Public Sector vs. Private Sector Budgeting
Budgeting for the public sector is fundamentally different from budgeting in the private sector. They differ in their purpose, their processes, and their accounting methods. If you’re a prospective financial manager, or if you want to make the challenging transition between these two worlds, then it’s important that you understand the differences of these two sectors.
1. Organizational Purpose
Generally speaking, the goal of any company in the private sector is to generate the highest profits possible. In this arena, a financial manager must always keep an eye on the “bottom line,” or a minimum level of profitability. Financial managers in this sector are usually given a lot of authority to help them achieve profitability.
Alternatively, government organizations are usually created to service a specific and pressing need, such as school systems educating children, or sheriffs’ offices taking care of law enforcement. Because the purposes of these organizations aren’t profit, the financial manager needs to make sure he or she is using the public’s money as efficiently as possible.
2. Decision Making Process
In the private sector, decisions are usually made at the top, and then handed down along a chain of command. This makes the operation of the business fast and responsive, but also places a lot of pressure on the ones making the decisions. In the public sector, decisions are made much differently.
A financial manager working in the public field must navigate between what Beal Budgeting calls, “a nearly limitless number of interested constituencies, participants, and incremental decision-makers.” To deal with this, experts suggest, a public budget should allow for a great degree of flexibility. Therefore, it can support a range of budget analysis requirements because many people through many different lenses will view it.
Perhaps because public sector budgets invite a certain level of public participation, they are usually a lot more transparent than private sector budgets. From a financial manager’s standpoint, this means you need to justify the amount you’re spending on each item so everyone will understand and agree that such an expenditure was necessary.
Interestingly, accounting is one place where financial managers in the private sector are bound more tightly than those in the public sector. Private sector accountants must follow the Generally Accepted Accounting Principles (GAAP). The GAAP comprises a set of “best practices,” like using a double-entry method, that help keep financial records accurate and uniform. While financial managers and accountants in the public sector also may use the GAAP, it isn’t required.
Both public and private sector budgeting requires creativity and vision. However, because of their different contexts, this creativity manifests in different ways.
Private sector budgeting requires a financial manager to be quick, responsive, and occasionally ruthless to make sure his company stays profitable. Public sector budgeting requires its financial managers to be diplomatic, flexible in their thinking, and incredibly persistent. To this end, the latter type of financial manager often will possess a Masters of Public Administration as part of their educational background.
Picking the right sector for you at the beginning of your career is important because, while it is sometimes possible to switch between public and private spheres, it is incredibly difficult. Hopefully, this article will help you make that decision.