Finance Function in Government Companies

Ø Performance of Government Companies Like the private sector companies,
the government companies also aim at profitability and value creation. But they
focus much more on non-financial and social objectives A very few government
companies make profits and declare dividend. In 2002–03, 81 companies, out of
118 profit making companies paid about 36 percent of their net profits as
dividends.
Ø Finance Function in Government Companies The organization of finance
function of the government companies is evolving over the years, and it has
become now a specialized function with a decentralized structure in case of
multi-divisional and multi-product companies. The scope of finance function in
the government companies is as extended as in the case of the private sector
companies. It includes the funds management, budgeting, cost control, assets
management and security etc.
Ø Investment Decisions of Government Companies The basic principle of
value creation governs the investment decisions of the government companies.
But these companies also use economic return and the social impact criteria inchoosing projects. The authority for investment expenditure goes beyond the
management of the company. Government departments and ministries play
important role in authorizing investment expenditures beyond certain specified
limits. Most government companies are dependent on the government funding
for financing their expansion and growth. The government funding is available
either as equity or debt. Hence, the issue of capital structure is considered
redundant as the source of the debt and equity is the same, that is, the tax
payer’s money allocated by the government.
Ø Current Assets in Government Companies Government companies have
huge investment in current assets. Hence, working capital management
assumes for greater importance. A number of companies (e.g., BHEL, NTPC)
have well-established policies and practices of managing working capital.
However, a large number of companies have inadequate working capital
management. The Boards of the companies hardly discuss the working capital
management issues and lay down policies and procedures.Financial Controls in Government Companies are more stringent then in
the private sector companies. They are subjected to internal audit, statutory
audit and audit by controller and Auditor General. An additional feature of
performance evaluation and control in government companies is Memorandum
of Understanding (MoU). Performance budgeting and zero-base-budgeting (ZBB)
are special budgeting control tools used by government companies.
Ø Memorandum of Understanding (MoU) is a performance contract between
the government and the company management. It specifies the performance
targets as well as explicitly states the autonomy and accountability of
management in meeting financial and non-financial objectives and targets. The
emphasis is only reducing the close control of the government and the day-to-day
interference in the management of companies.
Ø Performance Budgeting is a flexible system of aligning organizational
mission, goals and objectives with budgeted funds and expected results. It takes
a comprehensive, policy oriented approach, rather than a short term mechanical
approach of preparing budgets.Ø Programme Budgeting Performance budgeting may be extended to each
specific programmes, and it is referred to Programme budgeting.
Ø Zero-base budgeting is based on the notion that each activity or Programme
and its funding must be justified each time afresh.