How well a local government is able to provide for the needs and preferences of its citizens generally depends on the financial resources available; and, how such resources are allocated, distributed, and managed. Demographics, size of local government, supply and age of infrastructure, financial position of the government, and the local economy represent a few of the factors affecting what public goods and services citizens prefer. Internal systems of accounting and control affect the allocation, distribution, and management of financial resources. As such, these internal systems significantly affect the provision of public goods and services. The research outlined in this study examined the relationship between a government's financial management capacity (independent variable) and its financial condition (dependent variable), while controlling for environmental factors related to governance and demographics. Financial condition was quantitatively measured using financial ratios calculated from a database of over 1,600 U.S. cities compiled by the Government Finance Officers Association. Financial management capacity and its relationship to financial condition were measured with a survey of the chief financial officers of almost 500 of the sample cities. This research was exploratory in nature as there is little empirical evidence with respect to financial management capacity or its relationship to overall financial condition. In this study certain statistically significant moderate correlations were found with respect to financial condition and financial management capacity. However, multiple regression analysis of financial condition and financial management capacity (controlling for governance and socio-economic factors), indicated no statistically significant relationship between them as conceptualized and operationalized for this study. When controlling for certain governance and socio-economic factors, annual limits on increases in assessed property valuations and population were found to be statistically significant with respect to financial condition. Additionally, these control variables increased and decreased financial condition, respectively. A major contribution made to the literature by this study lies in its attempt to establish an empirical relationship between financial management capacity and government performance as measured by financial condition. Based on existing literature as reviewed by this researcher, the testing of this relationship had not been done previously. This study defined and measured both financial management capacity and financial condition in dimensions and indicators that can be used in future research. Additionally, efforts were made to test the internal reliability of both measures. The results of this research indicated there are a number of other financial management capacity and environmental factors influencing financial condition beyond those identified in this study. This research also provided insight regarding the extent financial management capacity affects financial condition even though such relationships were not found to be statistically significant. Because no statistically significant relationships between financial condition and financial management capacity were found in this study, additional research is necessary to further explore this relationship as well as the correlation between the various indicators of these concepts.