Reading 2 Developing and Managing Internal Budgets

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Reading 2 Developing and Managing Internal Budgets

Transcript of Reading 2 Developing and Managing Internal Budgets

  • HOLES PUNCHED SPINE

    Developing and Managing Internal Budgets

    Better Practice Guide

    Developing and Managing Internal Budgets

    www.anao.gov.au

    Z00

    3333

    5

    June 2008

    Better Practice Guide June 2008

    embedallocationphasingvariationforecastingbottom-up

    top-down

  • 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

  • iForeword

    Developing and managing internal budgets is a fundamental element of an organisations financial management framework. Effective internal budgeting will significantly 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 financial controls, and monitor and report financial performance. Effective internal budget processes, which underpin the efficient 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 financial 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 Office, 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.

    Ian McPheeAuditor-GeneralJune 2008

  • ii Developing and Managing Internal Budgets Better Practice Guide

    Contents

    Foreword i

    1. Overview of internal budget processes 21.1. Introduction 2

    1.2. Coverage 2

    1.3. Definition of internal budgeting and other common terminology 3

    1.4. Acknowledgements 3

    1.5. Internal budget processes 4

    1.6. Characteristics of effective internal budget processes 6

    2. Embedding internal budget processes into organisational planning and management 82.1. Integrate the internal budget into organisational planning 9

    2.2. Align internal budgeting with organisational roles and responsibilities 11

    2.2.1. Ensure clear accountability for all budget allocations 12

    2.2.2. Align organisational structures to outcome, output and program responsibilities 13

    2.2.3. Present full cost of service delivery 14

    2.2.4. Show full financial impacts of budget decisions 16

    2.3. Integrate operational and capital budgets 20

    2.4. Align internal and external budgets 24

    2.5. Harmonise budgeting and reporting 25

    2.6. Engage stakeholders in internal budget processes 26

    2.6.1. Obtain organisational support for the internal budget 26

    2.6.2. Supporting operational managers in internal budget processes 26

    2.6.3. Internal budget processes for whole of government initiatives 28

    3. Developing and implementing a comprehensive internal budget 303.1. Effective planning and coordination 30

    3.1.1. Set budget policies 31

    3.1.2. Establish budget timetables and milestones 32

    3.1.3. Allocate responsibility for budget development 34

    3.1.4. Document budget processes and disseminate guidelines 34

    3.2. Effective budget construction 35

    3.2.1. Budget top-down, bottom-up or both 35

    3.2.2. Determining the budget approach 36

    3.2.3. Automate internal budget processes 39

    3.3. Effective oversight, review and communication 41

  • iii

    4. Monitoring and evaluating budgeting performance 444.1. Monitor and report against internal budgets 44

    4.1.1. Report budget performance 44

    4.1.2. Assist managers assess budget performance 45

    4.1.3. Phase the budget to provide meaningful comparisons 45

    4.1.4. Analyse and explain budget variances 47

    4.2. Revising the internal budget 50

    4.2.1. Frequency of budget updates 50

    4.2.2. Revising internal budget allocations 50

    4.2.3. Understanding and tracking changes in internal budgets 51

    4.3. Forecasting to manage gaps between budget estimates and actual results 52

    4.4. Review and improve internal budget processes 54

    4.4.1. Measure internal budget accuracy and timeliness 55

    4.4.2. Identify opportunities for improvement 56

    Appendices and Glossary of terms 57A Illustrative template guidelines for internal budget processes 58

    B Budget summaryillustrative structure 60

    C Internal budget processesbetter practice checklist 64

    Glossary of terms 70

  • iv Developing and Managing Internal Budgets Better Practice Guide

  • 1Overview of internal budget processes

    Part 1

    Overview of internal budget processes

    Contents

    1. Overview of internal budget processes 21.1. Introduction 2

    1.2. Coverage 2

    1.3. Definition of internal budgeting and other common terminology 3

    1.4. Acknowledgements 3

    1.5. Internal budget processes 4

    1.6. Characteristics of effective internal budget processes 6

  • 2 Developing and Managing Internal Budgets Better Practice Guide

    Overview of internal 1. budget processes

    IntroduCtIon1.1.

    Budget processes within Australian Government organisations are guided by the requirements of the Financial Management and Accountability Act 1997 (FMA Act) and the Commonwealth Authorities and Companies Act 1997 (CAC Act). For example, Chief Executives of FMA Act agencies are required to manage the affairs of their agency in a way that promotes the efficient, effective and ethical use of the resources for which they are responsible. Similarly, directors of Australian Government authorities and companies are required to exercise care, diligence and business judgement in carrying out their responsibilities under the CAC Act.

    Since 19992000, Australian Government organisations have budgeted under the accrual-based, outcomes and outputs framework. The framework was designed to allow parliamentarians and the public understand the real cost of delivering benefits to the Australian community (outcomes) and goods and services (outputs). Within each organisation, the framework is intended to improve governance and public accountability by driving improvement in the way organisations manage resources and measure results. The adoption of accrual budgeting also aligned financial reporting and budgeting in Australian Government organisations, providing a consistent framework for the measurement and disclosure of budget estimates and actuals and providing enhanced accountability for financial performance.

    The 2002 Budget Estimates and Framework Review endorsed the accrual accounting framework but made several recommendations to improve the quality of financial information provided to Government.1 The progressive implementation of these recommendations over the last five years has seen a renewed emphasis on program budgeting and reporting (in addition to, and as part of, the accrual outputs and outcomes framework) as well as a reaffirmation of the continuing importance of cash information, particularly in terms of Government decision-making.

    In 2006, the Australian Government determined that all organisations in the Australian Government General Government Sector (GGS) must report annually on legislative compliance and financial sustainability to their responsible Minister and the Finance Minister. This included a certification from each Chief Executive (or Board) as to their organisations ability to meet existing program requirements within agreed resources, including the management of capital and other long-term assets and liabilities. The Certificate of Compliance program has reinforced the importance of organisations adopting a longer-term focus in their internal p