Financial policies – why should you bother?

The need for well-designed financial policies continues to play an important role in the overall financial strength of an organization. While the creation of a new policy is time-consuming, the good news is that a well-written financial policy can offer a multitude of ongoing benefits. Does your organization have these financial policies in place?  

• Budgeting
• Capital assets
• Debt management
• Cash and investments
• Fund balance

If so, when was the last time they were updated? If not, why not?

While each policy has potential benefits and potential drawbacks, one common benefit is the ability to identify and capitalize on resource allocation decisions. In addition, setting policy provides management with the guardrails within which to manage and the governing body a framework in which to govern. A potential drawback is the perception/reality that management and the governing body will have decreased flexibility in addressing the organization’s financial affairs. However, to address this, policies can be written with the appropriate level of flexibility to allow governments to realize the benefits without experiencing the associated downsides. 

We recommend considering the following when creating and adopting financial policies: 1) review/create policies annually during the budget process; 2) build transparency into the process, and; 3) adjust the policies as needed based on the future goals and needs of the government. 

Debt policy

One of the more common financial policies is a debt policy. A properly drafted debt policy can assist governments through the life cycle of debt, beginning with the debt limit, continuing through the debt issuance and debt structuring, and concluding with debt management practices. The Government Finance Officers Association (GFOA) has published recommendations to aid governments when adopting a debt policy: ensure the policy is a comprehensive, written policy that has been formally adopted by the governing body, confirm the policy is reviewed periodically, and guarantee the policy reflects the local, state, and federal laws and regulations that the government must follow. A growing trend with the adoption of a debt policy is the relationship and integration between a government’s long-term capital improvement plan and their debt policy. The debt policy can complement the long-term capital improvement plan by addressing the government’s long-term financial considerations and strategies to fund the capital improvement plans.