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.
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
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
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,
• How much did/will we deliver with the funds we allocated to each spending
• 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
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