REVENUE BUDGETING AND CONTROL

Transcription

1 REVENUE BUDGETING AND CONTROL

2 Elements MTFP or MTEF Programme budgets Revenue and capital budgeting Budgetary control, monitoring and reporting Final accounts and outturn THE FINANCIAL CYCLE Budgeting is done before outturn known for current year A clear understanding of the current year important for accurate budgeting Means budgetary control vital for good budgeting MTFP critical A coherent financial plan Bringing together the various aspects Covers the period three to five years ahead

3 FINANCE IS ONE PART OF THE CORPORATE STRATEGY Asset Management Strategy Workforce Plan Corporate Strategy Medium Term Financial Strategy Information Strategy Service Delivery strategy

4 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

5 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

6 The MTFP provides the basis for: Revenue Budget Capital Programme Other resource allocation mechanisms MTFP LINKAGES Informed by and sets the basis for: Financial performance targets Financial scrutiny Financial Risk Management The Treasury Management strategy External Audit planning Financial rules and regulations

7 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

8 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

9 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

10 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

11 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

12 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

13 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

14 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

15 Insufficient political commitment to direction of travel Change of political direction WHAT CAN GO WRONG WITH THE BUDGET 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

16 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

17 Unexpected pay awards or costs of job eva Unexpected pay awards or costs of job evaluation WHAT CAN GO WRONG WITH THE BUDGET (3) 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

18 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!!!

19 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

20 Incremental budgeting THREE APPROACHES TO BUDGET PREPARATION Zero based budgeting Hybrid approach

21 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

22 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

23 BUDGETARY CONTROL

24 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

25 Allocation of resources to objectives and priorities Clear evidence of direction of travel Political approval implies political support BUDGETARY CONTROL IS ESSENTIAL 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

26 Requirement for a framework of budgetary control Reporting structure Timetable A dynamic process Events, pressures, windfalls BUDGETARY CONTROL 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

27 There will always be variances that need to be managed Regular management accounting reports and monitoring Overall variance reporting to senior management BUDGETARY CONTROL 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

28 BUDGETARY CONTROL EXERCISE

29 Overspending creates problems BUDGETARY CONTROL- OVERSPENDING It can reveal problems in the organisation: 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

30 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?

31 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!!!!

32 Over-spending or failed income targets may have to be carried forward and dealt with in future years BUDGET VARIANCES: NEED TO CONSIDER 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

33 EXERCISE THE DEPARTMENT OF ADMINISTRATION

34 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?

35 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 BUDGET REPORTING 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

36 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!