 about the Army Financial Management Plan. It's outlined in AR 37-5 and amplified in numerous other regulations. To install it completely throughout the Army establishment is a long-range plan and eventually it will be done. One of the primary objectives of the plan is economy, not to economy million the money saving sense, but economy in the sense of the most effective use of resources. It's a funny thing about economy. Everybody accepts it in principle, but very few really practice it. It's like health. No one questions the value of good health and yet there are only a few of us who are willing to take the trouble to lead healthy lives. Now this doesn't mean that most people are sick or in the case of economy, wasteful. It simply means that we're not doing all we could. It usually requires some kind of crisis, such as a serious illness or a financial problem to shake us up. Here's the way it might happen. This is Fred Robinson. His father died suddenly several weeks ago and he went home for the funeral. He's just returning. Oh, it's you, Fred. Hello, George. I didn't expect you back until the end of the month. Well, there wasn't much point in my staying any longer. What's the matter? It looks as though I'll have to give up the army. Your mother? Yeah, she's going to need my help. Must have been quite a shock for her. Oh, she's taking it a lot better than I expected. Just a matter of helping her out financially. Didn't your father leave anything? Well, they had a little money saved. He had some insurance, but now you know with prices of what they are, it's just not going to be enough. Can't you just send her some of your pay? I barely make enough to get along on. There ought to be some way. That's what I figure. I haven't found it yet. Ready for dinner, George? You're right, William. Well, hello, Fred. How are you, Leo? I didn't know you were back. Yeah, I just got in. Hopefully sorry to hear about your father. Thanks. You had dinner yet, Fred? No, not yet. Why don't you come with us? Well, I was going to finish unpacking. Well, you can do that later. We're only going to the club. Might as well. Leo is just a man for you to talk to. He works in the controller's office, and he's an expert on money matters. Oh, yeah. Just as Fred's tragic loss of his father means that he has a heavier responsibility for his mother's support, so it is with the United States. The shadows of war which have been hanging over the free world for so many years indicate clearly the need for a strong defense organization. This manpower chart indicates in part what the United States did. But the story is better told by looking at the difference in expenditures. This chart shows that our national expenditures have increased greatly, and those for the army have grown at an even greater rate. The expenditures for the other services have followed the same pattern, all of which raises the question, can we support these expenditures in the long run without hurting our economy? The only alternative is to cut costs without reducing military effectiveness. The army went to the experts for advice, and that's just what Fred did. I guess the only thing left to do is put in for a hardship discharge, go back home, get a job. Look, Fred, I've known at least a half a dozen guys here in the post who've had the same problem. They solved it without leaving the service. That's just what I've been telling them. Well, how? That isn't easy. You have to watch every penny. I'm willing. Where do I begin? With a budget. Make a list of all of your expenses. Everything you have to do this month and figure what it will cost. Sounds easy enough. I can tell you right now, though, there isn't going to be anything left. Well, I said what you have to do, not what you want to do. I get it. You mean just the essentials. Well, that's right. Now, this budget is very important, so take your time. Work it out carefully. The army got the same advice from its experts. However, since it was already using a budget, its problem was largely one of going over all its methods and procedures, evaluating them, and changing them where necessary. The object was a budget based on more realistic estimates and tied in more closely with immediate program requirements. Here's how they achieved it. The president's budget outlines the army's programs and financial needs and serves as the basis for congressional appropriations. To use these appropriations in the most effective manner, the army must prepare budget execution plans at all levels. Here's the way it would work at a post commander's level. The post commander receives program documents and the related schedules, telling him what is to be done during the year and when it's to be accomplished, and the total fund resources which can be made available. With the help of his principal staff, acting as a program and budget committee, they then determine what is to be done by the various activities on the post, when it's to be accomplished, and what resources are required and available. They usually begin by having each activity figure out what it must do and how much it will cost to carry out its part of the program. Let's take one activity, say the motor pool. In arriving at its budget, or cost estimate, it must make a schedule of the work to be performed, then figure out the various costs. First, the costs of operating the pool, including military pay and related costs, civilian salaries, and the gas, oil, lubricants, and spare parts for all the vehicles for which it is responsible. Next, the costs of services that the motor pool does for others, such as the maintenance of ambulances and school buses. Then there are the costs of items or services supplied by others, such as electrical power furnished by the post engineer and telephone service by the signal officer. The total of these three will be the operating costs of the motor pool. The next step is determining the amount of funds to be included in the installation budget for the motor pool. This is done by subtracting the costs paid by others, the pay and other costs for military personnel, electricity, telephone, and so forth, from the total operating costs. Notice that costs and funds are not the same. Once the motor pool has figured out what it must do, what it will cost, and what funds are required to carry out its part of the post program, the estimates and schedules go up through channels to the program and budget committee for review and consideration, and are consolidated with other activity budgets to develop a balanced installation, work, and costs plan. This plan then goes to the post commander for his approval. It sets forth post operations and costs and fund requirements on the basis of training, logistic services, and other programs previously outlined in the program document. When approved, this plan and those from other installations on the same level will go to a higher command, where they are analyzed and consolidated to give a comprehensive summary of work, costs, and fund requirements at this level. This planning finally results in a thoroughly coordinated Department of the Army plan based on realistic estimates developed at each of the subordinate levels. On a more simplified scale, this is just what Fred has to do to prepare his budget. Hi. What's all this? I thought you were working on a budget. I am. What's all this got to do with it? Well, I can't tell what I'll need until I see what I've already got on hand. I, uh, I don't get it. Well, take these shirts, for instance. Now, I'm going to need a clean one every day for the next month, right? So you figure the cost of laundering 30 shirts? I see that. All right, so I check to see how many clean shirts I've already got. I happen to have seven here. I get it. So you figure on laundering 23 this month? Not quite. See, I have to count on a few spares, all say three, in case I need more than one clean shirt on some days. Now, that means I ought to figure on 26 clean shirts. You, uh, doing this with everything? Yeah, I've got to. It's the only way I can accurately figure out just how much I'll need. Four pairs under shirts. This is what we would call property management. But in the army, it's not quite so simple. In the first place, the value of supplies the army has on hand in this country alone is approximately $16 billion, including operating stocks. These stocks make up a relatively small part of the total army inventory. But their status changes rapidly. At any given time, the operating stock picture in the zone of the interior, the United States, might look like this. Total on hand, on order, dues out. To keep operating stocks moving, to replenish the shelves, and to fill the dues out, or back orders promptly, is a sizable property management job. The huge army inventory includes everything from toothpicks to tanks. And most of it is stored in some 50 depots throughout the country. The cost of storing, distributing, and maintaining these supplies and equipment is now almost $1 billion a year. Until recently, the army had to rely exclusively on the item control system to keep track of its inventories. In the typical accountable property office, this requires thousands of individual stock record cards. Each item has its own card, and it has to be posted regularly. It's possible for a good property officer to get to know his inventory. But the knowledge usually stops with him because it's difficult to transmit thousands of items of this information to those above him. As a result, the commander and his staff rarely get a complete and overall picture of their inventory situation when reported item by item. And without this picture, it's practically impossible for them to estimate their needs accurately or closely control their spending. The Army Financial Management Plan tries to correct this by using a system of financial inventory accounting to supplement the existing item control. Here's how it works. First, a standard price is established for each item. And then, all related items are grouped by categories. For example, all non-combat vehicles would be put in one category. All small arms would be another. After the items have been priced and classified, the dollar value of each category is figured out. This category arrangement can be refined to supply additional information to isolate the problems to be looked into, such as the value of items in excess, those already disposed of, or those on hand but unserviceable. The great value of financial inventory accounting is that it gives the busy commander or staff officer an accurate summary of his inventory in manageable terms. And the individual item records can be analyzed where there are specific problems. At present, financial property accounting is used only for warehouse inventories. But eventually, it will be extended to include buildings and certain types of equipment. As you can see, records play an important role in efficient management. Fred is just discovering this. Well, what do you think of it? So far, it seems all right. You know, I can't understand how I had so much money left over. Well, I think I can. Fred, don't you owe any money? I don't think so. I haven't borrowed any. What about the bills that have to be paid this month? I forgot all about them. But you know, there aren't many. I have a list of most of them right here. Well, where are the others? Well, if there are any for the car, they'll be over here. I keep them all together, so I'll know exactly what I'm spending on the car. You sure that's all? I think so. You better go over these again. Make sure you include all of your bills. I know they're here somewhere. Incidentally, Fred, in the future, I'd keep all of my bills together if I were you. That way, you won't forget any of them. I know they're here. The army's accounting methods were never as haphazard as friends. But they were far from adequate. Until recently, there were 33 more or less unrelated accounting systems used throughout the army. Often, as many as 8 or 10 were used in the same installation. The laundry, providing a service for individuals, had its own bookkeeping system. The engineers, supplying services for the entire post, had another. Transportation had still another system. And in addition, there was also the basic system for cash disbursements. All this came about when these and other activities over the years developed their own special bookkeeping systems to take care of their particular needs. Since the various organizations used different systems and reporting channels, it was difficult for the commander and his staff to get the overall picture of the workings of his command. To remedy this, the army has come up with a system of integrated accounting. This integration binds the various systems together through a single set of control accounts and places the responsibility for all accounting activities in a finance and accounting office, thereby enabling a commander to get a complete and coordinated picture of the financial operations of his command. When the integrated accounting system is in full operation, the commander and his staff will regularly receive financial statements similar to those prepared for top management in industry. George? Yeah. I've been going over my expenses trying to cut them down. Having trouble? Yeah. I have them to where they fit my budget. But here's a problem that has me puzzled. I can see right now that during April, my life insurance must be paid. My car insurance is due. Next year's auto tags have to be bought. Well, on top of everything else, that's going to take quite a sizable pile of dough. You're telling me. You better get yourself a printing press. You got any good ideas? Legal ones, that is? iPads. You know, George, I've been thinking. And I've decided to put some money aside each month in a sort of special kitty, beginning right now. So then when it comes time to make those payments, it'll be done with no strain. Tell me now. You've been talking to Leo lately? No. No, I figured this one out myself. And the Army, likewise, has developed newer and better methods of financing its many varied activities. One type of improved financing is the stock fund. This is the cash used to buy and hold stocks of common use items, such as clothing and medicines, until such time as consumers will eventually buy and use them. It is significant that the stock fund is set up as a working capital or revolving fund. That is, this fund moves in a continuous cycle, buying from suppliers, receiving incoming shipments, making sales to customers, and getting reimbursements for deliveries. The money the stock fund customers pay for goods then goes back into the stock fund and is used to buy and hold new stock. Since the stock fund requires payment for goods supplied, it does away with the free issue of common use items in the Army. The idea behind this is that with consumers paying for the goods they receive, they will be more conscious of costs in order only what they need. And as a result, the stock fund operators will limit their buying and storing of supplies to these actual needs. Another method of financing is consumer funding. Under it, funds are supplied through command channels to consumer level to pay for goods and services required to carry on operations. This includes funds to reimburse stock fund operators for goods they have supplied. Consumer funding differs from the old method of funding in that the funds are allotted in larger amounts. And likewise, there are fewer individual allotments or pots of money. This means that the commander has greater authority and freedom in carrying out his mission. But it also increases his responsibility for the effective use of his financial resources. The Army continues to operate numerous commercial and industrial type activities. To finance such activities, the Army uses still another type of financing. This is called the industrial fund. Like the stock fund, it operates on the basis of a working capital or revolving fund. The fund supplies cash and material to the industrial fund operating activity, which goes into production, keeping complete and reliable records on production costs. The products or services are sold to its customers who reimburse the industrial fund from appropriated funds. There are many advantages to the industrial fund. Cash and material are furnished to operations adequately. Operations and costs are controlled effectively. Customers are billed promptly and accurately. The revolving fund is reimbursed adequately and can lay in supplies and materials to fill new orders as they come in. And now we come to another important problem in financial management. Fred is just encountering it. Look, Leo, you don't have to go over it so carefully. Don't I? I went over it several times myself, and I can assure you there are no mistakes. Well, I've found two already. Where? Here's one in addition. You sure? Well, check it yourself. And over here, you went at the same item twice. Well, how did I do that? I thought I'd bother you. There are probably more. Oh, I guess I'm not very good at this sort of thing. Not at all. You've done a good job. It's just that everybody makes mistakes, and sometimes they're not little ones. That's why it's a good idea to have someone go over your figures. Someone who hasn't worked on them, who isn't involved. And someone who knows what he's doing. Yeah, that's right. Even if they don't find any mistakes, they can make suggestions. Even their reactions can help. Like Fred or anyone else trying to manage his financial affairs, the Army must frequently check its accounts and related operations. The Army Financial Management Plan provides for this by requiring a continuous review by the controller and other members of the commander's staff. In addition, the plan provides for a periodic internal audit. Such audit is made by a team of qualified personnel, working from regional auditing offices and reporting findings to command and to the controller's office in Washington. The internal audit gives the commander the benefit of an independent appraisal of his financial situation. Apart from verifying the accounts, the auditing team also evaluates the various financial procedures, controls, and reports used by the office. And as a result, when these men sit down with the commander and his staff to discuss their findings, they are able to make specific suggestions and recommendations. The commander needs added protection and assistance in carrying out his financial responsibilities. Under the Army Financial Management Plan, his responsibility is greater than ever. He has more funds and other resources at his disposal. And since funds are allotted in larger amounts and with fewer restrictions as to their use, he has greater freedom and responsibility in handling them. A continuous review of accounting and operations by his own staff, along with a periodic internal audit by someone outside, assures the commander that his records are reliable and gives him a basis for measuring efficiency. Where are you going? New York. I'm driving up with Leo for the weekend. We're going to see some shows. Hey, why don't you come along with us? Well, I'd like to, but I can't afford it. Well, that's tough. Say, by the way, what happened to the budget and all the planning you've been doing for the past six months? Giving it up? Not at all. You still sending money to your mother? Every month. And I'm able to save a little besides. I don't believe it. That's what I'm using it for, this trip. It's a sort of celebration. Well, I'll be back Sunday night. Well, sorry, you can't come along, George. Have a nice time. Maybe I ought to have a talk with Leo. Maybe Fred's experience is a little hard for you to accept. But it happens more often than you think. It shows what careful management and planning can do. The practices that Fred introduced into his financial affairs on a simplified scale are nothing more than those tried and tested procedures that have been used in business for many years. And they are the backbone of the Army Financial Management Plan. The cost of performance budget tells how much it will cost to carry out one or more programs, as the case may be, and what resources will be needed in financial terms. Consumer funding is making funds available to a consumer, such as an installation commander, to pay for the goods and services he requires to do his job. The stock fund is a financing device to buy and hold stocks of common use items so that they are available when needed. The industrial fund enables a commercial or industrial type activity to finance its operations initially out of a single fund, which is repaid subsequently, thereby making it possible to exercise closer control of costs and operations. Integrated accounting binds together the various types of accounts and places control in a single office. Financial property accounting converts all property in terms of dollars and helps to get more effective control over all types of property. And finally, internal audit is an independent appraisal to assure that the accounts are reliable and the related operations are in order. The larger and more complex the operation, the more important these elements are. For an organization such as the Army with its vast and varied activities, they are essential. However, these are only the tools of management. And whether or not the Army succeeds in reducing costs without lowering its effectiveness will depend on how you use them.