Budgeting Basics Dr Rodney Dormer Victoria University of Wellington

Budgeting Basics

Dr Rodney Dormer Victoria University of Wellington

• define a budget;

• explain how budgets, corporate objectives and long-term plans are related;

• set out the main components of the budget-setting process and explain how the various budgets interlink;

• identify the main uses of budgeting

Objectives


Corporate objectives - identify the broader goals of the organisation

Long-term plan - defines the general direction of the organisation over next (e.g.) five years, covers matters like:• Segment(s) of society that the organisation aims

to serve• Production / service methods• Financial / financing requirements and methods• Personnel and other resource requirements

The Planning & Budgeting Process


Planning and management in a public service organisation

No ‘bottom line’

Different perspectives on performance:

• public servants – legacy of managing inputs

• front line staff – fairness, equity, realised human potential

• accountants – rational linear models of cause and effect


Plan - an intended course of action and objectives

Budget - essentially a financial plan for a future time• expressed in largely financial terms• converts the long-term plan into an actionable

blueprint for the future



Identify business objectives

Consider options

Evaluate options and make a selection

Prepare long-term plans (long-term budgets)

Prepare budgets (short-term)


Budgets and forecasts are distinctly different:

• a budget is a plan for a future time, expressed mainly in financial terms

• forecasts tend to be predictions of the future state of the environment

forecasts are useful to the planner / budget setter

Budgets vs. Forecasts


1. Promote forward thinking and the possible identification of short-term problems;

2. Help co-ordinate various sections of the organisation;

3. Motivate managers to achieve better performance;

4. Provide a basis for a system of control;

5. Provide a system of authorisation for managers to spend up to a limit

Why Budget


Promote forwardthinking and

identification ofshort-term problems

BudgetsHelp co-ordinate

the various sectionsof the business

Motivate managersto achieve better

performance

Provide a basisfor a system

of controlProvide a systemof authorisation






performance








performance



Why Budget?

In an enterprise there is not one budget, but several – each relating to a specific aspect, or function, of the organisation.

Ideally there should be a separate budget for each person in a managerial position.

Budget Accountability


Budgets are prepared for each of the individual responsibility centres that are defined within the organisation’s structure.

Responsibility centres are the various decision centres throughout the organisation for which a manager is responsible for a set of specified activities.

Those activities are commonly based on a functional, product or geographical basis.

Responsibility Centres


Incremental Budgeting on the basis of last year’s budget with some adjustment for factors, such as inflation, that are expected to affect the new year.

Used in areas such as research and development or staff training where a sum of money is allocated to a budget holder (manager) who is given discretion as to how it will be spent.

Zero-based All spending needs to be justified. Just because a training programme was funded last year it will not be funded in the future if a justification can be provided.

Incremental vs. Zero-Based Budgeting

A periodic budget is prepared is prepared for a particular period – usually twelve months; and is broken down into smaller time periods – usually monthly.

A continual budget (or rolling budget) is continually updated – adding a new month (or quarter) to replace the month (or quarter) that has just passed.

Periodic vs. Continual Budgeting


Operational planning - a top down bottom up dialogue

How do we link the reality of internal metrics, with the demands of external accountability?

Planning should be an ongoing dialogue between managers at the centre and at the operating edge.


1. Establish who will be responsible for the budget setting process.

Someone must run the process and someone, at a very senior level, must sign off on the final product (e.g. a divisional manager, chief executive or senior management team).

The Budget Setting Process


2. Communicate budget guidelines and expectations to relevant managers.

Budget guidelines and instructions should provide a clear statement of the organisation’s strategic objectives, the nature of the external environment (i.e. expected inflation rate, demand growth, social environment, etc.) and the limits or boundaries that are applicable to each responsibility centre's activities



3. Identify the key or limiting factor.

What is the limiting factor that constricts the organisation from achieving its objectives to the maximum extent? Normally this will be customer/client demand; but it may be the capacity of the organisation to meet that demand.

4. Prepare the budget for the area of limiting factor.

The limiting factor such as product or service demand, will normally determine the overall level of activity for other elements of the enterprise.



5. Prepare draft budgets for all other areas.

Each responsibility centre manager can then develop their own budget and plan in the context of the budget guidelines and limiting factor constraints.



Top-down

an approach to budgeting where senior management originates the budget targets.

Bottom-up

most of the budget input comes from lower level staff such as social workers or doctors, within the context of high level organisational objectives and agreed operational constraints.

Top Down vs. Bottom Up


6. Review and coordinate the budgets.

In complex organisations it is perhaps inevitable that plans and budgets will not ‘mesh’ across the organisation as a whole. Decisions and direction will need to be given to ensure this is remedied.

Similarly, if budgets are developed on a bottom-up basis, managers will tend to develop plans and budgets that are favourable – i.e. that contains goals that are not challenging and funding that is generous. The ‘reasonableness’ of each responsibility centre’s plan and budget will also need to be confirmed.



7. Prepare the master budgets.

The master budgets are the budgeted income statement, the budgeted statement of financial position (balance sheet) and a summarised cash budget. These financial statements draw together the information from the individual plans and budgets of the responsibility centres.



8. Approve and communicate the budgets to all interested parties.

Formally agreed/approved plans and budgets are passed to individual managers who will be responsible for their implementation. In effect, this is senior managers agreeing with, and communicating to, individual managers the targets that they are expected to achieve



9. Monitor performance relative to the budgets.

Generally the above processes will be pointless unless each responsibility centre’s actual performance is monitored and compared with the benchmark provided by the budget.



The Planning and Budgeting Process

WHAT RESOURCES WILL THAT TAKE?

WHAT ARE WE GOING TO DO?

WHAT WILL THOSE RESOURCES COST?




BUDGET

PLAN





BUDGET

PLAN

Units of Activity

Units of Resource

Units of Funding ($)





BUDGET

PLAN

Units of Activity

Units of Resource


Quantities of resource per unit of activity

Cost per unit of resource





BUDGET

PLAN

Units of Activity

Units of Resource




Demand

Constraints





BUDGET

PLAN

Units of Activity

Units of Resource




Demand

Constraints

Balance


Child, Youth and Family Services

• Care & Protection services

• Youth Justice services

• Adoption services

• Development & funding of community services

• Prevention services

• Policy Advice

In New Zealand Child, Youth and Family Services receives and responds to reports of concern in respect of the neglect or abuse of children and young people. Those reports may come from other family members, teachers health professionals, the Police or the general public.

After an initial assessment Child, Youth and Family may take no further action or may formally investigate and intervene.


On an average day Child, Youth and Family…

•supports the more than 5,000 children living with caregivers or extended whānau

•builds strong networks with agencies, community organisations and child and family service providers to better support children and their families

•visit key groups and agencies in the community to raise awareness about child abuse, how to report it, and how to get help.


On an average day Child, Youth and Family…

•receives 230 notifications of child abuse or neglect

•meets more than 100 families to talk about their situations and children's safety

•facilitates around 20 care and protection and 40 youth justice family group conferences

•houses just over 100 young people in youth justice residences

The following slide summarises the care and protection social work process.

Report of Concern

Contact Centre & Site Assessments

Investigation

Child & Family

Assessment

Family Group Conference

Family Court Order

Informal Resolution

Resolution Services

Plans & Orders

ENGAGEMENT & ASSESSMENT SAFETY AND BELONGING STABILITY AND WELLBEING

Care of the Chief Executive

Partnered Response (Services Provided in the Community)

Strengthening Family Coordinator

Differential Response Coordinator

***

***

**

**

CARE AND PROTECTION

SERVICES

No Further Action

Safety Assessment

Refer to Service

A simpler model would look something like this:

Report of Concern Investigation

Family Court


Family/ Whanau Agreement

A Plan or Order

No Further Action

80%

50% 10%

30%

10%

100%

20%


If the Porirua office receives 10,000 reports of concern a year:

Report of Concern

10,000

Investigation

8,000

Family Court

800


2,400

Family/ Whanau Agreement

800

A Plan or Order

4,000

No Further Action

6,000

80%

50% 10%

30%

10%

100%

20%



Challenges and Responses

• When funding does not match demand, how do we allocate the shortfall?

• Different mixes of qualified and unqualified/support staff.

• Differing availability of community providers

• Different patterns of front line practice

• Projects to develop new ways of working


Input-based Management and ‘the Coping Organisation’

• Little or no understanding and active management of the links between service provision and resource requirements.

• Budgeting independent of planning.

• Resourcing and funding decisions based largely on historic practice.

• Resource retention in silos.

• Confused accountability.


Resource-Based Management

For a required level of goods and services,

•what resources will be required, and

• what will they cost?

For a given level of funding,

•what resources can be available, and

•what services can those resources provide?


Volume–Based Services

Volume-based Services are those that we are able to plan in quantifiable terms and subsequently monitor or count.


A “Master Schedule”

Capacity-Based Services

Capacity-based Services encompass those groups of work that we are (at least currently) not able to plan and monitor in quantifiable terms. Rather it is necessary to assign a given amount of resource on the basis that it will undertake a generic, or undefined, group of activities.


Projects

Project-based Services are more discrete or non-recurring pieces of work that have some specific deliverables, a beginning and ending and to which we will assign particular resources.


Resource Balancing

It is necessary to consider:

Reviewing the plan against last year.

Revisit major cost categories.

Review the standard resource requirements.

Prioritising the services and costs.

Look at the resources required for efficiency.

Escalation.

Balancing Costs & Funding


Public sector organisations need to:

• Manage the resources that they have to ensure they are fully and optimally used.

• Justify the retention of those resources.

• Be able to clearly and logically demonstrate to ministers and their advisors the relationship between service provision and resource requirements.

• Be able to provide ministers with practical options for changing the level and mix of services.


• Planning and budgeting are two sides of the same coin – i.e. budgeting is not just about the dollars

• Budgets need to be developed in the context of the overall corporate strategy and objectives

• Budgets must also be based on a commonly agreed and understood set of organisational definitions

• To be effective budgets need to contain explicit links between workload and resources

• The operational planning and budget process should be owned and driven by senior management

Summary


• How are budgets created in your organisation?

• What freedom do your budget managers have in how they spend their budgets?

• How do those managers respond to increases in the demand for their services?

Budgeting Basics



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Budgeting Basics Dr Rodney Dormer Victoria University of Wellington