1. Introduction to Financial Performance Analysis
Financial performance is a concern for businesses and a critical aspect of the local government sector. Local governments, being the closest level of government to the people, bear the responsibility of providing essential services and meeting the development needs of their communities. To fulfil these duties, local governments receive substantial funding from national governments through grants, directly managed transfer funds, and other revenues, which must be managed effectively. The analysis and assessment of this financial performance are therefore of paramount importance. (Ashford, 2023; Bollens, 2021)
The Regional Financial Management Accountability Units (SKPKD/O), as Regional Work Units (SKPD) in charge of financial management, provide financial reports as a tool for monitoring Government Financial Management Accountability. These reports, however, are often underutilised. It’s important to recognise that these reports are not just documents but crucial tools for assessing the local government’s financial performance. (Furqan et al.2020)
The Regional Government Financial Reporting and Accountability Unit (SKPKD/O), as the Regional Work Unit (SKPD) in charge of financial management in the region, has a vital role in creating good financial management in the region. Local governments must deliver financial reports as a tool to monitor the Financial Management Accountability of the Government. However, with the exposure of the local government financial reports in the media, there seem to be many weaknesses in the local government financial statements. Generally, the local government’s financial performance is only assessed from a technical perspective. In contrast, an analysis of financial performance is fundamental to assessing the regional government’s financial performance. District-level local government financial performance needs to be analysed with direct regional real cash reduced income by drinking water mentality.
This study is dedicated to analysing the financial performance at the district level of local government. We will examine seven financial ratios representing liquidity, autonomy, growth, activity, and efficiency. The independent variable of this study is the district-level local government financial performance, which can be seen from the financial ratios as proxies of the performance aspect. We will also look at the determinants of variables influencing financial performance from the local government level, locality, and number of districts. The regions under scrutiny are the financial performance of district-level local government in Indonesia during 2008-2009. With a sample of 470 districts in 2008, 464 districts in 2009, and 7,288 districts in 2023, the financial performance analysis used is descriptive statistical analysis and independent sample t-test.
2. Key Indicators for Assessing Financial Performance
Performance is what determines how successful someone or something has been. Aspects important in performance evaluation include obtaining the appropriate indicators as a measurement tool. However, determining indicators is a reference point (Kurniawan, 2017). Regarding district-level government, performance is an aspect that evaluates how successful the local government is in carrying out district development planning. The performance indicator is often called a Key Performance Indicator (IKU), as stated in the Medium-Term Development Planning of Local Government (RPJMD). KPIs will be strictly monitored and become the target of Local Government performance.
Moreover, the target of this indicator would affect the budget. This effect is also known as the Performance Budgeting paradigm, a strong correlation between the money spent (Budget) and value that results against the community interest. Since the value of this interest is very subjective, the proxy indicators used for observation are the facility ratio, efficiency ratio, effectiveness ratio, growth ratio, independence ratio, and public sharing ratio.
Most local governments in East Java province still needed to manage their Internal Revenue Generation (PAD), which was eventually the local governments’ source of income. The analysis showed that the other ratio based on economic growth performance was also low, although several subsequent years showed slight improvement (Wiseman Nzuza & Mpele Lekhanya, 2014). In public sharing performance, the other ratios are insignificant in the Regency/city and Province Government, meaning their sharing of the health and education sectors could have been higher. A performance-based program evaluation model is essential in determining the success of regional development programs, usually performed through documented information measures such as input, output, outcome, and impact evaluation.
3. Challenges and Opportunities in District-Level Government Financial Management
Much has been written on the challenges and opportunities facing government financial management at all tiers. However, a scholarly assessment of the challenges and opportunities regarding government financial management at the district level, which is closest to the people, could be more detailed. This is especially so regarding the district level of government in developing countries like Ghana, despite the significance of this level of government in developing these countries. Consequently, this article aims to assess the challenges and opportunities confronting the financial management of the district level of government in Ghana.
In the view of Laubscher (Laubscher, 2012), financial management in government is complicated. The management of finances in any endeavor, including government, is defined as the process of planning, directing, monitoring, organizing, controlling, coordinating, and evaluating all the activities, which include human resources, financial and material resources of an institution, using efficiency and effectively, to achieve institutional objectives. Additionally, financial management includes the managing of all cash flow activities of government like the revenue mobilization, recording and safeguarding of income, approval of expenditure, payment of all debts of government, maintenance of all financial records, custody of cash and bank, preparation of financial statements of government, and management of the investment of government and its treasures (Ayaribilla Akudugu, 2012).
Accurately, these activities are vast, extremely complex, very delicate, and a minefield of hurdles, hence perhaps vindicating Laubscher’s view of financial management as complicated; X-simply put, there is, therefore, no need to over-elaborate on the complexities and hurdles of financial management in government. Nevertheless, a few of the complexities and hurdles of financial management in government that are interesting and noteworthy, as pertinent to this study, are effortfully highlighted after a succinct description of the sources of finance to government.
4. Case Studies and Best Practices in Improving Financial Performance
District-level government is an important governance structure in many countries, yet little is known about its financial performance at the district-wide government unit. Tools and approaches for measuring financial performance at the district level are limited. This study utilises annual data analysis from 2015 to 2021 to measure the financial performance of one provincial and 29 district-level governments in Papua, Indonesia. (Marbun et al, 2023) Using these results as a point of departure, a case study equipped with standard measures is used to inform and explain factors that could improve financial performance in one of these districts. The goal is to provide a comprehensive view and understanding of financial performance at the district level, its impact on efficiency, equity, and effectiveness of government programs and services at the district level, as well as potential interventions that could improve it (Wiseman Nzuza & Mpele Lekhanya, 2014).
Wider access to the internet has also opened up online publications of various types of reports, such as district audit reports, which now include essential information on financial performance at the district level in Indonesia. Building on this attention, a research interest is developing on the impact of financial performance at the district level. To understand this impact and potential methods and efforts to improve financial performance at the district level, a case study analysis is conducted focusing on the experiences of one district. While findings of the panel data analysis indicate that improvements have been made in financial performance, this analysis of the case study reveals that many factors are associated with improvements in financial performance, including adopting a ‘clean government’ vision, political commitment, and an emphasis on discipline, financial management, communication and training with associated apparatus incentives.
5. Conclusion and Recommendations for Enhancing Financial Performance
This essay highlights the factors influencing the financial performance of district-level government. Out of 20 factors identified through the literature, Indonesian government regulations, accounting standards, performance budgeting, accounting information technology, fiscal decentralisation, and local government internal control are significant factors influencing financial performance. To achieve accountability, transparency, and improved local government financial performance, concrete actions should be taken with regulations and support from the central government, including increasing public access to information and forming regional financial performance enhancement teams with explicit functions, structure, and coordination (Wiseman Nzuza & Mpele Lekhanya, 2014). To enhance the role of local government internal control in improving financial performance, synergy, integration, and enhancement of effectiveness and efficiency of internal control systems in local government, as well as improvement of human resources competency and budget allocation for internal control activity, should be augmented. The central government should design a comprehensive macroeconomic plan to ensure regional governments formulate and implement national laws, standards, and regulations of taxation authority and local taxation.
Enhancing performance indicators and developing measurement assessment systems for the performance of accounting information are expected to improve the performance of accounting information, which influences local government performance. In this context, the Legislative Senate should meet and form a committee to develop and assess criteria, systems, and procedures that can be used as a benchmark in gauging local government financial accountability and performance. Infrastructure development funds should also comply with the eligibility of projects or program activities in the area, as well as term debt planning, and be supported by a benefit/cost analysis and other dedicated financial tax mechanisms or regional taxes. The results of this research will provide insights for the government, particularly the Ministry of Home Affairs, Ministry of Finance, and the Bureaucracy Reforms Implementation Task Force, for revising policies and regulations to improve local government financial performance and meet the demands of local accountability and performance.
References:
Ashford, D. E. (2023). Financing Urban Government in the Welfare State. [HTML]
Ayaribilla Akudugu, J. (2012). Accountability in local government revenue management: Who does what? [PDF]
Bollens, J. C. (2021). Special district governments in the United States. [HTML]
Furqan, A. C., Wardhani, R., Martani, D., & Setyaningrum, D. (2020). The effect of audit findings and audit recommendation follow-up on the financial report and public service quality in Indonesia. International Journal of Public Sector Management, 33(5), 535-559. researchgate.net
Kurniawan, A. (2017). Determinant Factors of the Performance Indicator of Local Government (Study Towards Performance Indicator of Economic Growth and Open Unemployment Rate in Sidoarjo Regency). [PDF]
Laubscher, L. H. (2012). Challenges on financial control and accountability in South African municipalities. [PDF]
Marbun, R., Urip, T. P., & Indahyani, R. (2023). Asymptotic significance test on financial performance in Papua province government. International Journal of Professional Business Review, 8(8), e01580. https://doi.org/10.26668/businessreview/2023.v8i8.1580
Wiseman Nzuza, Z. & Mpele Lekhanya, L. (2014). A Theoretical Framework for Four Key Selected Determinants of Municipal Financial Performance. [PDF]
