Setting Annual Budgets

Annual budget setting is the process by which longer-term financial plans are turned into annual financial allocations. This should flow naturally from the council's longer-term financial plans. If commitments and demand pressures are close to forecast, and budget ceilings are in line with the anticipated funding streams, setting a budget should not present real difficulties. The elements of annual budget setting included in this section are:

The budget setting process

Involvement of budget managers

Setting pooled budgets

The budget setting process

Budgets need to be set on a firm financial base which reflects service commitments, demands and priorities:

  • Careful examination of historical budgets should be undertaken to ensure that budget levels continue to reflect need and are a realistic financial base for the service - read more (Good Practice Example: Derbyshire County Council, Good Practice Example: Stockport MBC) (Good Practice Example: Lincolnshire County Council and linking budgets to service priorities.)
  • Link to key performance indicators to consider how cost effective past budget allocations have been and decide whether any immediate changes to base allocations would be appropriate -read more (Case Example: Monitoring performance indicators to inform the budget setting process), read more.
  • Activity levels should be reconciled as part of the budget setting process. Too often the financial data is verified and included without any attempt to do the same with the service activity data. The result is that budgets do not match activity at the very start of the budget management process, completely undermining budget management accountabilities and also leading to inaccurate unit cost information.
  • Budgets should reflect known price increases. It is inappropriate to set budgets to reflect average price increases when actual increases can be very different. An example might be where all non-pay budgets (including transport budgets) are increased in line with inflation (say 2.5 per cent) when a corporate transport contract had just been negotiated with an 8 per cent increase.
  • Ensure that budgets are set which reflect operational reality at the micro level of running a particular team or unit. This problem is most likely to occur when budgets are simply set to historic levels without any recognition of events which may have caused a need to change them - read more (Case Example: Day services for learning disabilities).

GOOD PRACTICE TIPS

Image Manage within your means

  • Ensure service plans, commitments and activity levels match the total resources available.
  • If they do not, either increase the resources available or tackle the overcommitment by reductions in services or cost reductions.
  • Do not put in a general heading of efficiency savings to balance the books without actually identifying what these might be.
  • Take responsibility for ensuring that this match exists in the budget setting process and take whatever action appropriate to deal with any imbalance.

Failure to do this will completely undermine the budget management processes and mean that budgetholders cannot be adequately held to account for managing their budgets.

Involvement of budget managers

Budgetholders at all levels of the organisation should be engaged in the process of setting annual budgets. Budget setting should not be undertaken by finance support staff to the exclusion of operational budget managers under any circumstances.
GOOD PRACTICE TIPS

Image Include budgetholders

Budgetholders should be involved in agreeing:

  • Existing commitments which have to be resourced and the level of funding needed.
  • Service activity levels planned within the allocated budget.
  • Any planned changes in their service which need to be reflected in the budgets being set for that service. Any changes being driven externally or corporately within the council need to be covered in the budget. For example, increases in National Insurance employer contributions or increases in pension contributions being applied across the whole council have been fully covered in the pay budgets for a particular service.
  • The existence of any contingency funds which relate to their area of service, the purpose of these contingency funds, how to access them, and the criteria for allocation. The existence of 'hidden pots' of money for spurious contingency purposes creates a culture of mistrust and undermines accountability structures.

The timetable for setting budgets must allow sufficient time to engage all budgetholders in the process of producing budget and activity information, and to allow further engagement in the process when the reconciliation between the total requirements of individual budgetholders and final total resource allocation is made.

Setting pooled budgets

The principles for setting 'pooled budgets' do not differ from those identified above for Social Services in general. However, the involvement of two or more agencies in contributing to and agreeing pooled budgets require a number of other factors to be in place

  • The budgets to be included in the 'pooled' arrangement need to be clarified.
  • The timescales need to be set in such a way that the internal processes of each of the agencies involved for agreeing their contributions to a pooled budget can be met.
  • There needs to be agreement about how new commitments or changes in demand will be responded to.
  • The method of setting budgets may not be the same across agencies. For example, it is possible that one partner would normally adopt a 'cash' budget approach (where an allowance to cover inflationary increases during the year has been built into the budget) while another adopts a price-based approach determined by the date the budget was set (if the budget is set in November then the budget will reflect the price base at that time with future allowances for inflation being allocated from a contingency sum as they occur). In these circumstances agencies must agree their individual contributions to a scheme, which can then be translated into one budget for the budgetholder.
Read more.