The budget cycle is a crucial process in all organisations. However, in the public sector, it is overlooked as a tool for improving the efficiency of the organisation as a whole.

But changes are afoot that mean public organisations must take a long, hard look at their budgeting, forecasting, monitoring and reporting arrangements to find out just how well they are working and whether they can deliver more value.

In public bodies the budget has a special significance as a public statement of how the organisation intends to spend its public funding in the year ahead, and has an important role as a control mechanism.

The reporting of spending against budget targets is a crucial aspect in demonstrating accountability and stewardship to the public.

Because of this, the focus has tended to be on a fixed one-year planning horizon, with in-year monitoring and the reporting of financial results after the close of the financial year.

This is a somewhat linear set of discrete processes. The financial environment is now moving towards medium-term three-year settlements for public services, with pressure for faster closing, and a greater emphasis on efficiency, performance outcomes and value for money. The budget and reporting cycle, therefore, needs to adapt as a tool to support these developments.

The evidence from CIPFA’s review of the arrangements in most public bodies points to reform as necessary to encourage better engagement between an organisations’ leaders, managers and finance staff.

Be dynamic

They must increase the focus on the medium and longer term and develop stronger integration with performance management. They also need to make a more dynamic use of the known financial and service data throughout the financial year to modify future plans.

Modern budgeting can support performance management by integrating known outcomes with frequent reforecasting, and using the analysis of underlying pe rformance and trends to take a view on the future.

Rolling forecasts that are formally reviewed and updated each quarter are potentially a powerful tool. Looking ahead 18 months, quarterly forecasts are developed, with the first two quarters profiled in detail for the coming months. As each quarter passes, an additional quarter is added to maintain the 18-month forward view. At each quarter the forecasts are recast and combined with actual spend and presented as a trend analysis.

Combining financial trends with performance output trends allows an overall integrated picture to be presented. Through frequent reforecasting, managers are encouraged to develop their skills and remain engaged with planning what the future will look like.

By linking trend analysis for expenditure and income with patterns in key performance indicators, they will gain a deeper understanding of the key cost drivers and variables for their business. This process also helps to streamline the year-end close, because financial results have been prepared for each quarter.

The quarterly revision of the financial plan offers the opportunity to redirect resources at frequent intervals. If a spending programme is not capable of using its allocated funds these can be redirected.

For the organisation’s leaders, the forecasts act as a tool for relating funds with the outcomes they buy. Because the financial and performance trends lie side by side,
the organisation is better able to assess value for money.

A substantial proportion of the cost base in public service organisations is fixed in the short term and by introducing 18-month forecasts rolling forward, the impact of changes in the cost base can be reflected.

Similarly, events that may only have a minimal impact on the current financial year are captured and their impact and implications in the future clearly mapped. This 18-month rolling approach is a continuous process, not an isolated activity.

The potential benefits are that managers will constantly scan for issues, which pose challenges or offer opportunities for the business. Likewise it will encourage the organisation’s leaders to review regularly the future sustainability of the business and its finances.

The organisation will be constantly challenged to understand and review the outcomes and outputs which its current resources are delivering and to consider how adverse variations can be managed, and favourable variations maximised.

Full-time forecasting for fds

Your aim in adopting continuous forecasts will not simply be to change behaviours, but also to influence and encourage a culture that will lead to improvement in the organisation’s performance. Alongside the quarterly budget reports and forecasts you will also be tracking key performance indicators. These will be selected to help the organisation answer the critical questions, including:

• How much did/will we deliver with the funds we allocated to each spending programme?

• What was/will be the cost per unit?

• Did/will we deliver the required quality?

• Did/will it have the effect we intended among the target client group?

• Did/will we get value for money?

Keep it simple and clear by working with just enough indicators to help the organisation make decisions.

You will be able to analyse trends, comparing forecasts, the latest position and historic performance and understand and map what the future will look like based on past and predicted patterns.

You may set thresholds, or bands of tolerance, within which performance will be considered acceptable. Outside these limits managers will be required to account for the difference, identify corrective actions and revise forecasts.

Exception reporting will concentrate the focus on areas for action and decision. Where forecast performance deviates from corporate strategy and targets, explore the causes and examine the funding impact of any adjustments you might want to make.

Carole Hicks is finance and policy manager at CIPFA