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: [email protected] 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 planning and budgeting considerations.

Coverage1.2.

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 specifically cover those resources administered on behalf of Government. However, many of the better practices outlined in the guide also apply to administered items.

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.


defInItIon of Internal budgetIng and other 1.3. Common termInology

The internal budget shows an organisations expected financial performance, financial position and cash flows 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.

The guide uses common budget terms outlined below. A comprehensive glossary is at the end of the guide.

Budget allocation Distribution or disaggregation of an organisations budget to its various work areas, outputs or programs.

Budget phasing Budget phasing represents the pattern of expenditure (or income) over the budget period (for example, over the twelve months of an annual budget).

Budget transfer Moving budgeted funds from one group to another group or from one account to another account.

Budget variance Difference between a budget projection and an actual result. Budget variances can be expressed in absolute or percentage terms.

Cost attribution Allocation of costs to a particular group, output or program based on pre-defined rules and drivers.

Direct costs A cost that can be directly attributed to an activity or the delivery of an output, program or project (for example, costs associated with employees assessing grant applications under a discretionary grant program).

Indirect costs A cost that cannot be directly attributed to an activity or the delivery of an output, program or project (for example, costs associated with employees providing administrative services across an organisation).

aCknowledgements1.4.

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 Office;

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.


Internal budget ProCesses1.5.

Effective internal budget processes typically involve a series of integrated activities designed to align: organisational planning; financial responsibility, accountability and authority; budgeting and reporting; resource allocation; and the monitoring and evaluation of budgeting performance.

Accordingly, the guide examines internal budget better practices across the following broad dimensions:

Part Two: Embedding internal budget processes into organisational planning and management;

Part Three: Developing and implementing a comprehensive internal budget; and

Part Four: Monitoring and evaluating budgeting performance.

Figure 1 illustrates the structure and coverage of the guide.

Figure 1: Integrated internal budget processes

Par

t Tw

o Embedding internal budget processes into organisational planning

Align internal budget with roles and

responsibilities

Integrate operational and capital budgets

Align with external budgeting and

reporting

Engage stakeholders in internal budgeting

Par

t T

hree Developing and implementing a comprehensive internal budget

Effective planning and coordination

Effective budget constructionEffective oversight, review and

communication

Par

t F

our Monitoring and evaluating budgeting performance

Monitor and report against internal

budgets

Revise the internal budget

Forecasting to manage gaps between estimates and actual

Review and improve internal budget

processes


Part Two of the guide discusses the link between organisational planning and internal budget processes and the role of the internal budget in financial management.

Planning, budgeting and reporting processes ideally have a cascading effect within an organisation as strategic goals and priorities flow to operational areas. It is important to allocate internal budgets consistent with the organisations financial management framework while, at the same time, aligning with managers specific 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 long-term 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 efficiently 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 refine internal budget processes.


CharaCterIstICs of effeCtIve Internal 1.6. budget ProCesses

Effective internal budget processes incorporate the key characteristics listed in Table 1.

Table 1: Key characteristics of effective internal budget processes

CharacteristicReference in guide

1 Internal budget processes are embedded in organisational planning and align resources with organisational priorities.

Part 2.1

2 Budget allocations and accountabilities align with managerial responsibilities and authority.

Part 2.2

3 Operational and capital budgets are seamlessly integrated and multi-year focused.

Part 2.3

4 The internal budget is consistent with the external budget and this consistency is retained throughout the budget cycle.

Part 2.4

5 The recognition, measurement and disclosure of internal budgets is harmonised with reporting.

Part 2.5

6 Relevant stakeholders are engaged throughout internal budget processes. Part 2.6

7 Internal budget processes are carried out in accordance with clearly defined expectations and assumptions, a coordinated calendar of activity and well-documented and communicated policies and procedures.

Part 3.1

8 The internal budget is constructed with direct input by operational managers in accordance with strategic targets and priorities established by senior management.

Part 3.2

9 Internal budget processes are overseen and formally approved by senior management and subject to rigorous quality assurance processes.

Part 3.3

10 Managers are provided with relevant, timely and accurate budget-to-actual information appropriate to their level of responsibility and, in turn, provide clear and consistent feedback in a timely manner about underlying causes and effects of budget variations.

Part 4.1

11 Internal budget revisions are limited to approved formal updates to retain clear accountability for budgeting performance.

Part 4.2

12 Rolling forecasts are prepared to quickly respond to changes and to manage the gap between budgeted and actual revenues and expenditure in a timely manner.

Part 4.3

13 The organisation adopts a continuous improvement culture, and has an ongoing training program, to help ensure the internal budget remains relevant to the organisations requirements and priorities and is constructed in the most efficient and effective way.

Part 4.4

Appendix C includes a checklist of better practices covered in this guide.

7Embedding internal budget processes

into organisational planning and managem

ent

Part 2

Embedding internal budget processes into organisational planning and management

Contents

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


Embedding internal budget 2. processes into organisational planning and management

Organisations use internal budgets for financial planning, to establish performance expectations and to set financial controls. In addition, the internal budget can be used for purposes such as identifying costs and determining prices (for example, as part of cost recovery arrangements) and assessing individual managers financial performance.

The internal budget is a core element of an organisations planning and management framework. As shown in Figure 2, an integrated planning and management framework is characterised by close relationships between planning and budgeting and between budgeting and reporting, both within the organisation and externally.

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.

better practice

organisations embed

internal budget

processes into

organisational planning

and management.

Figure 2: Integrated planning and management framework

Internal Budgeting

Internal Reporting

Organisational Planning

External Budgeting

External Reporting

9Embedding internal budget processes


ent

Integrate the Internal budget Into 2.1. organIsatIonal PlannIng

The strategic (or corporate) plan sets long-term goals and priorities which establish the direction for operational plans within the organisation. Typically, the strategic planning horizon encompasses the next three to five years, although a longer horizon may be appropriate for significant government programs and for capital planning. Ideally, the strategic plan describes and quantifies the direction of the organisation and is endorsed by stakeholders in terms of goals, objectives and timing.

Organisations are better positioned to meet their objectives where resources are deployed consistent with organisational priorities. Closely aligning internal budget processes with strategic planning processes will help achieve this. Effective alignment means that organisational plans will be supported by internal budgets which establish funding expectations for the current year and future years consistent with the organisations goals and priorities. In this light, organisational plans have an appropriate financial basis and will be costed in a manner consistent with the delivery of the plan. The development of the internal budget enables an assessment of the extent to which goals are attainable or whether change is required.

By integrating the budget setting process into the planning process, organisations are better positioned to determine budgets and allocate resources based on operational needs and consistent with approved strategies and priorities. Effective integration also promotes better understanding among managers of how their individual activities and budgets fit into organisation-wide responsibilities.

The strategic plan is typically supported by a range of operational and specific plans, including business plans, group operational plans, workforce plans, capital plans and individual performance agreements. Each plan or agreement translates one or more areas of the strategic plan into detailed operational objectives, activities and accountabilities. The planning process requires clarity about priorities, targets and metrics such that strategic goals can be cascaded down into each plan and agreement. The internal budget should similarly support each level of planning and performance management within the organisation.

Better Practice Tip: Link the internal budget to workforce planningThe employee budget forms a large proportion of the overall internal budget of many Australian Government organisations. As such, assumptions made in relation to staffing levels and staff movements can have a significant impact on the overall budget.

As many organisations face increasingly tight labour markets and higher staff turnover, it is becoming more difficult to prepare a realistic estimate of staff numbers in the internal budget, especially for longer-term projections. A key risk in internal budget processes is that budget assumptions are biased towards current market conditions, including around workforce availability.

The establishment of a workforce plan is an effective way in which organisations can formally plan for the future workforce and link workforce numbers to organisational needs. The workforce plan sets out the organisations priorities and strategies for identifying, achieving and maintaining staffing numbers and skills to achieve organisational objectives.

The workforce plan can assist the internal budget by providing a reasonable basis for key employee-related assumptions underpinning budget calculations, including a longer-term perspective on workforce numbers.

by integrating the budget

setting process into the

planning process,

organisations are better

positioned to determine

budgets and allocate

resources based on

operational needs and

consistent with approved

strategies and priorities.


One means of establishing top-down direction in the budget setting process is to use the first-year 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.

Plan Budget

Strategic plan (also called Corporate plan): High-level plan that identifies the organisations role, key goals and targets over the medium to long term (for example, three to five years).

Budgeted financial statements: Key statements showing financial performance, financial position and cash flows. Aligns to external budget.

Operational plan: Outlines expected operational activities to deliver annual strategies.

Operational budget: Shows the impact of operating decisions on the organisations sources of income, expenses and cash flows.

Workforce plan: Identifies current and future workforce requirements by assessing the workforce required and workforce available to support the organisations objectives.

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.

Asset management plan: A multi-year plan for capital asset acquisition, maintenance and retirement.

Capital budget: Shows planned asset purchases, construction and disposals.

Group plans: Outline expected activities to be undertaken by each group.

Group budgets: Outline expected resource allocation and revenue sources for each group.

Individual performance agreements: Outline expected performance for the year including targets and planned development.

Budget allocations: Show allocated budget for particular positions or areas of responsibility.

Figure 3: Integrating the internal budget into organisational planning

Workforce Plan

Operational Plan

Strategic Plan

Planning

Asset Management

Plan

Group Plans

Individual Performance Agreements

Employee Budget

Operational Budget

Budgeted Financial

Statements

Budgeting

Capital Budget

Group Budgets

Budget Allocations

11

Embedding internal budget processes


ent

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 finance area is central to the integration of strategic planning and budget setting processes. The finance area can help operational areas translate strategic goals and performance plans into specific budget elements and drivers. The role of the finance area in supporting operational managers is discussed further in Part 2.6: Engaging stakeholders in the internal budget.

alIgn Internal budgetIng wIth organIsatIonal 2.2. roles and resPonsIbIlItIes

The internal budget is allocated to areas within an organisation to facilitate detailed planning and performance management and enforce internal accountability. Budget allocations will be more effective when they reflect the organisations planning and management framework.

Participants in internal budget processes typically include:

senior management, responsible for the delivery of outputs and programs and accountable for the performance and financial viability of the organisation as a whole;

operational or line managers, responsible for the delivery of specific outputs and programs as well as financial management of their group or team; and

business support managers, including the Chief Financial Officer, responsible for the delivery of certain support functions (such as the provision of financial advice) as well as financial management of their own group or team.

It is important that internal budget allocations are consistent hierarchically such that each lower-level budget can be aggregated consistent with the organisations management and accountability structure. However, this does not require the same level of detail to be reported at each level of management. It is preferable for relevant summaries of the internal budget to be prepared for each level of management, such that:

budget reporting to senior management is high-level and strategically focused, for example, providing budgets for the organisation as a whole with summarised results for each organisational area, output and program; and

budget reporting to operational and financial managers is more detailed than that provided to senior management to enable these managers to identify factors that influence budget results.

Ideally, the internal budget is fully allocated across the organisation. Where the internal budget is not fully allocated there is a risk that there may be components of the budget for which no one has taken responsibility. Similarly, where budget allocations do not reflect organisational roles and responsibilities, there is a risk that managers are responsible for multiple allocations of the same budget or for allocations over which they have no control.

In allocating the internal budget across an organisation, it is prudent to:

clearly assign each budget allocation to an accountable officer with the allocated budget limited to those items where the officer has the responsibility, and the associated authority, to take action;

align budget allocations with output and program structures in addition to organisational structures (for example, cost centre structures);

allocate the full cost of goods and services across the organisation, distinguishing between those items that the accountable officer has direct control over from those where control is indirect; and

allocate all elements of the budget, including balance sheet items, so that officers can view the full financial impact of their decisions.

These practices are illustrated in Figure 4 and explained further below.

budget allocations will

be more effective when

they reflect the

organisations planning

and management

framework.

Ideally, the internal

budget is fully allocated

across the organisation.


Ensure clear accountability for all budget allocations2.2.1. Budget allocations will be more effective when they are assigned to an accountable officer or position. General or broad statements of budget management responsibility are likely to create uncertainty about performance expectations and measures of accountability. Conversely, clearly articulated and communicated budget management responsibilities for financial and operational managers and staff helps ensure these responsibilities are widely and consistently understood.

An important consideration for organisations is whether the full budget is allocated across the organisation or whether a component is retained centrally by senior management, for example, as unallocated contingency. The retention of a contingency reserve gives an organisation flexibility to cope with uncertainties and to allow adjustments for unanticipated expenditures. However, there is a risk that the reserve is perceived as a slush fund that can be called upon when areas need additional funding. Organisations are also likely to encounter difficulties in allocating contingency reserves to outputs and programs, thereby reducing the accuracy of output and program budgets. As such, it is prudent to keep unallocated contingencies to a minimum and for specific purposes. It is also useful for organisations to have clear protocols in place to specify criteria under which contingency amounts can be accessed.

Figure 4: Better practices in allocating the internal budget

Accountability

Authority

Full Costs

Budget Allocation

Income and Expenses

Cash Flows

Assets and Liabilities

Group

Program

Output

Indirect Costs

Direct Costs

Responsibility

Clearly assign accountability. Align with managerial responsibility and authority

Align organisational structures to output and program responsibilities

Show the full cost of service deliveryShow the full

financial impacts of budget decisions

13



ent

Ensure budget accountability aligns with responsibilities and authority

Officers should only be held accountable for budgets that they controlthat is where they have authority to make decisions, allocate resources and commit the organisation to a course of action. Accountability is enhanced when consistency is maintained between budget allocations and the organisations overall financial management framework, in particular the organisations delegations framework. It is often desirable to include accountability for budget performance in an officers individual performance agreement.

Managers are more likely to take ownership of their allocated budget where they have input into developing the budget as opposed to having a budget attributed to them.

In addition to the allocated budget, responsibility for underlying budget sources and budget assumptions (for example, standard costs) should also be clearly assigned within an organisation to help ensure this data is kept up-to-date. Typically, responsibility for these items would reside in the finance area.

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

Public sector managers have many responsibilities, including to:

allocate funds in accordance with the organisations funding limits and delegations;

implement and administer government programs;

contribute to the delivery of the organisations outputs; and ultimately

contribute to the achievement of the governments desired outcomes.

An effective internal budget structure helps managers plan for, and measure performance against, each area of responsibility. This provides managers with a clear understanding of, and commitment to, the organisations goals.

Aligning organisational structures with output and program responsibilities reduces complexity in linking resources to output and program delivery, as:

managers are held accountable for one rather than multiple budgets;

the time required to compile the budget is reduced as consolidation points are reduced;

organisations can more readily measure the cost of managing administered programs (that is, there is less attribution); and

there is a direct link between external appropriation sources and internal resource allocation and between external performance measurements (in the Portfolio Budget Statements) and internal budget activities.

Better Practice Tip: Align organisational structures with outcomes, outputs and programsThis degree of alignment best defines 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.

officers should only be

held accountable for

budgets that they

control.


as well as contributing to specified outputs and programs. Other organisations identify individual managers with specific responsibility for managing outputs and programs across a range of organisational units.

Present full cost of service delivery2.2.3. Aligning organisational structures to outputs and programs is less straightforward for internal enabling activities (such as corporate support services) and fixed organisational costs (such as rental costs). Ordinarily, these activities contribute to multiple outputs and programs. Nonetheless, including indirect costs in output and program budgets is necessary to present the full cost of delivering services. One approach to allocating indirect costs to outputs and programs is to require each corporate area to identify the program and output they worked on. However, it is often simpler and more cost-effective for an organisation to adopt attribution rules to allocate indirect costs to output and program budgets.

As shown in Table 2, a range of approaches are available for attributing direct and indirect costs to outputs and programs.3 The most appropriate approach to use will depend on the materiality of indirect costs, availability of information and nature of the organisations activities, outputs and programsthe benefits of better information must outweigh the costs of collecting it. Many Australian Government organisations have automated cost-attribution systems to help support transparent and consistent approach to allocating costs to outputs and programs.

Table 2: Approaches to attributing costs

Attribution basis Description Suggested use

Time recording systems

Employee costs and associated costs in operational areas are attributed to output and program (or project) based on a time recording method (for example, timesheets). Indirect employee costs (for example, corporate areas) are also allocated based on timesheet activity or are based on another attribution method.

Where staff costs are a significant proportion of overall costs.

In project-based organisations with a large number of small projects.

In organisations recovering costs of activities.

Records of usage

Records are kept on the use of infrastructure, plant and equipment, with costs attributed on the basis of this information.

Where capital usage costs are a significant proportion of overall costs.

Activity snapshot

Cost attribution is based on an analysis of activities over a representative period, rather than continuously. Examples of activity-snapshot approaches include time and motion studies and collecting timesheets for a representative period.

In organisations with a small number of large projects or where the pattern of activity is fairly consistent over the course of a year.

3 Management Advisory Board (1997), Beyond bean counting: effective financial management in the APS1998 & beyond, Part 3, pp. 7581, contains further discussion on cost attribution approaches.

Including indirect costs

in output and program

budgets is necessary to

present the full cost of

delivering services.

15



ent

Attribution basis Description Suggested use

General ledger cost centre structures

Costs directly attributable to an output or program are identified based on the cost centre or profit centre structure in the general ledger. Indirect costs are then attributed using cost drivers or through another of the approaches listed in this table.

In organisations where there is a close alignment between organisational structures and outputs or programs (that is, a one-to-one mapping).

Activity Based Costing (ABC)

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 and programs.

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.

Proxy cost drivers

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.

In policy or process oriented organisations with a small range of activities and where indirect costs are not a significant proportion of the overall cost base.

Internal user charging or Service Level Agreements (SLA)

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 regular basis.

In organisations where indirect costs are a significant proportion of the organisations overall cost base.

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.

In organisations where indirect costs are immaterial.


In addition to reflecting 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 and take ownership of their allocated budget.

The following case study provides an example of the attribution of indirect costs.

Case study: Department of Environment, Water, Heritage and the Arts

A simple and transparent approach to cost attribution

Following a cost-benefit analysis of alternate indirect costing methodologies and taking into account its operational environment, the department concluded that the most appropriate attribution approach for the purpose of overhead allocation was through the use of a single cost-driver based on workpoints (floor space). A workpoint is a point at which a person is able to work, regardless of whether a personal computer is there. It includes storage areas but does not include common areas. In most cases, a workpoint can be attached to an activity.

Indirect costs (that is, indirect activity centres) are attributed to direct activity centres through a two-phased attribution process. Firstly, indirect activities that directly support more than one activity within an output or program (for example, divisional executive) are attributed to the relevant output and program direct activity centres. Secondly, indirect activities that support all programs and outputs (for example, the Office of the Secretary) are attributed to direct activity centres based on workpoints.

Activity centre budget reports show separately those revenues and expenses that relate to direct activities from those items or activities used by the output or program but where control is indirect (indirect activities).

The approach provides a reasonable and cost-effective attribution to support accountability and decision-making by showing the full cost of outputs and programs.

Show full financial impacts of budget decisions2.2.4. Consistent with the external budget, Australian Government organisations generally prepare internal budgets which include income statements, balance sheets and cash flows. However, a key consideration for most organisations is the extent to which all elements of the budget are allocated. For example:

whether non-cash items such as depreciation are allocated to operational areas;

the extent to which budgeted revenues (for example, appropriation and revenues from independent sources, including sales proceeds) are allocated to operational areas;

whether assets and liabilities are allocated to operational areas or maintained centrally; and

the extent to which operational areas are held accountable for cash estimates, accrual estimates or both.

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.

17



ent

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.

Benefits of allocating integrated budgets (that is, inclusive of income statement, balance sheet and cash flow impacts) to operational managers include:

the full financial 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 longer-term fiscal challenges.

The following example illustrates an effective approach for allocating depreciation to operational areas.

Example: Allocating depreciation to operational areasDepreciation is a non-cash expense which reflects the allocation of the cost of using existing assets over their useful life. The allocation of depreciation provides operational managers with a more complete understanding of the cost of providing services. Being charged with this cost gives managers greater incentive to identify surplus assets and assess useful lives so that the depreciation charge reflects planned asset usage. There is also greater incentive to consider alternate acquisition options, especially in circumstances where assets are unlikely to be fully utilised.

Organisations can support and encourage managers to consider the cost of depreciation when making resource decisions by:

separating depreciation on assets managed by each operational area from depreciation on assets used (but not managed) by the operational area, such as head office buildings or fit out. For budget collection and reporting purposes, managers are only required to act on managed assets;

deriving depreciation from the capital budget so that managers can observe the operational impact of their investment decisions;

distinguishing between capital expenditure on asset replacement (that is, the depreciation component) and asset expansion;

integrating the depreciation budget with the asset register so that managers can drill-down to the underlying assets; and

separating depreciation by class and by nature of funding. For example, some Australian Government organisations are responsible for specialised assets or heritage assets which are long-lived or irreplaceable and subject to specific maintenance and funding agreements. The depreciation associated with these assets should be shown separately from the depreciation charged on other assets.

The above practices assist in providing managers with the full cost of delivering their services but do not require managers to calculate or estimate depreciation.

the degree of devolution

of budget elements is

likely to depend on the

nature, size and

distribution of the

organisations assets

and liabilities.


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, 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 flow 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 flow 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 pre-determined 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.

Case study: Department of the Environment, Water, Heritage and the Arts

A fully integrated budgeting and reporting system

The Department of the Environment, Water, Heritage and the Arts (DEWHA) has created an integrated budgeting and reporting system that supports budgeting and reporting by organisation, program and output. Key aspects of the departments integrated internal budget process are discussed below.

An established budget framework

The DEWHA budget process is guided by a framework of financial management policy documents which articulate the departments principles and approaches to budget management and reporting. These documents include budget policies for the recognition

the key challenge

associated with the

allocation of full accrual

budgets is the ability of

nonfinancial managers

to understand the

interrelationship

between the financial

statements and the

different measures for

which they are

accountable.

Continued on next page

19



ent

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 significant senior executive involvement in, and support for, the framework and system.

Defined roles and responsibilities

The DEWHA financial management framework is underpinned by a shared commitment to financial management across the department. To ensure a consistent approach to financial management, the department has a documented policy which clarifies roles and responsibilities in budget management and reporting. This policy is translated into operational budget guidelines for each internal budget update.

Within the department, budget processes are overseen by the Budget, Finance and Strategy Committee. The Committees terms of reference, including roles, responsibilities and accountabilities, are clearly documented in a charter approved by the Secretary.

A flexible financial budgeting and reporting structure

A key requirement for the departments financial reporting system was the ability to budget and report against multiple accountabilities, including organisational unit, program and output.

To achieve these objectives, the department established a budgeting and reporting structure built around activity centres. An activity centre represents a particular activity that is sufficiently specific that it can be mapped to an organisational unit, output and program in a one-to-one relationship.

Departmental

Organisational Unit

Administered

Program

Special Public

Moneys

Sub-output

Activity Centre

Continued on next page


Continued from previous page

Activity centres are then classified 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 flexibility to aggregate activity centre budgets according to different reporting hierarchies, for example, by program, output and division.

Benefits

All budget and financial 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.

Integrate oPeratIonal and CaPItal budgets2.3.

Capital investment decisions have long-term implications, potentially affecting an organisations capital structure and influencing its ability to change operations in the future. Capital investment decisions also commit the organisation to a stream of costs that extend beyond the current year (through depreciation and maintenance costs). As such, having close integration between the capital budget and the operational budget helps ensure an understanding of the long-term consequences of budget decisions.

The management and associated funding of an organisations capital requirements involves planning processes that span a number of years. Because of the uneven pattern of capital expenditure, it is important that sufficient funds are created internally (for example, by creating depreciation reserves) to finance replacements. A planned cycle of acquisition and replacement will avoid funding difficulties caused by several major investments taking place in a single financial year and large-scale obsolescence of equipment.

Capital budget processes provide a long-term assessment of an organisations capital priorities and associated funding requirements. The capital budget identifies all new asset purchases (that is, expenditure on items that are expected to provide benefits for more than one year), all planned disposals and all costs that are to be capitalised, such as enhancements to existing assets or internally developed assets such as software. The capital budget typically includes:

an overview of proposed capital expenditure by year across the capital planning period;

an overview of sources of funding by year (for example, depreciation reserve, reallocated funds and external funding), and accumulated impacts on existing capital reserves such as quarantined depreciation funding; and

a summary listing of proposed capital projects by category, including explanatory detail such as timeframes and milestones.

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.

Figure 5 illustrates the effective integration of the capital budget into organisational planning and management to develop the overall budgeted financial statements.

Integration between the

capital budget and the

operational budget helps

ensure an understanding

of the longterm

consequences of budget

decisions.

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.

21



ent

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 long-term 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 flows 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.

Better Practice Tip: Link the capital budget to the asset registerUse the asset register to construct a long-term 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-to-day 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.

It is important that the

capital budget directly

links to, and flows from,

the asset management

plan.

Integrating the operating

budget and capital

budget enables

managers to more

readily assess whole of

life costs of purchasing

decisions.

Figure 5: Integrated capital planning and budgeting

Business Case Capital Bid

Process

Operational Plans

Capital Budget

Operational Budget

Long-term capital priorities

Capital requirements

Major Investment decisions

Operational priorities

Strategic Plans

Key priorities

Asset Management

Plan

Off-balance sheet capital decisions

Depreciation

Capital maintenance

Asset Register

Replacement requirements

Replacement costs


business cases: given the multi-year significance 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 benefits those deliverables will support;

identify sources of funding;

describe the implementation in sufficient detail to provide confidence 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 specification and implementation plan to help ensure that the proposed approach is an appropriate way to fulfil 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.

23



ent

Case Study: National Library of Australia

Governance over capital budgeting

An important aspect of any capital asset replacement process is that effective governance arrangements are in place throughout the organisation. The National Library of Australia (the Library) achieves this through various sub-committees of the Corporate Management Group. There is a Collection Management Committee, a Building Works Coordination Committee and an Asset Management Committee. The Library Council is responsible for endorsing overall acquisition programs and ministerial approval is required for any individual acquisitions or disposals in excess of $1 million.

Each of the three committees meet at least quarterly throughout the year to develop, amend and monitor progress against annual asset programs. Meetings are also timed to coincide with overall strategy review and budget timetables. Some staff are members of one or more committees, which helps provide an integrated approach across capital and operational budget requirements. Other than the Collections Management Committee, there is a representative from each division on each committee and that person is responsible for presenting divisional proposals and discussing progress against agreed plans.

In October or November each year asset bids for the upcoming year are finalised by the various committees and presented to the Corporate Management Group for consideration as part of the Librarys strategy and budget processes. Major capital projects are managed through the Librarys Balanced Scorecard system.

Planning for capital replacement

As most long-lived assets require active management beyond the budget and forward years it is important to take a long-term view of their ongoing maintenance and replacement. Within the Library, the Building Works program is based on:

a 15 year strategic building asset plan which is revised every three years to identify replacement and maintenance requirements of the various components of the building over that period;

a strategic building master plan that focuses on library service issues (for example, collection delivery issues, reading room locations, public program requirements and staffing issues);

a collection storage plan that aims to optimise collection storage within the Library buildings and identifies when additional external collection storage is required; and

a conservation management plan.

The Library also has a separate building management system that identifies building asset replacement and maintenance requirements. This system is also used to help manage associated contracts.

Any additional whole of life (for example, maintenance) and depreciation expenses are built into budget proposals as required. Some capital funding is held in reserve each year to take account of major purchases required in future years. These quarantined funds are considered as part of budget processes and are held for major categories of assets and the duration of asset management plans.


alIgn Internal and external budgets2.4.

Organisations within the Australian Government General Government Sector (GGS) are required to prepare external budgets in accordance with the Australian Governments budget reporting standards.4 The timing of budget updates is determined by the governments annual budget cycle and includes the main Budget, a mid-year update approximately six months after the release of the Budget, and a revised update before the release of the next years budget. Additional updates may also be required to support whole of government budget processes and an update is required when an election is called.

The external budget is prepared by each GGS organisation to support the Governments fiscal strategy and budget position through a detailed analysis of financial and performance information at the portfolio and organisational level. The external budget also provides the basis on which GGS organisations are appropriated. The external budget is tabled in Parliament and reported publicly.

It is critical that each organisations internal planning and budgeting processes deliver an internal budget that is consistent with the organisations external budget. The benefits of such consistency include:

the organisations internal managers are accountable to the Chief Executive (or Board) on the same basis as the Chief Executive (or Board) is accountable to the Minister;

the internal budget is aligned to the Governments priorities;

information compiled as part of the external budget process (for example, information on trends, risks and opportunities in the external community as well as whole of government impacts) can be used to guide development of the internal budget; and

the external budget is supported by a detailed internal analysis which takes into account available resources and the perspective of operational managers.

Alignment of internal and external budgets also provides greater consistency in budget reporting between Australian Government organisations, as the external budget is prepared on a consistent basis across Government. As a consequence, organisations are better able to benchmark budget processes and results against similar Australian Government organisations to identify potential improvements and efficiencies.

The use of a coordinated plan and timetable that is consistent with the Australian Governments budget cycle assists organisations to integrate internal and external planning and budgeting processes. Although it is not always possible due to the timing of government decisions and other changes in the external budget, it is preferable to complete the internal budget as near as possible before the release of the external budget. Part 3.1.2: Establish budget timetables and milestones provides further discussion.

In addition to a coordinated plan, it is important that there is consistency in recognition, measurement and disclosure of the internal and external budget, including consistency in accounting policies and the definition of the consolidated budget entity.

As illustrated in Figure 6, having consistent internal and external account structures and reporting formats can help avoid the need to remap or recalculate results when moving between the internal and external budget.

Part 4.2: Revising the internal budget provides further relevant discussion on maintaining consistency between the internal and external budgets throughout the budget cycle.

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.

It is critical that each

organisations internal

planning and budgeting

processes deliver an

internal budget that is

consistent with the

organisations external

budget.

the use of a coordinated

plan and timetable that

is consistent with the

australian governments

budget cycle assists

organisations to

integrate internal and

external planning and

budgeting processes.

25



ent

harmonIse budgetIng and rePortIng2.5.

Consistency between budgeting and reporting is critical to enable senior management to scrutinise the internal budget fully and accurately. Where consistent policies and formats are adopted for reporting budget estimates and actual results, the organisation has greater certainty in decision-making that actual-to-budget variances are due to operational factors rather than accounting treatments.

The link between budgeting and reporting is enhanced when organisations prepare a single budget and reporting plan which:

sequences budget and actuals reporting activities in a logical fashion;

identifies key deadlines relevant to each process;

identifies dependencies and relationships between budgeting and reporting activities; and

allocates resources and responsibilities within the finance area and across the organisation to provide for peak periods when budgeting and ex post reporting periods overlap.

In addition to an integrated budgeting and reporting cycle, it is important that organisations present budget and actuals reports on the same basis. This includes:

harmonising the revenue and expenditure recognition, measurement and disclosure policies for the internal budget with generally accepted accounting principles as reflected in the organisations audited financial statements;

adopting consistent reporting hierarchies for both ex ante (budget) and ex post (actuals) reporting;

applying a standardised chart of accounts and reporting formats for both ex ante and ex post reporting; and

using tools and reporting templates which are able to report budget, forecast and actuals data in a single document or file.5

Where possible, it is desirable to avoid changing reporting structures across financial years and budget cycles so that historical information does not lose its relevance for current budgetary analysis and decision-making. Where changes are required (for example, due to new accounting policies or

5 Part 4.1: Monitor and report against internal budgets provides further discussion on reporting of actual results against budget.

where consistent

policies and formats are

adopted for reporting

budget estimates and

actual results, the

organisation has greater

certainty in

decisionmaking.

It is important that

organisations present

budget and actuals

reports on the same

basis.

Figure 6: Integrating the internal and external budget account structure

Internal budgets are prepared and reported at a level of detail sufficient to meet operational requirements.

Internal budgets are consolidated and reported at a level of detail sufficient to meet senior management planning and reporting requirements.

Internal and external budgets are reported at a level of detail required by central agencies.

Budgets are reported at a level of detail that is consistent with generally accepted accounting principles as reflected in the Australian Equivalent to International Financial Reporting Standards.

Operational Budgeting Requirements

Organisational Budgeting Requirements

Central Agency Budgeting Requirements

External Reporting Standards


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.

engage stakeholders In Internal budget 2.6. ProCesses

Budgeting is not the preserve of the finance area. Finance officers have a leading role to play in formulating and coordinating the budget process, but it is essential that senior and operational management are involved in, and take responsibility for, the budget process. Key elements to effectively engage stakeholders in the internal budget are:

obtaining organisational support for the internal budget;

supporting operational managers in internal budget processes; and

managing relationships with other Australian Government organisations for whole of government initiatives.

Obtain organisational support for the internal budget2.6.1. Planning and coordinating internal budget processes involves input from across the organisation. In addition to the finance area, this would typically include the participation of senior management and line management but sometimes also representation from other corporate areas and internal audit. For example, the human resources area would generally be a key advisor on workforce planning matters.

The Chief Executive (or Board) is ultimately responsible for the efficient and effective management of financial affairs within their organisation. It is critical that the Chief Financial Officer is in a position to provide advice directly to the Chief Executive on the development and management of the organisations internal budget.

Supporting operational managers in internal budget processes2.6.2. Operational managers are responsible for managing programs and delivering outputs. These managers may not have expertise in financial management, however, it is important that they have sufficient skills and awareness to manage the financial resources under their control.7 Collectively, operational managers are in the best position to understand day-to-day activities, risks and opportunities that drive the organisation. It is essential to involve operational managers throughout budget processes. Mechanisms to support operational managers develop and manage internal budgets include:

Clearly communicating roles and responsibilities: it is important that the organisations communication strategy helps ensure each operational manager with budget responsibility is informed about their role in budget processes, including timelines for delivery, sign-off

6 Australian Public Service Commission (2007), Implementing Machinery of Government Changes: A good practice guide, viewed 18 February 2008, http://www.apsc.gov.au/publications07/machineryofgovernment.htm.

7 National Audit Office (2008), Managing financial resources to deliver better public services, Report by the Comptroller and Auditor-General, February 2008, p. 14.

It is essential that senior

and operational

management are

involved in, and take

responsibility for, the

budget process.

27



ent

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 non-financial 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 non-accounting language.

Better Practice Tip: Australian Government Budget and Financial Essentials trainingThe 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 financial framework for government officials. The training program provides a practical overview of:

the Australian Governments financial 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 financial 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, beneficiary numbers for transfer payments or stage of completion for capital programs), with the accounting value and classification based on pre-determined 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 staffing classification. The employee budget is then calculated through the application of standard salary costs and pre-determined 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 significant changes to budget functionality.

8 Department of Finance and Deregulation website, available from http://www.finance.gov.au/budgetgroup/Commonwealth_Budget_Overview/budget_and_financial_training.html [accessed 13 February 2008].

It is important that

managers understand

and agree to their role in

budget processes.

It is important that staff

requiring access to

internal budget systems

receive training.


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 finance 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.

Internal budget processes for whole of government initiatives2.6.3. Many government initiatives have a whole of government dimension. These initiatives are established and funded in a number of ways, for example, through shared outcomes, special accounts or purchaserprovider arrangements. While these considerations are outside the scope of the guide,9 it is important that each participating organisation structure its internal budget to support strategic objectives and accountability requirements for the initiative as a whole. This requires organisations to work together to develop internal budget and reporting arrangements that meet accountability obligations of each individual organisation and contribute to the collective achievement of, and accountability for, the whole of government outcome.

A coordinated approach to internal budgeting requires a shared understanding of different budget roles and responsibilities. An important component of this understanding is clear agreement about where overall responsibility for budget development and monitoring lies, as well as individual responsibilities for different components of the initiative. Arguably, the most critical element in budgeting for a whole of government initiative is senior management commitment to achieving the whole of government outcome, including a collaborative and transparent approach to budget development and monitoring.

One approach to whole of government initiatives is to establish a lead organisation. In these instances, there is often merit in formalising such arrangements through memorandums of understanding, agreements or committees.

Another approach is to establish a steering committee with responsibility for business issues associated with the initiative, including budget strategies and oversight. Ideally, the steering committee would have senior officer representation from each participating organisation.

There is also an expectation that organisations allocate, and if necessary reallocate, resources across organisational boundaries to achieve whole of government outcomes. This requires flexibility and consistency in internal budget processes between participating organisations. Where practicable, compatibility between budget policies, assumptions and data will help align budgets between the participating organisations. In this regard, it is essential to have sufficient transparency of those components of each organisations internal budget which have been allocated to whole of government initiatives. To achieve a sufficient level of transparency, it is desirable, in certain cases, to establish separate internal budget allocations for whole of government initiatives.

Implementing a whole of government program may represent a significant change to the way an organisation operates and is structured. As such, a zero-based approach to budget development is often highly desirable to ensure the internal budget is aligned to the Governments objectives in adopting a whole of government approach. Part 3.2: Effective budget construction further discusses zero-based budgeting.

9 The Better Practice Guide Implementation of Programme

Reading 2 Developing and Managing Internal Budgets

Documents

Transcript of Reading 2 Developing and Managing Internal Budgets