REVENUE BUDGETING

AND CONTROL

THE FINANCIAL CYCLE

• MTFP or MTEF

• Programme budgets

• Revenue and capital budgeting

• Budgetary control, monitoring and reporting

• Final accounts and outturn

Elements

• A clear understanding of the current year important for accurate budgeting

• Means budgetary control vital for good budgeting

Budgeting is done before

outturn known for current year

• A coherent financial plan

• Bringing together the various aspects

• Covers the period three to five years aheadMTFP critical

FINANCE IS ONE PART OF THE CORPORATE STRATEGY

Asset Management

Strategy

Medium Term Financial Strategy

Service Delivery strategy

Information Strategy

Workforce Plan

Corporate

Strategy

RELATIONSHIP WITH THE MTFP

• Medium-Term Financial Plan sets out the financial strategy for the next three

to five years

• The MTFP includes

The financial context and the financial outlook

Capital programme

Revenue budgets

Financing strategy

Treasury management strategy

• The Revenue Budget forms Year 1 of the MTFP

Should be developed from the MTFP

The detailed set plan for the first year

• The Revenue Budget is a key aspect of the delivery

of the financial part of the organisational strategy

WHY MEDIUM

TERM FINANCIAL

PLANNING?

• Financial mechanism intended to ensure

that the organisation can deliver its

objectives

• Provides a strategic financial plan:

• Recognising that significant change

takes longer than a year

• Enabling management to take a longer

term view of service delivery

• Integrates capital and revenue budgets

• Provides a link between revenue

budgeting and corporate planning

• Recognises impact of wider economy on

organisation’s finances

• Enables longer term planning of revenue

generation and taxation

MTFP LINKAGES

• Revenue Budget

• Capital Programme

• Other resource allocation mechanisms

The MTFP provides the basis for:

• Financial performance targets

• Financial scrutiny

• Financial Risk Management

• The Treasury Management strategy

• External Audit planning

Informed by and sets the basis for:

Financial rules and regulations

WHAT IS INCLUDED?

• Strategic and Operational Plans

and Policies summarised and/or

referenced

• Revenue Budgeting plans

•Capital Strategy

•Capital Financing Strategy

• Treasury Management

Strategy

• Reserves Policy

•Corporate Charging Policy

•Value for Money and

Efficiency Policy

• Procurement Plan

• Financial Performance Plan

• Risk Management Strategy

THE FINANCIAL MODEL

• Its a spreadsheet!

• Lays out in summary form the estimated

expenditure and income over the

period of the plan

• Assesses tax and grant income

• Sets out the capital programme

Include the revenue consequences

Whole life costing

• Explains the key assumptions that have

been made

• Allows sensitivity analyses to be done

• Sets out a summary of the financial

plans for any cross cutting programme

budgets

• Tends to be “firmer” in the earlier years

SCRUTINY AND AUDIT MATTERS

•This section looks at the outstanding issues raised under Financial

Scrutiny to ensure that the MTFP takes these matters into account

•Can include issues raised by the Public Accounts Committee or

Select Committees, or local scrutiny committees

•Also refers to issues raised at audit (both internal and external)

to ensure that proper account is being taken of any matters

requiring attention

WHAT IS A BUDGET?

• The financial expression of the

operational and service plans

• The financial targets for the

organisation and its managers

through resource allocation

•One basis for performance

monitoring

•Allocates management the

resources necessary to achieve

set

objectives

•Acts as a control mechanism

BUDGET AND COMMUNICATIONS

•An opportunity to say what’s important

•And what’s less important

•Reinforces the message of key priorities

•Reinforces the key objectives and the timescales

•Stresses the political nature of the public sector

•Underlines commitment to some projects

•Pulls together the resource allocation mechanisms

•There are winners and losers: it’s competitive

PREPARING THE BUDGET

• Timetable

• Work back from political deadlines -statutory deadlines concentrate the mind

• Take account of commercial constraints

• Framework

• Centrally set parameters

• Pricing and inflation assumptions

• Employee cost calculators

• Common chart of accounts

• Required detail

• Overall expectations

• Clearly set out responsibilities

• Information to be provided by finance

• Information to be provided by departments/cost centre managers

• The decision making mechanisms

• Review and challenge at several levels

• Political oversight

SEVEN STEPS TO SUCCESSFUL BUDGETING

•Define your objectives

•Define responsibility

•Gather the evidence

•Decide what to submit

•Test and check

•Win approval

• Live with the

budget……oh and ….

•Know your business

SUCCESSFUL BUDGETING

• To achieve the steps to successful budgeting you will need to:

• Understand the costs

Drivers and levers

Fixed and variable costs

Marginal costs

Opportunity costs

• Behave in a corporate and responsible way

• Have commercial awareness

• Understand your stakeholders and their business

• Develop a track record

• Have support and challenge

The budget compilation process is probably the

biggest corporate process your organisation undertakes

WHAT CAN GO WRONG WITH THE BUDGET

Insufficient political commitment to direction of travel

Change of political direction

Change of political power

Ministerial change

Lack of corporate commitment

Economic downturn

External events

Internal events, including civil unrest, crop failure, disease

Changes in tax collection methods and allowances

Availability of external funding and grants

WHAT CAN GO WRONG WITH THE BUDGET (2)

Does not change to meet changing objectives or priorities

Does not reflect changing circumstances

Savings included without any plan as to how to deliver them

Does not reflect existing spending commitments

Does not have the acceptance of the cost centre manager

Is agreed too late

WHAT CAN GO WRONG WITH THE BUDGET (3)

• Unexpected pay awards or costs of job eva Unexpected pay awards or costs of job evaluation

• Revaluation of:

• Unexpected pay awards or costs of job evaluation

• Revaluation of:

Investments

Assets

Liabilities

• Reassessment of pension fund commitments

• Does not support compliance with International Accounting Standards

• Litigation risks

Major contracts

Public liability

Professional indemnity Investments

Assets Liabilities

• Reassessment of pension fund commitments

• Does not support compliance with International Accounting Standards

• Litigation risks

Major contracts

Public liability

Professional indemnity luation

• Revaluation of:

Investments

Assets

Liabilities

THE BIGGER PICTURE!

• Legislative change

• Changes in Government or donor funding

• Demographic changes

• Economic downturn

Banking failures

Sovereign debt issues (higher interest rates)

Reduced income from taxation

Increased bad debts

Reduced income from fees and charges

Reduced income from land and property

portfolio (revenue and capital)

Lack of regeneration projects in the area

Brexit!!!

BUDGET RISK MITIGATION

• Financial planning and horizon-scanning (MTFP)

• Risk management planning

• Robust budget monitoring and reporting

• Reserves, balances, provisions, contingent liabilities

• Cash flow planning, including emergency overdraft facilities

• Risk sharing (partnership arrangements)

• Business continuity planning

• Government emergency support in times of local crisis

THREE APPROACHES TO BUDGET PREPARATION

Incremental budgeting

Zero based budgeting

Hybrid approach

STAFFING BUDGETS

• Based on “establishment”

List of posts and associated salaries

Detailed calculations of salary costs based on individuals’ positions on

payscales

Central standard “calculators”

• Centrally provided assumptions for other employment costs e.g. Pensions and

pay awards

• Growth and retrenchment assumptions

Should be detailed assumptions if possible

Global cut assumptions without plans can be dangerous

• Assumptions on vacancies

Centrally held or at cost centre level?

Effects of recruitment freezes

• Temporary and agency staffing

ASSETS• Public sector incurs large costs on assets

•Affects revenue budgets as well as capital

•Central or devolved budgets

But should be based on the asset management strategy

• Buildings

Rent, repairs, energy, cleaning and security

•Vehicles and plant

Purchase, lease costs, maintenance, fuel, taxes

•Depreciation? Revaluations?

•Can be budgeted centrally and charged as an internal

rent/contract hire

•Asset management can deliver significant savings

BUDGETARY CONTROL

WHY BUDGETARY CONTROL?

• Requires management to think about the future and set out detailed plans

for achieving the objectives

• Supports the organisation’s purpose and direction ·

• Promotes coordination and communication

• Clearly defines areas of responsibility for achievement of budget targets

• Provides a basis for performance appraisal

Budget is a yardstick against which actual performance is measured

and assessed

Departures from budget can then be investigated and the reasons for

the differences can be divided into controllable and non-controllable

factors

• Enables remedial action to be taken as variances emerge

• It is a key part of delivering the organisation’s objectives

BUDGETARY CONTROL IS ESSENTIAL

Allocation of resources to objectives and priorities

Clear evidence of direction of travel

Political approval implies political support

Directs resources to functions formally

Provides a basis for performance monitoring

Provides a basis for audit and scrutiny

The start point for the financial control environment

Evidence base for redirection of resources

Evidence base for trends in metrics and costs

BUDGETARY CONTROL

Requirement for a framework of budgetary control

• Reporting structure

• Timetable

A dynamic process

• Events, pressures, windfalls

Should be set out in the financial rules (corporate governance)

Budgetary control is the responsibility of managers – not finance

• Lies at the heart of effective management

• Is about managing resources

But finance

• Coordinates and supports the process

• Brings together the overall corporate or organisational view

BUDGETARYCONTROL

There will always be variances that need to be managed

Regular management accounting reports and monitoring

Overall variance reporting to senior management

Should compare total budget, actual to date and forecast outturn

Reporting to politicians/stakeholders?

Finance supports the process with advice guidance and challenge

Systems assist but people manage

Profiled budgets

Requires managers to understand their operations and their budgets

BUDGETARY CONTROL EXERCISE

BUDGETARY CONTROL-OVERSPENDING

Overspending creates problems

• Poor alignment to priorities

• Lack of budgetary control

• Underlying lack of financial competence or responsibility

• Poor corporate culture

• Poor scrutiny

• Low accountability

• Poor reporting…opportunities to address the problem not taken

It can reveal problems in the organisation:

BUDGETARY CONTROL- UNDERSPENDING

Underspending creates problems too

It can reveal problems in the organisation:

• Most of the problems of overspending!

• Loss of trust by the Minister

Undermines future bids for resources

Can give the impression of being over-resourced

Can give the impression of under-delivery

Can result in unnecessary reductions in other areas

Can result in greater expenditure in the next year

• More difficult to retain resources or bid for new resource

• Any new resource is likely to go to more effective spenders!

• Lost opportunities

• Disappointment among staff

• Demotivating

• Over taxing citizens?

TYPES OF BUDGET

• Demand led

• Healthcare, benefit payments

• Economy led

• Tax receipts

• Fees and charges

• Centrally allocated

• Support costs – IT, accountancy, HR

• Accommodation

• Committed contract costs

• Delegated budgets (schools in

the UK)

• Controllable costs and income?

ITS NOT EASY!!!!

BUDGET VARIANCES: NEED TO CONSIDER

Over-spending or failed income targets may have to be carried forward and dealt with in future years

In-year cuts can be very damaging –opportunistic rather than prioritised

Reducing staff numbers can cost more in severance payments than is saved

Sometimes accountancy “magic” can work but is limited and the “truth will out” in the end

Are the budget variances structural? – If so they need to be dealt with in the budgeting process

EXERCISETHE DEPARTMENT

OF

ADMINISTRATION

DEALING WITH OVERSPENDS

•Can you ration service provision?

•Reduce overtime working

•Stop staff recruitment (or severely restrict)

• Increase income

•Delay the opening of new capital projects

•Close facilities

•Reduce spend on supplies and services

•What can be done in your cost centre?

BUDGET REPORTING

Regular, accurate and up to date reporting at Board level is essential

Part of corporate governance

Major variances should be highlighted

Remedial action already taken should be explained

Options for further remedial action should be outlined

Likely projections should be given for the existing and revised situations

Set out potential consequences for outturn this year and beyond

Responsibility and accountability should be determined

But remember……..financial plans often require amending as the year progresses. They are not set in stone

AND…..variances should not automatically lead to a witch hunt

CONCLUDING THOUGHTS

• Public expectations continue to rise

• New technology offers opportunities for improved

financial control as well as better customer service

• Compliance with International Accounting

Standards needs a holistic approach to financial

management and implies the use of a major

accounting package at Government level

• Improved budgetary control is a priority in many

organisations

• Asset control and management is poor in many

public service organisations

• Following a fiscal mandate requires accruals, and

distinguishing between capital and revenue

• A sound budget framework is the first step in

improving financial control

• It’s not easy!