Question

GASB suggests that there are 4 major differences between governments and businesses:

1. Organizational Purpose

2. Revenue Process and Sources

3. Longevity

4. Relationship with Stakeholders

5. Importance of Budget

Explain the difference between governments and for-profit businesses in each of these 5 areas.

Answer 1

The difference between governments and for-profit businesses in each of the 5 areas given below are as explained:

1. Organizational Purpose: The primary organizational purpose of governments is to increase or maintain the well being and prosperity of citizens by providing services which are in tandem with the public policy and public goals. On the contrary for-profit businesses focus is on creation of wealth .
2. Revenue Process and Sources: Most government revenues are raised in the form of taxes imposed by the government and these are involuntary in nature . Whereas in case of for-profit businesses there is a a willing exchange of equivalent value i.e businesses receive revenues from a voluntary exchange between a willing buyer and a willing seller in a certain business transaction.
3. Longevity: Governments exist longer than for-profit businesses . Most governments do not operate in a competitive market environment i.e they function in a non- competitive scenario and therefore they are not subject to the threat of liquidation whereas the for-profit businesses are subject to the situations of liquidation ,bankruptcy and dissolution.
4. Relationship with Stakeholders: Governments serve a wider spectrum or group of stakeholders, including taxpayers, citizens, representatives who are elected from the public, bondholders, and others in the financial community. In case of for profit businesses , the interaction is mainly focused on those segments of society that aid them in fulfilling their objectives to generate a financial return on the amount invested for the purpose of business for their shareholders.
5. Importance of Budget: In case budgets play a very important role i.e the standards focusing on addressing this requirement and need for public accountability information by aiding the stakeholders to evaluate how public resources were acquired and either used during the period or are expected to be used. It also helps in understanding whether current resources were sufficient to meet current service costs or whether some costs were shifted to future taxpayers and that highlights the government’s performancewhether the government’s ability to provide services improved or declined from the previous year..Budgets are important for for profit businesses in terms of understanding whether spending and revenue are as budgeted in order to understand the variances so that they can focus on increasing their net income i.e profits of the business.