What Are the Fundamental Differences Between Public- and Private-Sector Financial Management?
Businesses operating in the private sector have different goals and follow different accounting practices than public-sector governments and agencies. Business financial management targets the areas of concern for company owners and shareholders. Public-sector financial management aims to satisfy the politicians and bureaucrats who have oversight of the operations of public bodies and the constituents of elected officials. The differing objectives and stakeholders result in fundamental differences in how financial operations are carried out.
While both public and private sectors use budgets as a key planning tool, public bodies balance budgets, while private sector firms use budgets to predict operating results. The public sector budget matches expenditures on mandated assets and services with receipts of public money such as taxes and fees. If a public sector budget doesn't balance, you have to cut services, raise taxes or borrow the difference. In the private sector, you forecast revenues and expenses to estimate how much profit your company will make. If your profit is too low, you can cut costs or increase the marketing budget and predict higher sales.
The financial objectives of a public-sector body are to maximize the delivery of services to the client group while keeping expenses to the authorized limit. Financial success is spending the amount authorized in the budget to provide the projected services. The objective is to meet the budgeted numbers.
The objective of a business is to reduce costs and increase revenue to maximize profit. A private-sector organization aims to spend less and sell more than predicted in the budget. Success is to exceed the profit forecast.
Public sector organizations carry out bookkeeping and accounting functions as detailed in the governing legislation. Financial controls are aimed at proving that spending is according to the amounts approved by the legislative bodies. Politicians are interested in spending rather than in tracking the effect on asset values and liabilities.
Private-sector accounting follows generally accepted accounting principles that govern how assets and liabilities are shown in the balance sheet of the company. The emphasis is on determining how much profit the company has made and how financially stable it is.
Both public- and private-sector organizations require auditing to verify the accuracy of their financial management. Public government organizations are audited by the government office responsible for the verification of government accounts. Other public agencies and private-sector organizations may provide financial statements audited by accounting professionals or accounting companies licensed to carry out this work. Large corporations have to prepare annual audited financial statements for their shareholders. While the auditing process is similar for the public and private sectors, the material audited differs, because public-sector audits establish that expenses are accurately portrayed, while private-sector audits show that the profitability and financial stability of a company are presented correctly.