phasing allocation
forecasting
bottom-up
Better Practice Guide June 2008
ISBN No. 0 642 81021 4 Commonwealth of Australia 2008 COPYRIGHT INFORMATION This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to the Commonwealth Copyright Administration, Attorney-Generals Department, Robert Garran Offices, National Circuit, Barton ACT 2600 http://www.ag.gov.au/cca Questions or comments on the Guide may be referred to the ANAO at the address below. The Publications Manager Australian National Audit Office GPO Box 707 Canberra ACT 2601 Email: webmaster@anao.gov.au Website: http://www.anao.gov.au
Foreword
Developing and managing internal budgets is a fundamental element of an organisations nancial management framework. Effective internal budgeting will signicantly contribute to the achievement of an organisations goals and objectives, particularly when embedded into corporate planning and aligned to the external budget. Organisations use internal budgets to establish and communicate funding priorities, support decision making, set nancial controls, and monitor and report nancial performance. Effective internal budget processes, which underpin the efcient allocation of resources, enable Australian Government organisations to more readily identify and respond to changes in environmental conditions and government priorities. The purpose of this Better Practice Guide is to assist organisations better manage internal budgeting activities. It discusses a range of principles and techniques designed to embed internal budgeting in an organisations planning, control and accountability systems. It also notes the importance of cultivating an environment that encourages effective internal budget practicesan important element of which is to construct internal budgets with direct input from operational managers. Managers are more likely to achieve budget targets that have been agreed with them and are limited to those costs over which they have control. This guide updates the Better Practice Guide on Internal Budgeting issued in February 2003. This guide reiterates many better practices in the former version and takes into account developments in nancial management and budgeting affecting Australian Government organisations since the release of the previous guide. While practices described in this guide generally apply to all Australian Government organisations, it is important that each organisation assess the extent that information provided is relevant, appropriate and cost-effective in light of their circumstances. The ANAO consulted with many Australian Government organisations and individuals to improve the usefulness of the guide. I particularly appreciated the assistance of the Department of Finance and Deregulation, Department of the Environment, Water, Heritage and the Arts, Australian Taxation Ofce, National Library of Australia and the Civil Aviation Safety Authority for commenting on previous versions of the guide and/or providing examples of internal budgeting processes and practices.
Contents
Foreword 1. Overview of internal budgetprocesses
1.1. Introduction 1.2. Coverage 1.3. Denition of internal budgeting and other common terminology 1.4. Acknowledgements 1.5. Internal budget processes 1.6. Characteristics of effective internal budgetprocesses
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PART 1
CONTENTS
1. Overview of internal budgetprocesses
1.1. Introduction 1.2. Coverage 1.3. Denition of internal budgeting and other common terminology 1.4. Acknowledgements 1.5. Internal budget processes 1.6. Characteristics of effective internal budgetprocesses
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1.2. COVERAGE
The principles and considerations outlined in the guide generally apply to all Australian Government organisations, irrespective of size and legislative framework. The guide focuses on internal budget processes undertaken by organisations to manage departmental resources. It does not specically cover those resources administered on behalf of Government. However, many of the better practices outlined in the guide also apply to administereditems.
1 Department of Finance and Administration (2002), Budget Estimates and Framework Review, Canberra. The aim of the review was to assess the accuracy, responsiveness and effectiveness of the budget estimates and advice system in meeting the requirements of government.
Indirect costs
1.4. AcKNOWLEDGEMENTS
The ANAO appreciates the assistance provided by KPMG in preparing the guide. In addition, a number of Australian Government organisations contributed information and insights that supported the development of the guide, primarily: Australian Maritime Safety Authority; Australian Taxation Ofce; Civil Aviation Safety Authority; Department of the Environment, Water, Heritage and the Arts; Department of Finance and Deregulation; Department of Health and Ageing; National Library of Australia; National Museum of Australia; and National Water Commission.
Part Three
Part Four
Part Two of the guide discusses the link between organisational planning and internal budget processes and the role of the internal budget in nancial management. Planning, budgeting and reporting processes ideally have a cascading effect within an organisation as strategic goals and priorities ow to operational areas. It is important to allocate internal budgets consistent with the organisations nancial management framework while, at the same time, aligning with managers specic responsibilities. Managers are more likely to take ownership of their allocated budget where they have control, not just accountability, over the implementation of the budget. Close integration between the capital budget and the operational budget further assists organisations assess the longterm consequences of budget decisions. Consistency between internal and external budgets and between reporting of budget estimates and actual results is also important. This helps ensure a close alignment between how an organisation plans and monitors performance internally and how it is held accountable externally. A critical element in gaining broad acceptance of the internal budget is the involvement of senior management and operational management throughout the budget process. Part Two also discusses better practice principles and approaches involved in engaging relevant stakeholders, including supporting operational managers. Finally, Part Two deals with the management of relationships between Australian Government organisations working on whole of government initiatives. Part Three discusses policies, procedures and systems critical to developing an effective internal budget. It is vital that the internal budget function is supported by robust processes and systems for planning and coordination, and that these are clearly articulated and consistently applied across the organisation. This is likely to generate a budget that is timely and accepted by management. Part Three also suggests some better practice principles and approaches to manage and support the development of internal budgets. Part Four discusses the link between preparing the internal budget and reporting and monitoring budgeting performance, including the role of forecasting to manage the gap between budgeted and actual revenues and expenditure. To use resources efciently and effectively, it is essential organisations build a continuous improvement culture into internal budget processes. Part Four also suggests some better practices to measure, review and rene internal budget processes.
Part 3.2
Part 3.3
Part 4.1
Part 4.2
Part 4.3
Part 4.4
PART 2
CONTENTS
2. Embedding internal budget processes into organisational planning and management
2.1. Integrate the internal budget into organisational planning 2.2. Align internal budgeting with organisational roles and responsibilities 2.2.1. Ensure clear accountability for all budget allocations 2.2.2. Align organisational structures to outcome, output and programresponsibilities 2.2.3. Present full cost of service delivery 2.2.4. Show full nancial impacts of budget decisions 2.3. Integrate operational and capital budgets 2.4. Align internal and external budgets 2.5. Harmonise budgeting and reporting 2.6. Engage stakeholders in internal budget processes 2.6.1. Obtain organisational support for the internal budget 2.6.2. Supporting operational managers in internal budget processes 2.6.3. Internal budget processes for whole of government initiatives
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Internal Budgeting
External Budgeting
Organisational Planning
Internal Reporting
External Reporting
Better practice organisations embed internal budget processes into organisational planning and management.
Better practice organisations embed internal budget processes into organisational planning and management by: integrating the internal budget into organisational planning; aligning the internal budget with organisational roles and responsibilities; integrating operational and capital budgets; aligning internal and external budgets; harmonising budgeting and reporting; and engaging stakeholders in the internal budget.
One means of establishing top-down direction in the budget setting process is to use the rstyear component of the strategic plan as the basis for the internal budget. Figure 3 illustrates how resources can be directed at achieving organisational goals through the alignment of planning and budgeting at each level within an organisation.
Workforce Plan
Operational Plan
Employee Budget
Operational Budget
Capital Budget
Group Plans
Group Budgets
Budget Allocations
Plan Strategic plan (also called Corporate plan): High-level plan that identies the organisations role, key goals and targets over the medium to long term (for example, three to ve years). Operational plan: Outlines expected operational activities to deliver annual strategies. Workforce plan: Identies current and future workforce requirements by assessing the workforce required and workforce available to support the organisations objectives. Asset management plan: A multi-year plan for capital asset acquisition, maintenance andretirement. Group plans: Outline expected activities to be undertaken by each group. Individual performance agreements: Outline expected performance for the year including targets and planned development.
Budget Budgeted nancial statements: Key statements showing nancial performance, nancial position and cash ows. Aligns to externalbudget. Operational budget: Shows the impact of operating decisions on the organisations sources of income, expenses and cash ows. Employee budget: Shows the cost of employeesgenerally a component of the operational budget although employees involved in capital projects may instead be included in the capital budget. Capital budget: Shows planned asset purchases, construction and disposals. Group budgets: Outline expected resource allocation and revenue sources for eachgroup. Budget allocations: Show allocated budget for particular positions or areas ofresponsibility.
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Integration is enhanced when planning and budgeting processes source information from the same internal and external data sets. This provides greater visibility in decision-making and consistency in the assumptions made. The nance area is central to the integration of strategic planning and budget setting processes. The nance area can help operational areas translate strategic goals and performance plans into specic budget elements and drivers. The role of the nance area in supporting operational managers is discussed further in Part 2.6: Engaging stakeholders in the internal budget.
Embedding internal budget processes into organisational planning and management
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Authority Accountability
Output
Budget Allocation
Direct Costs
Cash Flows
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Better Practice Tip: Align organisational structures with outcomes, outputs and programs
This degree of alignment best denes management accountabilities and responsibilities, and enables organisations to directly translate internal activity reporting to external reporting.2
If an organisation is unable to align organisational structures to output and program responsibilities, it is important to clearly map linkages between each organisational unit and the outcomes, outputs, and programs to which they are contributing. Some organisations develop a matrix approach to the internal budget where managers are allocated budgets for one or more organisational units
2 Joint Committee of Public Accounts and Audit (JCPAA) Report 388, Review of the Accrual Budget Documentation, 2002, p. 12.
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as well as contributing to specied outputs and programs. Other organisations identify individual managers with specic responsibility for managing outputs and programs across a range of organisationalunits.
Records of usage
Activity snapshot
3 Management Advisory Board (1997), Beyond bean counting: effective nancial management in the APS1998 & beyond, Part 3, pp. 7581, contains further discussion on cost attribution approaches.
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Description Costs directly attributable to an output or program are identied based on the cost centre or prot centre structure in the general ledger. Indirect costs are then attributed using cost drivers or through another of the approaches listed in this table. The organisation is broken down into activities with each activity representing one way in which outputs and programs are delivered. Direct costs are allocated directly to outputs and programs (cost objects). The majority of indirect costs are assigned to activities, which are in turn allocated to cost objects. A key advantage of ABC is that it converts indirect costs into direct costs which are directly assigned, rather than allocated, to outputs andprograms.
Suggested use In organisations where there is a close alignment between organisational structures and outputs or programs (that is, a one-to-one mapping).
Embedding internal budget processes into organisational planning and management
In complex organisations with a range of material indirect costs. In organisations where the data used to capture and measure activities can be generated at little cost and effort.
Indirect costs are allocated to operational areas (direct cost areas) based on one or only a few key cost drivers which are readily measurable, for example, staff numbers or work space. While there is not a direct relationship between the proxy cost drivers and each indirect cost element, the proxy(s) are representative of the organisation as a whole. Indirect cost areas (for example, corporate areas) record actual costs incurred for each operational area (client), calculate a charge for the service and invoice (either physically or notionally) each client on a regularbasis.
In policy or process oriented organisations with a small range of activities and where indirect costs are not a signicant proportion of the overall costbase.
In organisations where indirect costs are a signicant proportion of the organisations overall costbase. In organisations where internal enabling areas operate as autonomous business operations or are outsourced. In organisations where the data used to measure usage can be generated at little cost and effort.
Managerial judgement
Indirect costs are allocated to outputs and programs based on managements assessment of where costs are incurred.
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In addition to reecting the full cost of service delivery, it is important that the allocated budget continues to align with managerial responsibilities and authorities. One way to achieve this is to distinguish in budget reporting between those budget items or activities that the output or program manager has direct control over (direct costs) from those items or activities used by the output or program but where control is indirect (indirect costs). Consistent with external budget and reporting standards, there is also a need to distinguish between departmental and administered activities. The involvement of operational managers in establishing attribution rules and identifying key cost drivers increases the likelihood that they will understand and accept the attribution rules. The involvement of operational managers in establishing attribution rules and identifying key cost drivers increases the likelihood that they will understand and accept the attribution rules and take ownership of their allocated budget. The following case study provides an example of the attribution of indirect costs.
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It is prudent to devolve all elements of the budget, including balance sheet items, to managers who have control or stewardship over each element. However, the degree of devolution of budget elements is likely to depend on the nature, size and distribution of the organisations assets and liabilities. Benets of allocating integrated budgets (that is, inclusive of income statement, balance sheet and cash ow impacts) to operational managers include: the full nancial impact of managers decisions are visible to them and they can be held accountable for the full cost of delivering outputs and programs; managers are able to assess budgetary impacts in the same period the underlying activity is planned; operational managers are assigned responsibility to focus on, and manage, the organisations assets and liabilities; it encourages consideration of alternate asset acquisition options (for example, leasing); there is greater consistency between budget and actual reporting; and there is increased awareness of longerterm scal challenges. The following example illustrates an effective approach for allocating depreciation to operational areas.
The degree of devolution of budget elements is likely to depend on the nature, size and distribution of the organisations assets and liabilities.
Embedding internal budget processes into organisational planning and management
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The key challenge associated with the allocation of full accrual budgets is the ability of non-financial managers to understand the inter-relationship between the financial statements and the different measures for which they are accountable.
The key challenge associated with the allocation of full accrual budgets is the ability of nonnancial managers to understand the inter-relationship between the nancial statements and, as such, the different measures for which they are accountable. To address this challenge, organisations can: automate relationships between the income statement, balance sheet and cash ow statement such that managers do not have to provide the same information in two or more statements. This may include, for example, the automatic derivation of the cash ow statement from the income statement and balance sheet; and separately disclose budgeted gains and losses which are due to factors outside the managers control (for example, changes in the market value of assets between budget updates). In circumstances where an organisation determines that central management of a budget element (including cash) is appropriate, it is important to undertake a formal risk assessment and identify appropriate compensating controls to help manage each budget element. This is illustrated in the following two examples.
Example 1:
Each manager is accountable for an employee expense budget, however the employee provision liability budget is maintained centrally. Senior management have established leave balance targets (including maximum leave days and average leave days) and managers are accountable for monitoring and proactively managing staff leave within these targets. Managers receive regular reports showing employee leave balances and are required to explain exceptional balances.
Example 2:
Each manager is accountable for supplier expenses, however the creditor liability is not allocated to operational areas as payment is centrally managed under predetermined payment terms (for example, 30 days). Under the organisations control framework, managers are accountable for the monthly reconciliation of creditor suspense accounts and the review of aged creditors and commitments. All exceptional balances must be explained and actioned.
The following case study illustrates use of a fully integrated budgeting and reporting system.
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and allocation of departmental revenue, including priorities for utilising funding sources to meet required payments, and the departments methodology for allocating and reporting corporate overheads. The policy framework was established before the implementation of DEWHAs current budget and reporting system and, as such, provided the overarching functional requirements to be met in the system implementation. Key stakeholders within and external to DEWHA were consulted and their requirements considered in developing the framework. Most importantly there was signicant senior executive involvement in, and support for, the framework andsystem.
Administered
Departmental
Activity Centre
Organisational Unit
Program
Sub-output
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Continued from previous page Activity centres are then classied as direct or indirect (for example, corporate activities). Direct activity centres must be able to map to one organisational unit, program and sub-output. Indirect activity centres are allocated to direct activity centres based on the departments corporate overhead allocation methodology. Each activity centre has only one accountable manager, but a manager may have multiple activity centres. This approach provided the department with the exibility to aggregate activity centre budgets according to different reporting hierarchies, for example, by program, output anddivision.
Benefits
All budget and nancial reports are from the one system ensuring consistency of information. Readily available information for staff and other stakeholders can be produced. Accountability is understood and recognised for all levels of staff. There is ownership and acceptance of the budget and it is fully automated.
The timeframe covered by the capital budget is dependent on the nature of the organisations asset base but should, at least, encompass the expected useful life of current and planned asset purchases.
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Strategic Plans
Key priorities
Operational priorities
Operational Plans
Asset Register
Replacement costs
Capital requirements
Capital Budget
Operational Budget
As illustrated in Figure 5, key inputs in developing an effective capital budget include: asset management plan: a multi-year asset management plan provides a framework for decisions to acquire, maintain, replace and retire capital assets. The asset management plan translates the organisations longterm priorities and strategic goals (as determined through the strategic planning process) into capital requirements. It is important that the capital budget directly links to, and ows from, the asset management plan to help ensure capital needs are appropriately costed and funded. asset register: the asset register is more than an accounting record of an organisations existing asset baseit also provides key information required for forward planning such as expected useful lives, replacement values and the purpose for which assets are being used. It is important that the capital budget directly links to, and flows from, the asset management plan.
Better Practice Tip: Link the capital budget to the asset register
Use the asset register to construct a longterm rolling projection of asset replenishment requirements based on estimated replacement costs and useful lives of an organisations current asset holdings. This provides an overview of projected capital expenditure requirements as well as an indication of annualised funding required to service the replacement cycle.
operational budget: the operational budget shows the ongoing impact of holding assets through reporting depreciation. An organisation may also utilise off-balance sheet assets in its day-today operations under leasing agreements or other arrangements that would not show up in the balance sheet. As such, integrating the operating budget and capital budget enables managers to more readily assess whole of life costs of purchasing decisions. Furthermore, the operational budget shows consequential costs to the organisation when capital investment decisions are not made, for example through increased repairs and maintenance expenditure.
Integrating the operating budget and capital budget enables managers to more readily assess whole of life costs of purchasing decisions.
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business cases: given the multi-year signicance of capital investment decisions, it would generally be appropriate for organisations to adopt different, and more extensive, submission and approval arrangements for capital decisions than those applied to the operational budget. These arrangements often include requirements to prepare separate capital proposals and establish separate committees to consider and approve the capital budget. It is prudent that all new major capital investment proposals are supported by an appropriate business case for senior management consideration. It is also prudent to apply business case discipline to major replacement projects to help ensure replacement is appropriate to current priorities. At a minimum, the business case for capital investment should: justify the need for the capital investment against the organisations priorities; concisely, clearly and completely specify what is to be delivered, the overall time and cost limits, and what benets those deliverables will support; identify sources of funding; describe the implementation in sufcient detail to provide condence the project is achievable, and set a means for assessing and monitoring progress; identify risks associated with the project (including risks associated with not proceeding) and strategies to address these risks; obtain validation of the project specication and implementation plan to help ensure that the proposed approach is an appropriate way to full the organisations requirements; and help ensure that decisions for the project are clearly stated, properly documented and taken by the appropriate person. The extent and depth of each key input into the development of an effective capital budget is dependent on the value, nature and size of the organisations asset base. The following case study illustrates the use of formal governance arrangements over major capital investment decisions.
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4 The legislative framework underpinning the external budgeting process is contained in the Australian Constitution; the Charter of Budget Honesty Act 1998; the annual appropriation Acts, the Financial Management and Accountability Act 1997; and the Commonwealth Authorities and Companies Act 1997.
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Budgets are reported at a level of detail that is consistent with generally accepted accounting principles as reected in the Australian Equivalent to International Financial Reporting Standards.
Internal and external budgets are reported at a level of detail required by central agencies.
Internal budgets are consolidated and reported at a level of detail sufcient to meet senior management planning and reporting requirements.
Internal budgets are prepared and reported at a level of detail sufcient to meet operational requirements.
Where consistent policies and formats are adopted for reporting budget estimates and actual results, the organisation has greater certainty in decision-making.
It is important that organisations present budget and actuals reports on the same basis.
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structural changes), an effective practice is to provide managers and other key stakeholders with a map showing changes made between the current reporting structures and those that existed at the last update. When functions are transferred between Australian Government organisations as a result of machinery of government changes, accountability and decision-making are enhanced if organisations also map historical information. In this regard, the good practice guide Implementing Machinery of Government Changes6 makes a number of recommendations to assist organisations implement machinery of government changes, including developing information and communications and records management strategies. It is desirable that these strategies also consider historical budgetary and actual information.
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responsibilities and escalation arrangements. It is also important that managers understand and agree to their role in budget processes, for example, through including budget responsibilities in their performance agreement. Educating nonnancial managers about the budget framework: operational managers with budget responsibility require an understanding of how budget data is generated and reported, as well as how it is used in decision-making. Organisations can support operational managers prepare and manage budgets through a combination of targeted training and guidance provided in nonaccounting language.
It is important that managers understand and agree to their role in budget processes.
Better Practice Tip: Australian Government Budget and Financial Essentials training
The Budget and Financial Essentials training program is an Australian Government initiative established by the Department of Finance and Deregulation and conducted in partnership with accredited training providers. It provides introductory training on budget processes and the nancial framework for government ofcials. The training program provides a practical overview of: the Australian Governments nancial framework and its practical implications for the day-to-day operations of the Australian Government; key elements and timeframes of the Australian Governments budget process; different types of appropriations and how they operate, legislation and conventions that affect them, and associated key technical and process issues; external reporting standards used in Australian Government nancial reporting, including the Government Finance Statistics and Australian Accounting Standards; the impact of transactions on key budget balances and how these balances are derived; and Australian Governments charging policies, including cost recovery and competitive neutrality.8
Enabling managers to input budgets in operational terms: operational managers should not require accounting or costing expertise to prepare an internal budget. An effective practice is to allow operational managers to input budget data on the basis of operational drivers (for example, full-time equivalent employee numbers, beneciary numbers for transfer payments or stage of completion for capital programs), with the accounting value and classication based on predetermined rules and standard costs. This approach is commonly adopted in the estimation of employee budgets where operational managers are only required to estimate full-time equivalents by stafng classication. The employee budget is then calculated through the application of standard salary costs and predetermined percentages for superannuation on-costs, leave and related entitlements. Providing access to systems and tools: user-friendly systems and tools allow managers to easily submit and retrieve data, and drill-down and analyse drivers and model scenarios to assist in developing internal budgets. Refer to Part 3.2.3: Automate internal budget processes for further information. It is important that staff requiring access to internal budget systems receive training in an organisations budget policies and procedures and the operation of budget systems, including security principles. In this regard, training will be more effective when it is provided before staff receive access to budget systems and also after any signicant changes to budget functionality.
8 Department of Finance and Deregulation website, available from http://www.nance.gov.au/budgetgroup/ Commonwealth_Budget_Overview/budget_and_nancial_training.html [accessed 13 February 2008].
It is important that staff requiring access to internal budget systems receive training.
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Sharing knowledge and ideas on budget practices: in addition to systematic training and guidance, it is important that organisations provide opportunities for managers to interact and share knowledge on a regular basis. Examples of how this may be accomplished include: the establishment of a budget network where nance and operational managers participate in regular forums and information sessions to discuss issues and share ideas for better practice internal budget processes; maintaining an intranet budget site or email forum where managers can access guidance and advice, post queries and share experiences regarding internal budget issues; and hold lessons learned sessions after the completion of the internal budget to identify strengths, weaknesses, and opportunities to improve budget processes.
9 The Better Practice Guide Implementation of Programme and Policy InitiativesMaking Implementation Matter, issued jointly by the Australian National Audit Ofce and the Department of the Prime Minister and Cabinet in October 2006 discusses whole of government considerations in establishing government programs.
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PART 3
CONTENTS
3. Developing and implementing a comprehensive internal budget
3.1. Effective planning and coordination 3.1.1. Set budget policies 3.1.2. Establish budget timetables and milestones 3.1.3. Allocate responsibility for budget development 3.1.4. Document budget processes and disseminate guidelines 3.2. Effective budget construction 3.2.1. Budget top-down, bottom-up or both 3.2.2. Determining the budget approach 3.2.3. Automate internal budget processes 3.3. Effective oversight, review and communication
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allocating responsibility for budget preparation and review; and documenting budget processes and communicating guidelines.
It is prudent to prepare longer-term internal budget estimates consistent with the organisations strategic planning process.
A critical consideration in budget preparation is the budget horizon, that is, the time period over which the organisation will set its budget. Traditionally, organisations have limited the internal budget to a single year as funding and activity can be estimated with greater reliability. However, it is prudent to also prepare longerterm internal budget estimates consistent with the organisations strategic planning process (three to ve years). This will enable an assessment of longerterm nancial implications of current and proposed policies, services and assumptions.11 To support integration with external budgets, it is also useful to align the internal budget horizon with the external budget horizon (which includes at least three forward years in addition to the budget year). Capital budgets generally require a longer budget horizon to show the multi-year impact of current and proposed capital investment (depending on the nature and useful lives of the organisations asset base).
11 It is often more cost-effective for organisations to prepare longerterm internal budget estimates at the higher levels as there is less certainty about the accuracy of estimates further into the future, and therefore less benet in preparing detailed budgets for all operational units. 12 KPMG (2004), 2004 Budgeting and Forecasting Survey ReportProcess Tweak or Process Overhaul?, reported ndings from an international survey of budgeting and forecasting practices in the private and public sectors, that the average cycle time for developing a budget was around 2.6 months, with 84 per cent of respondents requiring more than two months and almost one-third requiring more than three months.
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Given the intensive workload typically associated with preparing internal budgets, it is important that organisations establish arrangements to cater for contingencies such as the unavailability of key personnel during the budget process. This is particularly important in small organisations, which are heavily dependent upon the knowledge and skills of a small number of individuals. To minimise this risk, it is prudent to provide more than one staff member with exposure to each budget responsibility, and include budget responsibilities in succession planning.
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Documenting budget processes and responsibilities also helps to: identify resourcing gaps, including where budgeting and reporting activities overlap; assign a clear accountable owner for each step in the internal budget process; identify potential bottlenecks in the process; and inform each stakeholder in the budget process of the nature of their responsibilities. In particular, this helps ensure line areas understand their responsibilities in meeting the timetable for preparation and review. Appendix A provides an illustrative template for developing budget guidelines, including budget policies.
Key:
= Top-down
= Bottom-up
= Hybrid
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The hybrid approach is generally preferred as: there is greater commitment to, and ownership of, the budget setting process as all levels of management contribute to the process; it encourages a broad, organisation-wide perspective consistent with government priorities as senior management set the strategic targets and constraints which then cascade down through the organisation; it leads to a greater understanding of how the actions and demands of individual areas impact the organisation as a whole; and the detailed budget is constructed by those that are responsible for delivering the services. However, an ineffective hybrid approach can result in signicant amounts of time and effort being spent in negotiation and iteration, with senior management ultimately having to impose budget cuts to satisfy organisational constraints. Approaches to mitigating this risk include: involving line management in the target setting process; providing opportunity for operational areas to submit proposals for funding priorities early. These proposals are reviewed and vetted prior to resource allocation; ensuring organisational goals, constraints and planning assumptions are clear and communicated at the beginning of the budget process and throughout the budget cycle; incorporating longerterm goals and constraints to guide managers in allocating resources; and integrating budget priorities and allocations into the strategic and operational planning cycle. There are circumstances where a largely bottom-up budgeting approach might be appropriate to an organisation. In particular: when an organisation has undergone substantial change (for example, after machinery of government changes or where there has been a redirection of government priorities) and a bottom-up approach is useful in setting the budget baseline; when an organisations operations change signicantly year to year, for example, projectbased organisations; or as a periodic zerobased retesting of budget assumptions and resource allocations, for example, on a triennial basis. A primarily top-down budgeting approach is the most appropriate approach in some circumstances, for example, where a organisation has to identify substantial budget savings in a short space of time or in circumstances where additional budget discipline is needed.
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Characteristics Description: Concentrates on factors that drive costs and justies expenditure on the basis of activities performed in relation to predetermined drivers. Places responsibility on the manager with responsibility for the driver. Advantages: enables managers to input and measure budgets in operational terms; provides opportunities to examine work practices and eliminate non value-adding activities; and close linkage to operational planning. Disadvantages: greater complexity as it requires managers to understand what activities drive their budget and estimate activity volume.
Description: The various performancebased budgeting approaches begin with an assessment of what the organisation is trying to achieve. The activities required to achieve each output are identied and costed (generally using activitybased budgeting). Advantages: links resources (inputs) to the organisations deliverables (outputs); strongly integrates the budget and strategic and operational plans; greater alignment to source of appropriation funding; and close linkage to external performance measures in Portfolio Budget Statements. Disadvantages: greater complexity in aligning organisational and output responsibilities and in allocating corporate costs; budgets are ineffective if performance measures are not clearly articulated up-front; greater time and effort involved in collecting output and program indicators; and allocation of internal costs (for example corporate overheads) can be arbitrary unless the organisation has effective allocation approaches.
Conceptually, a budgeting approach with elements of zero-based budgeting and performance-based budgeting would generally be considered better practice.
Conceptually, a budgeting approach with elements of zerobased budgeting and performancebased budgeting would generally be considered better practice as the budget links to the organisations goals, priorities and outputs and has been fully justied. However, given the complexity, time and cost associated with these methods, they are not practicable for all organisations. This is particularly the case for organisations that exhibit little change year-to-year where the cost is unlikely to bejustied.
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Some techniques organisations use to incorporate zerobased and performancebased concepts into their budgeting practices include: limiting the use of zerobased budgeting to a select number of discretionary cost items (for example, suppliers) or to a select number of programs; applying full zerobased budgeting on a periodic basis (for example, triennially) rather than every year; and applying performancebased budgeting using a limited number of cost drivers as intuitive proxiesthat is, key drivers (such as headcount) which are likely to explain the majority of activity and provide a reasonable approximate of other activity in the absence of more specic drivers.
As a budgeting tool, the spreadsheet has a number of limitations around data integrity, integration, change control, multi-user access and size restrictions.
Developing and implementing a comprehensive internalbudget
To facilitate the production of timely and consistent budgets, organisations limit the amount of manual intervention.
13 ibid., p.19. The report highlighted that in excess of 85 per cent of survey respondents used spreadsheets for some or all internal budgeting processes.
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Table 5: Better practice functionality and control for budget systems and tools
BUDGET SYSTEM ENVIRONMENT Budget systems are incorporated into an organisations information technology planning, and are subject to appropriate governance and review. Access to budget systems and tools is appropriately restricted. Changes to budget systems and tools, including assumptions and calculations, are governed centrally. Budget programs, data and documentation are backed up on a regular basis. Comprehensive and up-to-date documentation is maintained for the administration and use of budget systems and tools. Adequate segregation of duties exists between budget input and budget approval. Budget systems and processes are included in disaster recovery and business continuity arrangements. Workow technology is used to manage the budget setting process. BUDGET INPUT Data collection is standardised across the organisation. Direct entry of budgets by operational areas. Built-in data integrity and reasonableness checks. Automated interfaces between source systems and budgeting system(s) which are reconciled. BUDGET PROCESS Automatic consolidation capability. Tracking of budget adjustments by account, area, program, funding source and reason. BUDGET OUTPUT Standardised reporting across the organisation. Ad-hoc reporting and drill down capability. Budgets are integrated with forecast and actual data, including the ability to report in a single document or le. Ability to create multiple iterations and scenarios in budget development.
It is essential that internal budget system and tools are re-evaluated on a periodic basis.
It is essential that internal budget system and tools are re-evaluated on a periodic basis (for example, every three years) so that they remain appropriate to the efcient and effective development of the internal budget.
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Involvement and commitment of senior management is critical to developing an effective internal budget.
Collaboration and trust between areas involved in the budget setting process is critical and provides less incentive for managers to inflate budgets.
14 Trend analysis refers to the comparative analysis of an organisations nancial information over time to identify patterns. Ratio analysis refers to the calculation and comparison of different sets of nancial information to identify relationships between different activities.
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PART 4
CONTENTS
4. Monitoring and evaluating budgeting performance
4.1. Monitor and report against internal budgets 4.1.1. Report budget performance 4.1.2. Assist managers assess budget performance 4.1.3. Phase the budget to provide meaningful comparisons 4.1.4. Analyse and explain budget variances 4.2. Revising the internal budget 4.2.1. Frequency of budget updates 4.2.2. Revising internal budget allocations 4.2.3. Understanding and tracking changes in internal budgets 4.3. Forecasting to manage gaps between budget estimates and actual results 4.4. Review and improve internal budget processes 4.4.1. Measure internal budget accuracy and timeliness 4.4.2. Identify opportunities for improvement
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44 44 45 45 47 50 50 50 51 52 54 55 56
Monitoring and evaluating budgeting performance 43
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Better practice organisations provide managers with details of actual results against budgets within three days of the close of each period. Standardising reporting across the organisation is ideal and is made easier when managers source actual and budget data directly from the same nancialsystem. In organisations with responsibility for capital expenditure projects or capital grant programs, monitoring budget estimates against actual results helps identify project variations (such as cost overruns or delays in key milestones) early enough to take corrective action. Routine reporting of detailed information on individual projects, such as milestones, percentage of completion and phasing of total projected costs, provides decision-makers with useful information on current and future impacts of project activity. In organisations with a large number of projects, this information should be presented on a summarised basis with more detailed information provided by exception, that is, where projects are not progressing to plan. To provide a comprehensive analysis of achievement against goals and targets, it is essential that nancial information is complemented by nonnancial performance indicators, including efciency and effectiveness measures.16
Better practice organisations provide managers with details of actual results against budgets within three days of the close of eachperiod.
Phasing the internal budget assists managers with the timely identification and analysis of budget variances.
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greater precision in forecasting the organisations working capital needs; and identifying ineffective or unnecessary expenditure within the organisation (for example, disproportionate unplanned capital or operating spending towards the end of the nancial year to meet annual budget targets). Organisations adopt differing approaches to budget phasing, based on the nature of the underlying budget item. Organisations often adopt differing approaches to budget phasing, based on the nature of the underlying budget item. For example, appropriation revenue, depreciation and some transfer payments can exhibit little monthly uctuation and, as such, a simple pro-rating of the annual budget is appropriate. However, for capital expenditure, revenue from independent sources and discretionary expense items, budget phasing should specically account for any foreseeable uctuations. Table 6 provides a list of factors that inuence phasing of common departmental budget elements (that is, factors impacting on the timing of revenues and expenditures).
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Operational managers are commonly in the best position to identify factors inuencing budget phasing as they are aware of the day-to-day operations of the organisation. Analysis of historical data may also assist managers identify trends, including seasonal impacts. Although generally more difcult to interpret, external measures also provide insight into the operating environment to support appropriate phasing of internal budgets. For example, the annual State of the Service Report17 prepared by the Australian Public Service Commission provides an analysis of demographic and structural patterns and trends in Australian Public Service stafng. This information is of value to organisations when identifying stafng trends and developments for inclusion in budget assumptions. External measures provide insight into the operating environment tosupport appropriate phasing of internal budgets.
Management of variances
Continuous improvement inbudgeting Continuous improvement in outcome, output and program delivery
Utilising variance information to assess the efciency and effectiveness of current service delivery mechanisms and improve current budgeting practices. Formal reviews of consolidated variance information on a periodicbasis enables organisations to challenge underlying budget assumptions and estimation techniques.
In addition to the focus on accountability for, and management of, individual budget variances, undertaking formal reviews of consolidated variance information on a periodic (say quarterly) basis enables organisations to challenge underlying budget assumptions and estimation techniques. The explanation of budget variances better supports and guides decision-making when accompanied with sufcient nonnancial information. Ideally, the explanation: focuses on key nancial results; refers to the inuence of underlying key planning assumptions (such as salary rates, indexation factors, and productivity gains) or drivers (such as quantity, price, and timing) rather than merely the nature of the variances; identies causes of variances, including the extent to which they are due to internal or external factors;
17 The most recent report was: Australian Public Service Commission (2007), State of the Service Report 200607, Canberra, November 2007.
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identies impacts on the organisation and key stakeholders in output terms (for example, programs impacted) with an assessment as to whether the impacts are permanent or temporary; clearly identies what, if any, action will be taken to address or manage variances and expected outcomes of those actions; and projects expected impacts on the areas, organisations and governments key nancial results for the current and future nancial years, including an assessment of risks associated with the projected outcome. It is important to evaluate whether the variance is temporary or whether it will have ongoing consequences. It is important to evaluate whether the variance is temporary (for example, due to timing) or whether it will have ongoing consequences. If the variance is ongoing, assessing the impact on the current year budget and future years will assist the organisation determine whether remedial action is required. Forecasting is a useful means of projecting revised outcomes without changing the underlying budget. Part 4.3: Forecasting to manage gaps between budget estimates and actual results provides further discussion. The availability of internal guidance on the analysis and explanation of budget variances helps ensure a consistent approach to commentary across the organisation. Figure 8 provides a framework for analysing and explaining budget variances. The extent of analysis and explanation undertaken is dependent on the size of the budget variance, its complexity and any likely impacts on the organisations current year or future activities.
2. UNDERLYING DRIVER
Explain expected outcome for the current and future nancial years.
6. EXPECTED OUTCOME
3. CAUSE 5. ACTION
Identify causes of the change in the underlying driver. Explain the impact on the organisations outputs and programs.
4. CURRENT IMPACT
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Consideration What is the impact on: resourcing; and nancial and nonnancial results.
2. Underlying driver
Are the underlying key planning assumptions still valid, or has the variance resulted from a discrepancy in: timing (for example, milestones); quantity (for example, full time equivalents, beneciary numbers); price (for example, salary rates, ination, average claim size); structure (for example, restructures); or revenue or expenditure recognition, measurement and disclosure policies.18
3. Cause
Was the variance caused by: events which were controllable or uncontrollable? a deliberate decision or unanticipated event? internal or external factors? supply or demand side issues?
4. Current impact
What outputs and programs are impacted? Without further action, is the variance permanent or temporary. Iftemporary, will it turn around in the current nancial year?
5. Action
Will the organisation: modify service delivery? renegotiate arrangements? rephase or redistribute resources? accept the variance and continue to monitor?
6. Expected outcome
After action has been taken, what is the expected outcome on: current year outputs and programs? current year resources? future year outputs, programs and resources?
Monitoring and evaluating budgeting performance
7. Projected variance
After action has been taken, what is the expected nancial impact on: agency resourcing? projected underspend or overspend? future year outputs, programs and resources? What risks are associated with the projection?
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Internal budget transfers should be authorised by senior management andbe counter-signed orrecommended by theCFO, or by an approved delegate in theCFOs unit.
19 A key consideration when transferring funds is whether this is permitted under the outcomes and outputs framework and appropriation acts.
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4.3. FOREcASTiNG TO MANAGE GApS BETWEEN BUDGET ESTiMATES AND AcTUAL RESULTS
Effective forecasting processes quickly identify and respond to changes in the external or internal environment and assist organisations manage gaps between targets and actual results. The purpose of a forecast is to provide an objective and realistic assessment of likely budget results on the basis of actual trends, current assumptions, and plans. It is a periodic estimate that reects changes and impacts actually being experienced within an organisation and within the wider community. Forecasting is more than just an extrapolation of variances. It provides managers with the tools and information to identify underlying drivers and, as a result, likely impacts on the current year and beyond. Forecasts provide an updated view of the likely outcome without amending the underlying budget. A budget forecast is typically prepared in circumstances where a budget-to-actual variation has been identied. Forecasts provide an updated view of the likely outcome without amending the underlying budget. However, a monthly review of forecasts is also a useful means of identifying potential budget variations that are anticipated but have not yet arisen. With a focus on responsiveness, the planning horizon for forecasting is typically less than that of the internal budget. Some organisations focus on the current yearthey nalise the annual budget, review it on a monthly basis and re-project the balance of the annual results. Better practice organisations use a rolling planning forecast that extends beyond the current nancial year, for example, a rolling horizon of six to eight quarters, adding new periods as the current period ends. Monthly or quarterly forecasts are prepared for the current year and quarterly forecasts for the next nancial year. The interpretation of forecasts is more effective when the organisation has considered the phasing of the original budget for the current and next nancial year. Similar to the internal budget process, an effective forecasting process is based on: using the same chart of accounts as budget and actuals reporting to help ensure consistency, although typically a simplied forecasting model would be employed by summarising and reducing the number of items comprising the forecast; the direct capture of forecasting inputs from operational managers who are closer to operational activities. In this way, operational managers own and are accountable for their forecasts; an integrated calendar which sequences budgeting, reporting and forecasting activities in a logical fashion; and rigorous governance processes and control over data to ensure reliability.
The interpretation of forecasts is more effective when the organisation has considered the phasing of the original budget for the current and next financial year.
20 Under a journalbased approach, each budget change is prepared using a separate journal document. This provides an audit trail showing the full impact of each adjustment on the budgeted income statement, balance sheet and cash ow statement.
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While the analysis of comparative results for the same period in previous years assists in the identication of trends that may affect current and forecast budget performance, a driverbased approach to forecasting is more likely to result in a forecast that reects the current underlying nature of the organisation and the external environment. For a forecast to be meaningful, its cycle time must be short enough that the results will be useful to management for developing contingency plans, taking corrective action and advising stakeholders. For example, if an organisation develops forecasts on a monthly cycle, but requires two weeks to develop each forecast, the results are unlikely to be useful. Unlike the budget, which is usually developed well in advance of the period to which it relates and requires rigorous layers of preparation, review and approval, the forecast is primarily a communication tool to support rapid and exible decision making. However, while fast reaction underpins useful forecasting, it remains important to also focus on making reasonably accurate predictions. It is possible to complete a forecasting process within three to ve days of actuals data being available. To achieve this, it is vital that organisations: understand that forecasting is a means of enabling them to manage the gap between budget estimates and actual results, rather than treating forecasting as another target-setting process; keep modelling calculations and relationships relatively simpleso that managers understand the model and do not get a false sense of precision; restrict their focus to those activities or budget elements that are material and most open to change (for example, discretionary costs or headcounts); forecast account aggregates or summaries. The forecast should be consistent with, but to a lesser level of detail to, the original budget or the general ledger. For example, the number of forecast line items is restricted to key line items so that more time can be spent on analysis; update the forecast on a periodic or ongoing basis, by exception, rather than through a complete bottom-up update; and provide concise commentary focused on insights and trends. Forecasting inherently contains a degree of uncertainty. As such, the use of range forecasts (expected forecast as well as upper and lower limits), scenario planning and sensitivity analysis can assist the organisation to understand the range of potential outcomes.21 Arguably the most important element of the forecasting process is that senior management promote a culture of honest forecasting; where forecasting reects a best estimate of the future. Do not dwell on the quality of the original estimates when analysing forecasts, rather focus instead on what action needs to be taken. Table 8 illustrates some of the key differences between budgeting and forecasting practices.
A driver-based approach to forecasting is more likely to result in a forecast that reflects the current underlying nature of the organisation and the external environment.
While fast reaction underpins useful forecasting, it remains important to also focus on making reasonably accurate predictions.
21 Scenario planning involves an investigation into the implications of several options. Sensitivity analysis involves an investigation into how projected performance varies along with changes in key assumptions for each option.
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22 While taken from the external budgeting environment, the example can be similarly applied to an organisations internal budget, particularly when there is a close alignment of internal and external budgeting updates as detailed in Part Two of the guide. 23 Refer to Department of Finance and Administration (2007), 2006-2007 Annual Report, Chapter 4, Table 1, which includes performance information for the outcome of Sustainable Government Finances.
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It is useful to compile internal metrics on the accuracy and timeliness of budget estimates to benchmark performance.
To assist in the review of budget development processes, it is also useful to compile internal metrics on the accuracy and timeliness of budget estimates to benchmark performance over time and, where possible, to similar organisations. Table 9 provides a listing of possible benchmarks. A better practice is to capture benchmarking information on an ongoing basis as part of internal budget processesfor example, inclusion of benchmarking questions in budget submission templates (such as the time taken to complete internal budgets).
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PART 5
CONTENTS
A Illustrative template guidelines for internal budget processes B Budget summaryillustrative structure C Internal budget processesbetter practice checklist Glossary of terms 58 60 64 70
Appendices
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58
Potential component Budgeted revenue Revenue recognition, measurement and disclosure policies Revenue classications Revenue allocation Treatment of one-off revenues Key assumptions Indexation and productivity arrangements Budgeted expenditure Expenditure recognition, measurement and disclosure policies Expenditure classications Costing principles Costing methodology Cost drivers Cash and accrual impacts Key assumptions and standard costs Indexation and productivity arrangements Capital budget Linkage to asset management plan Distinguishing between operating expenses and capital assets Asset categories Project costing
Budget rules
Framework for budget decisions Approval arrangements Group and organisational budget responsibilities Budget data entry processes New or additional funding submissions Revenue retention and carryover arrangements Treatment of budget savings and underspends Internal transfers Capital investmentbusiness case arrangements Minor capital requests Unforseen and urgent circumstances Use of contingency reserves
Appendices
Appendix ABudget Checklist Appendix BBudget Templates Appendix CFrequently Asked Questions Appendix DGlossary of Terms
Appendices
Appendix EContacts
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Key Priorities:
Priority one Priority two Priority three
Employees
Depreciation
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Output discussion
Output 4 ($55.7m) Output 3 ($202.8m) Output 2 ($85.9m) Output 1 ($138.9m) Output 2 ($85.9m)
Output 3 ($202.8m)
Program expenses
Transfer payment a 347 Subsidy program b 231 Grant program c 231 Grant program d 58 Grant program e 116 Subsidy program f 173 0 100
50 80 60 60 143 90
Program discussion
Departmental Budget
200 $m
300
400
500
Administered Programs
Departmental Budget
Appendices
61
Staffing levels
20X2 Budget 20X1 Estimated Actual Group A 565 568 Group B 534 545 Group C 260 250 Group D 220 181 Corporate Group 94 80 Total 1,673 1,624
Stafng discussion
Capital Budget
Actual 20X1 $m Capital Projects Project A Project B Project C Project D Minor purchases Total capital purchases Sources of funds Equity injection Depreciation reserve Other Total sources of funds 2.0 2.0 0.5 4.5 3.0 2.5 0.8 6.3 2.5 2.1 4.6 2.0 3.0 0.6 5.6 2.5 0.3 2.8 7.0 12.5 4.3 23.8 4.0 0.5 4.5 Budget 20X2 $m 3.0 3.0 0.3 6.3 4.0 0.6 4.6 2.0 3.0 0.6 5.6 2.0 0.8 2.8 4.0 3.0 4.0 10.0 2.8 23.8 20X3 $m Projection 20X4 $m 20X5 $m Total
$m
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Outputs
30
Output 3 ($40.4m) 20 Output 2 ($40.4m) Output 1 ($120.1m)
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Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Employees
Depreciation
Programs administered
Grant program e 58 Grant program c 231 0
18 143
Appendices
Administered Programs
Departmental Budget
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Part 2Embedding the internal budget into organisational planning and management Integrate the internal budget into organisational planning (Part 2.1) 1 2 3 4 Internal budgets closely align to strategic planning processes. Internal budgets are developed and approved at the same time as organisational plans. Internal budgets support each level of planning and performance management. Planning and budgeting processes source information from the same data sets.
Align internal budgeting with organisational roles and responsibilities (Part 2.2) 5 6 Budget allocations are clearly assigned to accountable ofcers or positions. Ofcers are only held accountable for budget allocations where they have the responsibility and authority to take action. Ownership of budget source data and key budget assumptions is clearly assigned within the organisation. Allocated budgets show the full net cost of services and distinguish between those items that the responsible manager has direct control over from those where control is indirect. The organisation has adopted a reliable costing approach to attribute indirect costs to outputs and programs. Operational managers are consulted in the establishment of cost attribution rules and identication of key cost drivers. All elements of the budget, including balance sheet items, are allocated to operational managers so that they can view the full nancial impact of their decisions.
10
11
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Established Developing 12 For any budget elements that have not been allocated to operational managers, a formal risk assessment has been undertaken to identify compensating controls and help ensure that each unallocated budget element is managed.
Absent
Integrate operational and capital budgets (Part 2.3) 13 The organisation has prepared a longterm assessment of its capital priorities and associated funding requirements (a capital budget). The timeframe covered by the capital budget encompasses the expected useful life of current and planned asset purchases. The capital budget links to, and ows from, the organisations asset management plan. The organisation uses the asset register to assess useful lives and replacement values to estimate capital replacement costs each year. Capital and operating budgets are integrated so that managers can assess the whole of life cost of capital investment decisions. The organisation requires all new major capital investment and capital replacement proposals to be supported by an appropriate business case.
14
15 16
17
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Align internal and external budgets (Part 2.4) 19 Consistency is maintained between the internal and external budgets throughout the external budget cycle.
Harmonise budgeting and reporting (Part 2.5) 20 21 Consistent policies and formats are adopted for reporting budget and actual information. Budget accounting policies are consistent with external reporting requirements and standards.
Engage stakeholders in internal budget processes (Part 2.6) 22 Planning and coordination of internal budget processes includes representation from across the organisation. The Chief Financial Ofcer reports directly to the Chief Executive on the development and management of the organisations internal budget.
23
Appendices
65
Established Developing 24 Managers understand and agree to their role in the internal budget process and their responsibilities have been clearly articulated in their performance agreements. Managers with budget responsibilities have been provided with training or guidance on the: organisations internal budget processes, including its budget policies and guidelines; operation of the organisations budget system; and Australian Governments budgeting and nancial management framework. 26 27 Operational managers are able to submit budgets on the basis of operational drivers. Managers with budget responsibility have access to appropriate systems and tools to assist in developing their budget. The organisation provides opportunities for managers with budget responsibilities to interact and share knowledge on budgeting practices. There is sufcient visibility of that part of the organisations internal budget attributed to whole of government activity.
Absent
25
28
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Part 3Developing and implementing a comprehensive internal budget Effective planning and coordination (Part 3.1) 30 The organisations internal budget policy articulates budget priorities and constraints and communicates the organisations framework for budget development and decision-making. The internal budget is prepared on a multiyear basis consistent with the organisations strategic and capital planning processes. The organisation has a timetable that: identies information required for internal budget processes; describes deliverables in detail; incorporates key checkpoints; and identies key deadlines and milestones. 33 The organisation clearly articulates responsibility for budget coordination and preparation.
31
32
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Established Developing 34 The organisation has appropriate contingency arrangements if key budget staff or systems are unavailable. The organisation has issued guidelines and instructions that contain: budget policies; priorities and assumptions on which the budget is based; roles and responsibilities; timeframes and deadlines; and protocols for budget development. Effective budget construction (Part 3.2) 36 The organisation uses a combination of topdown direction and bottom-up participation to develop the internal budget. The organisation has considered incorporating concepts of zerobased and performancebased budgeting into their budgeting approach. The organisation uses fully integrated budgeting and reporting software, which incorporates sufcient controls and functionality to meet the needs of users. Forexample: the system is subject to appropriate governance and review; changes to budget systems and tools are centrally governed, including changes to assumptions and calculations; adequate segregation of duties exists between budget input and budget approval; operational areas are able to enter data directly into the system; budget data is regularly backed-up; interfaces to other nancial systems are reconciled on a regular basis; the system supports tracking of adjustments; and the system provides managers with access to ad-hoc reporting tools and the ability to drill-down through the budget data. 39 The internal budget system and supporting tools have been evaluated in the last three years to assess if they remain appropriate for the efcient and effective development of the internal budget.
Absent
35
37
38
Appendices
67
Established Developing Effective oversight, review and communication (Part 3.3) 40 The organisation has established a budget committee to oversight internal budget processes. The Chief Financial Ofcer has sufcient authority to ensure that budget guidelines and policies are being complied with throughout the organisation at all levels. Operational areas are required to consult with the Chief Financial Ofcer on all signicant budgeting issues, including new budget initiatives. Quality assurance checks are undertaken before budgets are submitted to the budget committee or senior management for deliberation. Managers are consulted on changes to budget submissions before the conclusion of the internal budget process. Approved budgets are communicated to managers as soon as practicable after the conclusion of the internal budget process. The organisation prepares a summary of the approved internal budget for relevant stakeholders.
Absent
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43
44
45
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Part 4Monitoring and evaluating budgeting performance Monitor and report against internal budgets (Part 4.1) 47 The organisation monitors and reports budget estimates against actual results on a regular basis. Internal nancial reports are prepared for each level of accountability and summarised appropriately for each level of management. Managers are provided with details of actual results against budget within three days of the close of each period. Financial information is presented with operational (nonnancial) information to obtain a balanced view of performance. Monthly phasings are prepared to apportion the total approved budget in accordance with foreseeable patterns of expenditure (or revenue), including seasonal factors.
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Established Developing 52 Managers with budget responsibility analyse and explain budget variances on a regular basis. The organisation has a range of internal guidance to help ensure a consistent approach to analysing and explaining budget variances.
Absent
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Revising the internal budget (Part 4.2) 54 The organisation plans whole of organisation updates to its internal budget to coincide with the external budget cycle. Transfers between internal budget allocations are: adequately justied; appropriately documented; and authorised by senior management. 56 57 Changes to the budget are reported to those affected within the organisation. The organisation maintains accurate documentation of budget adjustments.
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Forecasting to manage gaps between budget estimates and actual results (Part 4.3) 58 The organisation prepares forecasts on a regular basis to identify and respond to gaps between budget estimates and actual results. The organisation prepares forecasts on a rolling basis that extend beyond the current nancial year. The forecasting process is completed within three to ve days of actual data being available. Senior management promote a culture of honest forecasting; that is the forecast reects a best estimate.
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Review and improve internal budget processes (Part 4.4) 62 The organisation regularly reviews the timeliness and accuracy of internal budget processes. Managers are consulted on the establishment of budgeting timeliness and accuracy indicators. Performance of internal budget processes is benchmarked over time and against similar organisations.
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Appendices
69
Glossary of terms
Activitybased budgeting Bottom-up budget An approach to budgeting that focuses on factors that drive costs and justies expenditure on the basis of activities. A budget which is developed from the bottom up where budget holders develop bids for resources and all bids are considered before decisions are made about the nal budget. A budget is the nancial plan of an organisations operations and a tool to control the allocation and management of resources. A budget of expenditure on capital items including noncurrent assets, investments, and internally developed assets such as software. The capital budget also includes expected sales or disposals of assets. The person who holds the highest ofce in the organisation and has ultimate responsibility for the organisations performance. The person with overall responsibility for nancial planning and nancial management activities in the organisation. This includes roles in strategic planning, development of accounting policies, budget development (internal and external), management reporting, nancial statement preparation and managing the Financial Management Information System. A cost that can be inuenced by its budget holder. An estimate of the actual nancial outcome for the balance of the current accounting period or a forthcoming period based on actual performance to date and other information available to the budget manager. An approach to budgeting where the previous years budget or actual results provide a base line for the current year. This base line is adjusted for known changes in activity level, ination or percentage based efciency targets. The internal budget shows an organisations expected nancial performance, nancial position and cash ows disaggregated by area of responsibility. Developing an internal budget involves making decisions on the allocation, use and administration of resources to achieve the organisations objectives. A budget of the revenues and expenses expected in the forthcoming accounting period. Managers whose main responsibilities are delivering the programs and outputs of the organisation. They are also referred to as line managers or program or output managers. The results, impacts or consequences of actions taken by the Government and Australian Government organisations on the Australian and international community.
Incremental or traditionalbudgeting
Internal budget
Outcomes
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Outputbased budgeting
An approach to developing a budget that is driven by the outputs required to be delivered by an organisation. The budget is established by understanding the relationship between the outputs and the resources required to deliver the outputs. The goods and services produced by organisations on behalf of government. An approach to developing a budget that is based on an assessment of what the organisation is trying to achieve. The activities required to achieve the outcome are then identied and costed (generally using activitybased budgeting). A budget that is imposed by the executive of the organisation with limited opportunity for the budget holder to participate in the budget setting process. In some organisations it is based on predened rules, agreed formulas or based on planned activity levels. The evaluation of performance by analysing differences between planned, budgeted or standard outcomes and actual expenses or revenues. A method of budgeting that requires each cost element to be specically justied, as though activities to which the budget relates were being undertaken for the rst time. Without approval the budget is zero.
Top-down budget
Variance analysis
Zerobased budgeting
Appendices
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