In-Year Budget Control and Management

1. In-Year Budget Control and Management Andrew Graham Queens University School of Policy Studies MPA 827 2015

2. Structure • Today: lecture, first part • Cash Management Class Exercise • Tomorrow: Reprise and more material • Group work on final assignment.

3. Reprise • Focus on internal management of budgets in-year – management accounting • Basis for adapting approved budget to changing circumstances • Cash Management Exercise: a scenario of a financial situation will be presented and you will be asked to brief your boss, the Deputy Minister as well as your colleagues on the senior management committee

4. Definitions • Cash, budget, treasury and liquidity can get confused at this point • No one term exists for the management of in-year budgets • This is not about managing bank accounts to ensure adequate cash is on hand: that is a liquidity management function – commonly called cash management • This is not about the effective use of cash at hand in terms of short-term investments: that is a treasury function • Goal: managing the budget at hand effectively. Cash Management = In-Year Budget Management

5. Why Budget and Forecast? Budgets and Forecasts A budget is a formally approved plan for the operation for a specific period. An approved budget becomes the benchmark to test your actual results A forecast is a projection of activity based upon the latest information.

6. Why Budget and Forecast? Budgets and Forecasts Measure actuals and forecasts against the budget throughout the planning process. Analyze anticipated versus actual results – variance. Predict future performance and anticipate changes. Assist in monitoring control of current performance. Provide early warning of deviations from plans. Take actions needed.

7. Definition In-year budget management is the system which compares actual expenditures against unit spending plans for a given financial year, identifies risks and variances and enables the adjustment of resource allocations to reflect changed circumstances in the that year. Budget Cash Management is not a way to re-open the budget decisions but to adapt to changing circumstances.

8. Effective in-year budget management creates opportunity for managers to: • Ensure that they remain within budget • Alert senior management to shifts in demand for services or other cost drivers • Maximize the use of their funds so that they are fully expended for their stated purpose and opportunities to meet emerging needs are met • Reallocate within a current year so meet unanticipated needs • A means of assessing departmental, unit and individual performance

9. Key Part of the Job • Responsibility of all responsibility centre managers • Knowing how to do it is important • Uses tools of control, risk management, forecasting, good financial reporting and analysis

10. Managing the Budget Reflects on Performance • Out of control budgets suggest bad management or failure to adapt to changing circumstances. • Money unspent in a persistent or perverse way suggests failure to deliver full program or program shifitng. • An organization’s ability to collectively manage its current resources most effectively reflects its overall capacity to work as a team or unit toward a set of coherent goals

11. Managing the Budget Reflects on Performance • The degree of flexibility and decentralization in an organization will have an impact on how cash is managed in terms of • how it can and cannot be redistributed, • the degree of reporting and • the scope and role of central corporate offices within the organization

12. Actual Cash Remains a Concern • In the public sector, even with accrual accounting, there remains a high measure of accountability for explaining what is happening to voted funds within one year. • Financial reporting requires this annualized approach. • Some argue that the main concern is how cash is used during the period and not matching revenue and expense which is of a higher priority in the private sector – this remains a preoccupation of many players in the scene: managers, clients, oversight groups and legislators

13. Importance of in-Year Budget Management • Organizations are always looking for spare capacity and this is one way of finding it in the short term. • It does not replace permanent reallocations, program evaluation or policy making that shifts resources in a formal way, i.e. legislatively or through other policy instruments. • Budgets can be complex landscapes.

14. Compliance Adaptability

15. What could possibly go wrong? • Errors in reporting – accounting systems can be wrong • Incomplete information • Budget plan proved to be inaccurate • Actual events did not conform to plan • Unanticipated surges in demand or loss of revenue • Catastrophic events

16. The Objectives of Effective In-Year Budget Management • To have funds to pay the bills, i.e., sufficient liquidity • To use budgeted resources for their program purposes and not leave needed funds unspent • To keep within the appropriated or authorized budget • To have the organizational and resource capacity to react to changes in plan • To reallocate available funds to meet emerging, short-term priorities.

17. The Big Three Questions • What has happened so far? • What do we think will happen to our plan for the rest of the year? • What (if any) actions do we need to take to achieve our agreed plan?

18. Qualities of the Financial Performance Review Process • Focus on a few critical aspects of performance • Look forward as well as back • Explain and react to key risk considerations • Explain and react to key capacity considerations Source: Reporting Principles, Canadian Comprehensive Audit Foundation, 2003

19. Qualities of the Financial Performance Review Process • Explain other factors critical to performance • Integrate financial and non-financial information • Provide comparative information • Present credible information, fairly interpreted • Disclose the basis of reporting

20. In some countries, this is the law • The accounting officer in New Zealand must submit to the relevant treasury and executive authority within 15 days of the end of each month, information on: • · the actual revenue and expenditure for that month, in the format determined by the national Treasury • · projections of anticipated expenditure and revenue for the remainder of the current financial year in the format determined by the national Treasury • · information on conditional grants received and actual spending against them • · information on all transfers • · any material variances and a summary of actions to ensure that the projected expenditure and • revenue remain within the budget.

21. Movement towards government-level Interim Financial Reports

23. Operational Cash Forecasting Goes Beyond Financial Statements • Knowing about cash movements to date based on financial reports is not enough • Encumbrances and anticipated risk or costs changes are not reflected • Cash forecasting and financial reporting moves into the realm of bringing content, knowledge and numbers together

24. From Cash Flow to Cash Forecasting: Financial Statements • Financial analysis uses the financial statements and other sources of information to: • help managers and outsiders understand an organization's financial condition, • make decisions about the organization, and • compare an organization's financial performance to its peers.

25. From Cash Flow to Cash Forecasting: Financial Statements • There must be confidence in the retrospective information to then add in the value of management forecasting, commitments and risks • Analysis of just financial statements rarely gives a final answer • Rather, it indicates where further analysis is needed

26. From Cash Flow to Cash Forecasting: Financial Statements • Good organization management, regardless of the size of the organization, demands that the organization regularly review its financial situation • Financial Statements/Cash Forecasts/ Financial Report/Review of Performance Reports are different names for such a process

27. The In-Year Budget Management Mix

28. From Cash Flow to Cash Forecasting: Financial Statements • The cash management process is not a purely financial function. In fact it will fail if it is. • Managers’ input at the beginning, middle and end is essential • Most financial information is submitted to the manager for decision • Means moving some decisions up the ladder, overseeing other financial managers, aggregating data to the level of the entity

29. Some other basic questions that good financial analysis can help answer • Is the organization on budget? • Will there be over-runs, will there be surpluses? • Have the budget assumptions changed? • Is resource use matched to objectives? • How is the organization or its units performing relative to previous years, to each other and to plan? • Are significant shifts being detected in this data?

30. Some other basic questions that good financial analysis can help answer • What is the significance of these shifts? • Is there a need for extra-ordinary action? Supplementary funding? Internal reallocation? Emergency funding? • How are managers performing? • What opportunities exist to solve problems internally or to meet unplanned demands that are nonetheless important for the organization?

31. Elements of an In-Year Budget Management System • An appropriated budget • Build in changes and modifications to the approved budget to create an adjusted budget • Cash flow projections over the budget period: the in-year cash flow or expenditure plan • A system of measuring actual financial performance in relation to the projected plan

32. Elements of a Cash Management System • A system of monitoring performance, identification of variances and reporting results at the appropriate level • The capacity for management discussion and analysis of the results and variances • A governance mechanisms that would • review the results, • assess variances and their analysis, • determine adjustments needed and • make decisions needed to affect those adjustments.

33. Roles and Responsibilities • Senior management must set budgets and program direction • Line managers must manage the resources they are given to carry out programs • Financial advisors must provide information for decision making to budget setters as well as advice line managers about their budgets • Financial advisors must also provide information and analysis to identify variances, offer comparisons and further analysis of budget perform and make recommendations to line managers and senior managers

34. Roles and Responsibilities • Financial advisors must prepare reports for senior mangers to make decisions • Line managers must respond to variances against plans with explanations, solutions and alternatives • Senior managers must determine what actions to take based on these two sets of inputs.

35. The In-Year Budget Management Cycle Assess Budget Implications for Next Year Cash Requirements Budget Appropriated Hold Backs/Reserves/ Adjustments Adjusted Budget Plan for Year Adjusted Budget Senior Management Direction: Reallocation Budget Plan for Year Reporting Results: Actual vs Plan: Financial and Operations Senior Management Reporting and Review Management Discussion and Analysis Variance Reports and Analysis

36. Expenditure Plans of Organization: Budget, Program • All financial reporting and in-year decisions begin with a budget allocation to a responsibility centre • Difficult to hold a manager accountable if she/he does not know his/her budget

37. Impediments to establishing a base budget • Uncertainty in the financial position • Failure of legislative authority to approve appropriations • Failure of the department/ministry to distribute the budget to responsibility centres • Program change announcements made without budget adjustments

38. Impediments to establishing a base budget • Senior managers withhold authorities pending further changes • Dependency on external funding sources, e.g. intergovernmental transfers • Multiple sources of program funding within the organization but not within the responsibility centre, e.g. centrally held funds • Creation of reserves, hold-backs and only provisional budgeting

39. [1] Grants and Contributions are a Special Fund and cannot be reallocated to other budgets. [2] Capital Expenditures are a Special Fund and cannot be reallocated with permission from Management Board using a formal submission process. However, some non-recurring salary costs for project management and implementation can be built into the capital budget.

40. Expenditure Plans of Organization: Budget, Program • Budgets for responsibility centers are the result of the budgetary process that is then modified within the organization as funds are distributed Reviewing what is a responsibility centre in an organization: chief defining characteristics.

41. [1] Allowances are automatically distributed in the same way.

42. Expenditure Plans of Organization: Budget, Program • Subject to adjustments and clarifications: • In-year program adjustments • External charges, e.g. central services • Reserves and partial distributions by senior management • Objective is to arrive at the Adjusted Budget of the responsibility centre

43. To Get to an Adjusted Budget • Take original budget • Apply changes: increases, decreases, etc • Allocate to units and total. • An adjusted budget is not a projection: it reflects decisions and changes subsequent to the original budget • Important to clarify exactly what the budget manager has to work with at the start • Budgets can also be adjusted throughout the year as part of the cash management process, as new funds become available (or are removed) or to reflect policy changes.

44. *Salary adjustments from collective bargaining = 400,000 plus 350,000 from DM’s special youth employment funds ** Departmental target to reduce overtime – your share is 100K ¹Special central agency funding – one year only – for technology training.

45. Developing a Cash Flow Plan for the Responsibility Centre • In-year cash management requires a sense of how funds will flow or be expended • Eliminate non-cash accruals Do Not Just Divide by 12!

46. Developing a Cash Flow Plan for the Responsibility Centre • Generally managers are expected to prepare cash flow plans based on: • Historical data • Their program plans – the implementation side • Know commitments • Addressing risks • Not all funds flow at once – some costs are distributed over the fiscal year, some are spent at one time, some are held in reserve • Often capital is on a different cash flow cycle and not included.

47. Developing a Cash Flow Plan for the Responsibility Centre • Such flows are predictable within limitations. e.g. salary dollars • Some are less predictable in terms of planning, e.g. overtime, but such unpredictability can be mitigated using historical data • Cash flows can be limited by managerial discretion: • Spending authority limits, • Internal budget restrictions, • External restrictions, e.g., salary dollars for salary only • Tolerance boundaries.

48. Developing a Cash Flow Plan for the Responsibility Centre • Some items are spent all at once, e.g. transfers or major capital purchases. • Are there any other rules of the game set in place by the organization: • Informal reserves and hold-backs • Reporting frequency • Degree of detail • Contingency funds – formal and informal • Budget conditions • Limitations on managerial flexibility End result: Managers Expenditure Plan

49. Factors to take into account in building a cash flow plan • Previous patterns of inflow in past year, e.g. for an NGO: donations tend to peak during major fund-raising events with regularity, major government funding tends to flow two times a year provided the grants is approved in advance • Anticipation of any changes that might cause such a flow to alter, e.g. the organization decides that it will change its fund-raising campaign to a different type and a different time, a major donor adjusts some criteria and is reviewing its procedures which may create delays.

50. Factors to take into account in building a cash flow plan • Timing of the maturity of investments or endowments in various funds;. • Awareness of the timing of cash requirements to match them up with inflows, e.g. major capital expenses are anticipated for the summer, thereby necessitating a cash outflow demand surge in late summer; this will not help anticipate inflows, but will inform and condition the risks and urgencies around the first two elements.