from parents. Furthermore this kind of organization does not pay tax on its income.
Unlike private sector, there is no concentration on output and goals as fixed and clear objectives. The school
must
mould children’s personalities and conduct
inculcate in children certain values and life views
prepare children for adult life
The achievement of these objectives is not readily measurable, with the result that the formulation of
objectives tends to be vague and generalized.
Decisions are not made purely on the grounds of financial considerations such as cost-effectiveness, but also on
the grounds of values such as the best interest of the pupils.
The above features have the following implications for financial management:
The provision of a service such as education is not associated with or dependent on an amount to be paid by
“clients”.
Any “profit” made on a programme must be regarded only as a surplus and may not be retained by the supplier
itself; it must always be reemployed in the interests of the user of the service.
Funds allocated for a specific purpose have to be spent for that purpose. The requirement can only be waived in
exceptional cases and with proper justification from which it is evident that the envisaged alternative would be
in the interests of the user of the service.
Since objectives are not clear and values play a role in the making of financial decisions, such decisions are not
necessarily effective from a profit-seeking viewpoint.

ACTIVITY 4.3.
Distinguish the difference between the terms “non-profit” and unprofitable”.

4.4.2. How Education Financing at Macrolevel Reflects in Education Financing at

Local or School Level
Every country has a variety of schools ranging from private schools to government schools. From a financial point of
view, the most important difference between these types of schools is the state’s contribution. The state’s contribution
to the schools could be from none to 100%.
There is now a tendency to move away from government schools to state-aided schools. From a financial point of
view the most important implication of this movement towards greater autonomy for schools is the increase in the
managerial autonomy of governing bodies. This means that the schools have greater responsibility for financial
matters and greater responsibility in respect of physical facilities, staff, pupils and the community.

ACTIVITY 4.4.
Discuss the financial implications of school autonomy in terms of a) the physical facilities b) the
appointment, promotion and dismissal of staff and c) the school’s admission policy.

4.4.3. The Management of School Finances

The primary function of schools, namely educative teaching, becomes more complex every day, yet despite
diminishing resources educational institutions must continue to perform this function effectively. This situation places
a considerable responsibility on the shoulders of financial education managers such as school principals.
Principals must then have certain knowledge and skills on planning, organizing of and control over school

finances. a) Planning of school finances

The planning of school finances usually begins with the drafting of a budget. A principal should develop a total-
school approach or attitude to the drafting of a budget, which means that everyone who is involved in implementing
the budget should also be involved in drawing it up. In other words, where teachers head certain activities or subjects
in a school they should automatically be involved in drawing up the budget.
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Budget be seen as a document that includes the following:
the principal income for a specific financial year
the amounts allocated to specific items to be financed from the revenue
the conversion of objectives into priorities the ranking of priorities.

Therefore, in drawing up the budget, the principal and staff must

express the school plan in financial terms.
identify and prioritize the school’s programmes.
Estimate the school’s income from various sources.
Allocate funds to the programmes according to priority.
Test expenditure against the budget.

A budget must be based as far as possible on relevant and objective information like:
the amounts for previous years,
increases or decreases in pupil numbers,
pupil periods per week,
the weights of different subjects.

b) Organizing school finance

A school principal or financial manager must be knowledgeable in a number of matters if he or she is to organize
school finances effectively.
He or she must be familiar with the correct procedure applied in the school when the following financial
activities are handled.
He or she must know how different kinds of funds must be collected.
He or she must know how cash must be handled.
He or she must be familiar with accounting procedures.
He or she must be familiar with the reporting procedure.

A principal must also know how to organize staff concerned with school finance. This entails the following:
He or she must know how to train staff by delegating certain functions to them.
He or she must know how to coordinate staff activities.

Principal must have skills relating to the collection and application of funds. As to the sources of funds these
could be
Per capita allocations by the department
Trust funds
School fees
Sponsorships
Donations
Funds generated by fund-raising project

The principal can also collect funds from a variety of sources with the aid of fund-raising projects, such as
Social functions
Donations,
Competitions
Direct sales
Services rendered
Leasing of property

c) Control of school finances

The school principal must ensure that each person in the school who performs financial functions does the right thing
at the right place and time. Therefore, he or she must at least be knowledgeable about the following;
procedures of regular reporting
regular balancing of books
regular and punctual maintenance of all records, documentation and
books regular stocktaking and prescribed audit inspections.

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Principal should also remain abreast of the assets and funds of the school, including operating assets such as supplies.

Control or control measures should be implemented in respect of the following:

budgeting
expenditure
receipts
petty cash
bank reconciliation
investments
school funds
creditors
supplies
movable and fixed property

ACTIVITY 4.5.
Explain how you would plan a school’s finances in accordance with a budget.
Explain how funds are allocated to education in your country.

4.4.4. Educational Finance

Many countries provide free primary education to their citizens. However, this does not mean that communities could
not make financial and labour contribution to the educational activity willingly and voluntarily.

4.4.4.1. The Structure of the Budget

a) Revenue budget
The revenue budget is the usual starting point for budgeting because the expenditure budget generally depends on the
forecasted level of revenue. Most education revenue budget is classified into three categories: ordinary revenue,
external assistance, and capital revenue.
Ordinary revenue includes direct taxes, indirect taxes, foreign trade taxes, license and other fees, sales of goods and
services, government investment income, pension contributions, extra ordinary revenue, etc. External assistance
includes cash grants and technical assistance in the form of cash and materials from bilateral and multilateral sources.
The capital revenue is generated from domestic sources such as sales of properties and collection of loans, external
loans from bilateral and multilateral sources of capital projects.
b) Expenditures budget

Expenditures budget is the amount of money planned to be spent on administration and development activities.
Broadly, these expenditures are classified as recurrent and capital budget. On expenditure side, the education
budget is also divided into recurrent and capital budgets.
Recurrent budgets are expenditures repeating year after year while capital budgets are expenditures made on assets or
mainly for investment reasons. The separation of the budget into recurrent and capital usually is based on three
combined criteria: the source of the revenue, the object of the expenditure, and the nature of the activities. Recurrent
expenditures are usually covered by domestic sources. Short-term activities that are project type are included in the
capital budget. Those activities that are recurring in nature are put in the recurrent budget.
The recurrent budget is structured under five major expenditure categories:
Salary and allowance
Service charge and fees
Materials
Contributions and transfers
Equipment and motor vehicles

Capital budget is the money allocated for capital expenditures. All money outlay for the acquisition of or
improvement of fixed assets constitutes the capital budget. At the Federal Government level, fixed asset is defined as
tangible goods costing Birr 200 or more that have a useful life of more than one year. In education this include the
acquisition of furniture, construction of school and administration buildings, purchase of computers, teaching
equipment, vehicles, installation or replacement of movable or immovable plants in schools. Consultancy fees are
classified as capital expenditure.
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Capital budgets usually refer to projects. The capital budget for each project is divided into four activities:
Survey, design, and studies
Equipment and procurement and construction
Operation and maintenance, personnel costs, and fees and charges;
and Capital transfer

4.4.4.2. Sources of educational finance at school level:

Some of the sources of educational finance can be:

The government’s budget
Schools’ internal income
Support from communities
Support from non-governmental organizations and the private sector

The budget allocated by the Government is expected to enable schools to carry out three major activities;
It should make sure that schools have obtained at least the minimum money required to execute the teaching-
learning process.
It should ensure that the budget allocated for schools is distributed fairly.
It should facilitate conditions whereby the community carries out finance-related and other activities through a
strong sense of ownership.
The non-salary recurrent expenditure would be used for procurement and publication of books, purchase of chalks,
stationeries, doors, windows, laboratory chemicals as well as for the maintenance of various furniture and to cover
water, telephone and electric bills, etc.
The budget would be allocated to the schools based on the number of students in the school in general. The
expenditure on the students varies according to the level of education.
It has been estimated that if the unit non-salary expenditure is below 75 percent, it would be hardly possible to carry
out educational activities. Therefore it will be made sure that at least this minimum non-salary budget is allocated for
each school. The unit cost increases with educational level because of the price rise of textbooks, the introduction of
laboratory equipment and the opening of various departments.

4.4.4.3. Incentive Budget

After the recurrent budget has been fully given to each school in block grant, an additional incentive could be
earmarked to encourage healthy competition among schools, encourage diligent teachers as well as students with
academic excellence.
Incentive budget is offered:
If the schools build through the participation of communities additional classrooms, libraries, laboratories,
latrines, pedagogical and sports centers to raise enrollment and improve the quality of education.
If the schools manage to reduce the number of dropouts compared with that of the previous academic year
through efforts they exert to avoid educational wastage.
If the schools manage to raise the enrollment of female students compared to that of the previous year
If the schools collect more revenue through various income-generating schemes to support the government’s
efforts towards expanding access in the country and reduce its financial expenditure in this regard.

Head teachers would also receive incentive if they demonstrate outstanding performance and if they stand 1 st to 3rd
competing with other head teachers or directors in their locality. The requirements that make the head teachers or
directors eligible for incentive are the following.
A director who furnishes the school by coordinating and mobilizing the local community (35%)
A director, who exerted utmost efforts to maintain quality of education, retain female students and avoid
educational wastage (30%)
A director who did his/her level best to maintain the quality of education by making sure that the school’s
laboratories, libraries, and pedagogical centers render the appropriate service (20%)
A director, who exerted maximum efforts to ensure that quality education is carried out at all educational levels
and are completed according to the schedule (10%)

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A director who strove to create a favourable teaching-learning environment in the school (5%)
Similarly, there could be an incentive scheme designed to teachers.

4.4.4.4. Handling and Utilization of Schools’ Finance

Schools financial income is obtained from block grant allocated by the government, internal income of schools and
the contribution from the community and humanitarian organizations. There ought to be a proper financial handling
and accounting systems to use the money obtained from these sources. In addition, the labour and contribution made
in kind would be calculated in terms of money and be reported.
Budgetary plan preparation includes three processes.
Calculating and recording the unit cost of plan of actions.
Conducting program review, i.e. examining the execution pf plans put into effect at half of the budget year. This
would be used as a term of reference to prepare the plan of next year in tune with the available capacities and
resources.
Preparing detailed work plan. The work plan would be prepared in such a way that it includes the activities
transferred to the next year and other new undertakings.

Activity 4.6.
Discuss the budget preparation process at the regional, local and school/institution levels.

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