Cash Management, Revenue Sources and Cost Effective Methods of Revenue Collection at Local Government Level

Transcription

1 Cash Management, Revenue Sources and Cost Effective Methods of Revenue Collection at Local Government Level Mustapha Gimba Kumshe 1 ; Kagu Bukar 2 1 Department of Banking and Finance, Ramat Polytechnic Maiduguri, P. M. B 1070 Maiduguri Borno State. mgimbakumshe@yahoo.com 2 Department of Banking and Finance, Federal Polytechnic Damaturu, P. M. B 1006 Damaturu Yobe State. mallamkagu@gmail.com Abstract The main objective of this paper was to focus on the elements, objectives, goals and importance of cash management; and also to examine the sources of revenue and cost effective collections for local governments. The elements of cash management are identified as establishing bank relations, preparing cash flow statements, estimating collection receipts and analyzing cash flow and preparing a budget. Amongst the objectives of cash management is to ensure availability of cash resources at all times for efficient and unconstrained implementation of the annual budget. The primary goals of a good cash management system are to maintain adequate cash at hand to meet the daily cash requirements of the local government while maximizing the amount available for investment and to obtain the maximum earnings on invested funds while ensuring their safety. The local governments obtain their revenue through internal and external sources, the external sources of revenue includes federal statutory allocations and loans obtained from financial institutions and other agencies; while among the internal sources are revenue from market fees, fees collected from motor parks, street hawking fees, shop fees and other miscellaneous sources. Some of the cost effective methods of revenue collections are contracting out of revenue collections to private collection agency, designating collection points for convenience, application of e-collection method where the local governments device a means of allowing tax payers to pay their taxes online. It is recommended that proper management of funds, efficient accounting and auditing system is necessary for proper cash management. Key Words Cash management; Cash flow statement; Revenue; Local government 1 Introduction Cash management is seen as the strategy and associated processes for managing cost-effectively the government s short-term cash flows and cash balances, both within government, and between government and other sectors (Williams, 2004). Cash management brings together various functions associated with short-term financial flow management: liquidity management, banking management, management of treasury surpluses and deficits and financial risk management; it is a broader concept than the mere management of payments and collections (José et al, 2008). 834

2 Kumshe & Bukar International Journal of Basic and Applied Science, The local government system which formed the third tier of government has a number of responsibilities to perform and without adequate source of finance and proper management of cash it will not be possible for it to carry out its functions. A good cash management program is a very important facet of the overall financial management of the local government as it improves the control and safety of funds as well as improving the non tax revenues of the local governments. Therefore, among the objectives of this paper is to examine the elements of an effective cash management; to examine objectives, goals and importance of cash management; and also to examine the sources of revenue and cost effective collections methods for local governments. 2 Cash Management 2.1 Elements of an effective cash management As outlined in the MCTA treasurer s manual the following are the basic elements of an effective cash management; Bank relations The treasurer should strive to be constantly aware of the range of services available from area banks. Since banks service charges, the treasurer should regularly evaluate the charges and rates of the banks used by the local government to make certain that continuing to utilize these banks serves the best interests of the local government. When borrowing the treasurer should endeavor to receive sufficient information about the borrowed funds i.e. with regards to interest rate, mode of payment and period of payment. The treasurer should solicit bids from at least 3 area banks to make comparison and opt for suitable one. The treasurer should critically review bank statements for treasury accounts. Also, the treasurer should utilize a uniform system of forms and procedures for all collection, deposit, and disbursement activities Cash flow statements As a component of implementing an effective cash management program, the treasurer must prepare a cash flow statement, also called a cash budget. Cash budgeting involves the estimation of cash receipts and cash disbursements to determine cash availability. A treasurer can best identify the local government s major cash items by examining an annual budget, payment and collection records and past cash flow patterns Estimating collection receipts Local revenues and federal grants constitute the primary sources of local government funds. By reviewing a local government s treasury and accounting records, a treasurer can determine the pattern of receipts of that local government. To assist in determining this pattern, the treasurer should develop a table that displays: (1) the type of each receipt, (2) the total amount of the receipt and (3) the month when each portion of the receipt was received. If the treasurer traces the cash flow back 2 or 3 years, a recognizable pattern should become apparent

3 International Journal of Basic and Applied Science, Kumshe & Bukar The treasurer should assess the historical patterns of these cash flows in light of current estimates and events. Attempting to make such adjustments should improve a collections forecast Analyzing cash flow and preparing a budget The treasurer should use the history of major collections and disbursements for the previous 3 to 5 years to identify recurring expense and disbursement patterns. The treasurer should then extrapolate these past trends into the future, being careful, at the same time, to make adjustments for anticipated changes in timing and payment patterns and to recognize when particular historical data is not representative. Analyzing the local government s current operating budget, looking particularly for the percentage increase in payroll and in other expenditures, for changes in seasonal spending patterns and for adjustments caused by the addition or deletion of programs, will provide crucial information for preparing a cash flow analysis. 2.2 Objectives of cash management William (2004) and Eden (2009) outlined the objectives of efficient government cash management as follows: a. To ensure availability of cash resources at all times for efficient and unconstrained implementation of the annual budget. b. To use available cash with the least cost and risks. c. Keeping to a minimum the volume of idle balances held in the banking system, and the extra costs associated with that. d. Reducing risk operational, credit and market risk. e. Adding flexibility to the ways in which the timing of government cash inflows and outflows can be matched. f. Supporting other financial policies. Eden (2009) posited that developing countries usually initially focus on the first objective; first task of government is to provide public goods and services to citizens. 2.3 The goals of cash management The following are the goals of cash management (MCTA treasurer s manual), the primary goals of a good cash management system are: a. To maintain adequate monies at hand to meet the daily cash requirements of the local government while maximizing the amount available for investment. b. To obtain the maximum earnings on invested funds while ensuring their safety. In order to reach these primary goals, a treasurer should strive to: a. Develop strong, internal control of cash receipts and disbursements. b. Establish improved procedures for collecting outstanding revenues. c. Establish clear lines of communication between the treasurer and other department heads. d. Develop solid professional relationships with local bankers and other members of the investment community. 836 Insan Akademika Publications

4 Kumshe & Bukar International Journal of Basic and Applied Science, 2.4 Importance of cash management Eden (2009) identified the following importance of cash management; a. Without cash management Budget execution can be disrupted by lack of funds. b. Without cash management excess liquidity idle balances can accumulate at non-treasury units and spent inappropriately. c. Without cash management Payments can be delayed, revenues held up, benefitting mainly the banking sector. d. Without cash management Cash shortages can exist while overall government has a cash surplus, requiring unnecessary borrowing inefficient use of cash resources e. Without cash management cost of cash accumulation can be substantial it is financed implicitly by government debt, and/or the remuneration is very low (opportunity costs) f. Without cash management short-term borrowing and investment of cash can be very risky (interest rate risk, investment risk, credit risk, etc). 2.5 Tasks of treasurers in cash management Treasurers in local governments perform variety of tasks in all aspects of cash management, among which are; a. Managing of receipts and payments of funds. b. Making short-term treasury forecasts for the local government. c. Managing account balances of the local government at their value dates. d. Managing of treasury deficit funding for the local government. e. Managing risk associated with loans such as credit risk, interest rate risks, etc. f. Harnessing various sources of revenue for local government. g. Ensuring proper collection of revenue from the identified sources. h. Monitoring of liquidity of banking operations. i. Advising the local government in all financial matters. 2.6 Sources of revenue for local governments The sources of Local Government revenue is divided into the following; External sources The External sources of the revenue represent the revenue from a. Federal Statutory allocations. b. Loans obtained Internal sources The Internal sources are as follows: revenue from market fees, fees collected from motor parks, street hawking fees, shop fees and other miscellaneous fees includes proceeds from fines, bicycle fees, kiosk fees, hawking permit, butchers license fees, general contractors registration fees, cattle dealers fees, corn grinding machine license fees, entertainment/ drumming permit, slaughter house fees, tender fees, approval of building plan fees, community tax and livestock tax. Others include revenue from Commercial undertakings, mass transit bus operated by the local government, tenement rates on properties belonging to the local government such as housing or other similar property belonging to the local government

5 International Journal of Basic and Applied Science, Kumshe & Bukar 2.7 Cost effective method of revenue collection One major administrative problem today for many local government councils is their inability to cost effectively collect fully the revenues due to them. Here emphasis will be on the cost-effectiveness of revenue collection in local governments. The following are some of the cost effective methods of revenue collection; a. Make assessment of taxpayers and ascertain number of taxpayers for that year. b. Reminder notice should be sent to tax payers 2-3 weeks before taxes are due for collection. c. Designate revenue collection points for convenience. d. In addition, losses through corruption and tax evasion need to be reduced by applying stiffer penalties to corrupt officials and tax evaders. e. Contract out collections to a private collection agency. Contracting revenue collection to private collectors increases revenues from existing sources and also reduces cost. f. The traditional rulers should be co-opted more especially in collection of community tax, this will also reduce cost. g. Reducing costs, for example by limiting the number of surplus staff. h. Measures are required to enhance taxpayers compliance and to improve the accountability of tax collectors. i. E-collection: this is a situation where the local governments will device a means of allowing tax payers to pay their taxes online. Here tax payers will be registered and connected using the internet with the revenue office/collector such that tax payers can be reminded or compelled to pay their taxes online as at when due and automatically identify defaulters for further action, this would make the job of revenue collection lot easier and cheaper. j. Finally, Adam Smith in his principle of taxation stated that taxes should not be imposed if their cost of collection is excessive. 3 Conclusions and Recommendations 3.1 Conclusions It could be concluded that the biggest challenge facing the local government system today is lack of proper cash management and poor internal revenue sourcing and collection. As such giving utmost attention to these issues is very necessary to ensure safety of funds and proper application of such funds to the required areas. 3.2 Recommendations In view of the above the following recommendations are necessary; a. To ensure proper management of funds, efficient accounting and auditing system is necessary this will ensure fair play in the local government system and avert corruption. b. It is also imperative for the local government councils to exploit and harness all available sources of revenue in their areas and device a cost effective way of collecting them. The local governments should consider investing in shares of private companies as dividend derived from such investment will serve as a very good source of revenue to the local government. 838 Insan Akademika Publications

6 Kumshe & Bukar International Journal of Basic and Applied Science, References Blind, R. L. (2005). A Revenue Guide for Local Government. Publication of ICMA. Eden, H. (2009). Local Government Cash Management. International Experience and Options. International Seminar on Local Government Treasury Cash Management. China, December 2009 Essien, E. S. (2010). The Role of the Local Government in the Attainment of the United Nations Millennium Development Goals. A paper presented at a conference organized by the local government resource center of the Niger Delta Environment Relief Foundation (NIDEREF) Fjeldstad, O. H. (2001). New Challenges for Local Government Revenue Enhancement. Michelsen Institute. Holger, V. E. (2009). Local Government Cash Management. International Experience and Options. International Seminar on Local Government Treasury Cash Management. China, December 2009 José, L. S., Iturralde, T., & Maseda A. (2008). Treasury Management versus Cash Management International Research Journal of Finance and Economics, 19, MCTA Treasurer s Manual- 5/5/12. Williams, M. (2004). Government Cash Management. Good and Bad Practice