REVENUE BUDGETING AND CONTROL
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!