Education Financial Management (MELM 518) Notes PDF

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MELM 518: EDUCATION FINANCIAL MANAGEMENT (3hrs) Course Purpose The purpose of this course is to expose the student to the cost of education, sources of income to meet the educational costs and the spending of the income in an objective manner. Expected learning outcomes By the end of the course the learner should be able to: 1. Determine the unit cost of education at any given level of education 2. Demonstrate application of cost benefit analysis as an important tool for determining alternative ways of allocating limited resources to produce maximum benefits 3. Explain various principles and processes of budgeting. 4. Discuss the importance of budgeting and budges in financial management, 5. Draw various types of budgets. 6. Plan and programme budget systems by giving an ideal budget plan. 7. Demonstrate financial accounting skills in preparing various financial summary documents. 8. Explain the purpose of auditing, its specific types and procedures and its professional ethics. 9. Identify parties involved in financing education

Course Content Basic framework and mechanism of financial management, planning, sources of school funds, cost benefit analysis, calculating unit costs of education, marginal costs and average costs of education, School budgeting, purposes, principles and types of budgeting, Financial accounting, books of accounts, double entry bookkeeping, trial balance, balance sheet, cash and bank reconciliation, suspense account, clearance and income generating account, auditing, objectives, types, procedures, professional ethics, internal and external auditing, re-computation, parties that finance education, mobilization of financial resources and expenditure. Teaching Methods 1. 2. 3. 4. 5. 6.

Modified Lectures Individual & Group Assignments Presentations Report Writing Research Work Tutorials Page 1 of 92

Teaching Materials & Equipment 1. Computers 2. Multi- Media technology and equipment 3. Textbooks Assessment Assignment 20% CAT

20% 40%

Final Exam

60%

Course Texts 1. Nook Frank (2005) Business Accounting I. Pearson, Educational Practice, Hall International Essex UK. 2. Ogan P & Helter L.(1992) Cost Accounting, South Western Publishing Company, Ohio 3. Aroram (2006) Cost accounting, K Publishing House PVT Ltd, New Delhi Further Reading 1. Okumbe J.A. (1999) Educational Management Theory & Practice, Nairobi University Press Nrb 2. Ayot & Briggs (1991) Economics of Education, Education Research and Publication, Nairobi

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FINANCIAL MANAGEMENT IN EDUCATION FINANCING EDUCATION Financial Management is a process of planning, mobilization and utilization of school funds in an effective and efficient manner and in accordance with regulations and procedures. The basic elements of a solid financial management include: a) Planning – planning involves establishing financial objectives or goals for the school to determining how the set objectives will be attained i.e. how funds will be utilized. It also includes drawing up, implementing and monitoring/assessing the budget. b) Financial regulations – this involves adhering to clear regulations and procedures on the use of financial resources on the procurement, management, storage and disposal of assets c) Financial Procedures – in order to achieve an effective and efficient financial management systems in the school, the financial management referred to in (b) above must be adhered to through establishing procedures. Purpose of Financial Management    

Regular and sufficient supply of capital (funds) to the school Better and effective utilization of funds Prioritization of school activities and progammes Effective monitoring and evaluation of finances

Financial management focuses on finances as the basis for;  Budgeting of available funds (planning)  Disbursement of funds (allocations)  Prudent use of funds (audit and control) The ever-growing demand for education the resultant expansion of educational systems, rising costs in education because of inflation and the need for more and more sophisticated equipment thus more expensive, all lead to massive increases in spending in education all over the world. Education consumes a big share of the total wealth available in a country, e.g. Kenya approximately 40% of Gross National Product spent on education budget standards on increase in schools, universities etc. Why Educational Stakeholders and Policy Makers study Financial Management in Education (a) (b)

Helps in the allocation of limited resources. To understand the magnitude of the cost and benefits involved in educational investments. Page 3 of 92

(c) (d) (e) (f) (g) (h) (i)

Helps in the evaluation and assessment of various stages of the education system. Important in the mobilization and efficient utilization of scarce resource for achievement of educational set goals. Policy makers and educationists are able to understand and forecast any economic changes through the social demand approach of economic planning. Enables them to initiate ways of increasing education productivity. Important in education planning against the available resources - to identify gaps and imbalances in manpower distribution. Helps in identifying and tackling issues of education iniquities. Enables them to understand the magnitude of costs and benefits associated with investment in education.

Why the Government is financing education in Kenya         

Social Responsibility Equity in provision of education across the country. Affirmative action Ensure a steady supply of qualified workforce into the job market/economy. Encourage research and innovation in areas of interest to foster economic development. Right as provided for in the Constitution. It is a best practice as seen in the nations and as per various conventional agreements. Spur economic growth. Encourage/boost/address specific gaps in the national skill/repertorre/bank.

How education is financed Definition – introduction – general policy of financing education is through cost sharing       

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Grants to institutions e.g. FPE and FDSE Bursaries, scholarships Loans Use of vouchers Provision of infrastructural funds to institution Payment of salaries to teachers Special grants o Communities contribution e.g. harambee, individual sponsorship etc o None-governmental organization e.g. banks, USAID, UNICEF etc o Contribution from business and cultural organization e.g. in the universities Income generating activities e.g. hire of halls, farming, introduction of parallel programmes – university o Through research funds

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o Individual contribution towards payment of fees and other hidden charges e.g at universities Parents or guardians pays fees, bring uniforms and other learning and teaching materials Foreign assistance Religious organizations o Tax relief – those supporting education may be exempted from paying tax.

Challenges     

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Inadequate budgetary allocation Effects rapid enrolment and budgetary stagnation e.g FPE as maintain Ksh. 1350 and FDSE 12,850 per student since its inception. Poverty levels of communities and families Higher expenditure for teachers hence not able to recruit enough Lack of clearly defined policy of allocation of funds to institution put into consideration to economic and social inequalities, geographical and ethnic dimension Questions of ability of families and social groups calls for careful planning Use of loans as a method of financing education is challenge due to lack of security which loaning institutions rely on in cases of default in repayment Period of return to educational investment is often long.

NB: Educated unemployment means those who have gone through formal education system, especially up to at least secondary level and are actively looking for jobs which they cannot find at the prevailing wages.

THE CONCEPT OF HUMAN CAPITAL Although it is obvious that people acquire useful skills and knowledge through the process of going through the levels and types of the educational system, it is, however not obvious that:  These skills and knowledge are a form of capital embodied in man;  That this capital is, in substantial part, a product of deliberate investment by man and society;  This capital is a direct product of education;  This capital yields returns just like investments in other forms of capital do. There were attempts by numerous economists from the early times to the middle of the 20th century to grapple with the concept of human capital but most were obviously deterred by the moral/philosophical problem of equating man embodying skills with other forms of physical capital. For instance, while Alfred Marshall admits (Marshall: 1961, 24-5) that the profit motive operates in personal investment in the same manner as it operates in personal investment in the same manner as it operates in any other Page 5 of 92

investment decision, it is, however inconceivable why he excluded human capital form his definition of wealth. It is widely acknowledged that it was not until T. W. Schultz that the notion of investment in human beings began to be taken seriously in economic thinking. (Blang 1968) Blang has defined human capital as:

The idea that people spend on themselves in diverse ways not for the sake of present enjoyments, but for the sake of future pecuniary and non- pecuniary returns. They may purchase health care; they may spend time searching for a job with the highest possible rate of pay, instead of accepting the first offer that comes along; they may purchase information about job opportunities; they may migrate to take advantage of better employment opportunities; they may choose jobs with low pay but high learning potential in preference to dead-end jobs with high pay; (Blang 1975; p.18) Crucial to the human capital theory is the notion that individual and government decisions to spend on education of additional education, are investment decision, provided, of course, that such acquisition of education and training entails the foregoing of present consumption for expected flow of monetary and non-monetary benefits.

MOTIVES FOR SPENDING ON EDUCATION It is necessary at this point to examine very briefly the motives for individual and government spending on education. Perhaps the most important motive for the individual spending on education is the expected pecuniary benefits usually in the form of increased income for the date employment is obtained to retirement. This motive is much more crucial for individuals in an economically developing country like Kenya where acquisition of education is viewed primarily as an avenue of upward economic mobility. The decision, therefore, especially by poor families to allocate the valuable portion of their scarce resources to purchasing education instead of satisfying their immediate needs is guide mainly by the simple economic notion of sacrificing the present satisfaction of their wants for an expected flow of sizeable monetary benefits. While we are not claiming that individuals and their parents consider the costs and future benefits of additional education in a purely investment manner, it is however, certain that most individuals at some point, undertake a rough comparison of such costs and benefits. Apart from the returns in the form of increased income streams which accrue to individuals who spend on education, a second motive for the willingness of individuals to spend on education is the direct benefits commonly referred to as “externalities” of “spill over benefits”. It is generally accepted that the acquisition of additional education enhances the social status of the individual concerned, provides him with valuable Page 6 of 92

connections, and so on. Although the indirect benefits are not easily quantifiable, they are however, an equally important motive for spending on education by individuals. Similarly, governments spend on education because of the direct and indirect returns which it yields. The direct returns is in the form of increased productivity of the beneficiaries of education. This is usually measured by using pre-tax income streams. Governments, like individuals, derive indirect economic and non-economic benefits from spending on education. A few examples of these benefits should be sufficient for our purpose here. An important indirect benefit to society form spending on education is that education helps to bring about improvements and innovations by promoting research and inquiring attitudes of mind. Yet another example is the fact that education not only helps to spread knowledge in society generally but it is also believed that educating one generation has beneficial effects on the next because educated parents will be able to assist their children in several ways. A last example of the indirect benefit which accrue to government spending on education is that education has a restraining effect on population growth. Some studies (Cochrane: 1979) have shown that a population wanting more and more education not only postpones marriage but also espoused the need to trim the family size.

ACTIVITY Compile a comprehensive list of why individuals and governments invest in education.

MEASUREMENT OF COSTS Essentially, two units in society are known to incur costs on and derive benefits from education. These are individuals, organizations or communities, and the government representing society. As a result, we always refer to costs incurred on and benefits derived from education by individuals, organizations and communities are private costs and benefits. Similarly, the costs incurred on and benefits derived from education by government are referred to as social costs and benefits. It is also important to point out that the cost of any investment must be measured by its opportunity cost rather than simply by monetary expenditures. Such as economic analysis as opposed to financial analysis will enable us to estimate the total cost of our investment in terms of opportunities foregone. This means that it is necessary to identify all the resources, both human and physical, that are used in and education project, and not simply those for which an expenditure item appears in the budget of the ministry.

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PRIVATE COSTS The cost incurred by an individual and/or his family in purchasing additional education can be categorized into two: direct costs and indirect costs. Calculating the direct private cost of education, or additional education, is comparatively simple. It involves totaling of such things as expenditure on fees (taking care to deduct the average value of scholarships received in a year), books, uniforms, transport, school meals etc. There is usually a controversy as to whether the cost of uniforms and school meals should be taken into account in computing the direct private cost of additional education. The argument which is usually advanced against inclusion is premised on the fact that it students are not enrolled in schools, they would still wear clothes and take their meals. It is, however, considered safe to include these items in the computation of costs because not only do students pay directly to the school for these items, but also, and probably more importantly, payment for these items is usually a condition for staying on in schools. The indirect private cost consists strictly of those expenditures which are not made directly, for example the student’s time. Were the student not in school, he would be gainfully employed somewhere. Earnings foregone by the student therefore is the opportunity cost of staying on in school. Invariably, earnings foregone by the student and his family constitutes a greater proportion of total private costs because such an annual income could be higher than fees paid. In most African countries, for example, children in the primary and secondary school age groups are often needed to work on the family land and the loss of their labour is a cost the their parents, even if paid employment in the “modern sector” is not available. It is, however, often problematic to enter earnings foregone into the cost calculation because there may be considerable unemployment amongst school leavers, as there is in most countries today. Some assessment has then got to be made for the individual based on his chances of getting a job (Psacharopoulos, 1985). Even more difficult is the assessment of the loss of the students labour on the family land.

What are the direct and indirect costs you are incurring in your acquisition of university education? SOCIAL COSTS Like private costs, the costs incurred by the government or society in providing a student with education, or additional education, can be categorized into two: direct costs and indirect costs.

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The direct cost of the resources which society devotes to education includes the cost of teachers and other staff (that is their salaries), text books, other goods and services such as heating or lighting and provision of milk, and the value of buildings and equipment “consumed” by students in a year. (see table 1) It is usually comparatively more difficult to estimate the value of building and equipment used up by students in a year. It a school building is assumed to have a life of thirty years, say, then the capital cost of the building may be amortized over thirty years to give the annual value of the building. This is sometimes called imputed rent. Even then, obtaining the annual value of a physical structure through amortization is not sufficient. It is clear that the opportunity cost of putting up school buildings and buying equipment are other types of investment which would yield an interest. In computing a realistic annual value of school buildings and equipment used up by students in a given year, it is necessary to build-in a rate of discount which would reflect the real opportunity cost of such an expenditure. The indirect social cost, like the indirect private cost, is the value of students’ time which, instead of being devoted to producing goods and services, is currently being spent on acquiring education. The value of the productivity foregone by the society is derived simply by calculating earnings foregone. As earlier explained, the use of earnings foregone as a measure of value of student’s time is problematic because of prevailing unemployment in most countries. Employment chances, therefore, have to be considered in arriving at an approximate estimate of earnings foregone by the alternative use of student’s time. Perhaps more problematic is the assumption that earnings foregone represent the real value of productivity lost. Since the real value of productivity foregone is the indirect cost to government of education students, there is an obvious need to measure this loss. However, the use of earnings foregone as a measure of productivity lost may be overestimating the indirect cost borne by the government especially in countries where wages are regulated instead of being allowed to respond to market forces. TABLE 1

Social Costs

SOCIAL AND PRIVATE COSTS OF EDUCATION Private Costs Direct

Teacher’s salaries Other current expenditure on goods and services  Expenditure of books etc  Imputed rent Indirect  Earnings foregone Source: Woodhall (1970), p.17  

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Fees, minus average value of scholarships Expenditure on books, etc

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Earnings foregone

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THEORY OF INVESTMENT IN HUMAN CAPITAL Introduction Comparison of costs and benefits in order to assess the rate of returns to education is a major consideration in human capital theory. Since we have explained how cost is computed from a private and social point of view, we will now direct our attention to the aspect benefits. It had been pointed out that two units in society are known to obtain benefits from investment in education. These are privat...