Financial Management and Budgeting
Financial management covers planning, budgeting, controlling, and reporting the use of funds so that objectives are met sustainably. Candidates should understand the budget cycle: strategic planning, budget preparation, approval, execution, monitoring, and review. Know the difference between operating and capital budgets, accrual versus cash accounting, and the meaning of variance, forecast, commitment, and contingency.
Important concepts include cost behavior (fixed, variable, and step costs), break-even analysis, contribution margin, and full cost recovery. In public and nonprofit settings, understand fund accounting, restricted versus unrestricted funds, and the distinction between appropriation (authority to spend) and expenditure (actual spending). Internal controls over cash, procurement, and segregation of duties are frequently tested.
Traps to watch: confusing a favorable variance with good performance, when a cost underspend may signal delayed delivery; treating a commitment as an expenditure before goods are received; and assuming a contingency is free money rather than a deliberately held reserve requiring approval to release. Questions may also test whether a cost is direct or indirect, or whether a surplus is genuinely unrestricted.
Rule of thumb: explain a variance by asking whether it is price, volume, or timing, and whether it is controllable by the manager being assessed.
Worked example: A budget of 500,000 with actual spend of 460,000 at 80 percent through the year looks favorable, but if only 60 percent of deliverables are complete, the variance is unfavorable in efficiency terms. Reforecast, identify timing versus permanent savings, and report to the finance committee with corrective action.