Managing Budgets

Key to the successful management of budgets is the requirement for the budgetholders (managers) to act in partnership with the financial advisers (finance support staff).

The topics covered in this section are:

Management accountability

The role and accountabilities of budgetholders

The role and accountabilities of finance and support staff

Budget structure

Monitoring and reporting arrangements

Forecasting commitments and expenditure trends

Flexibility in managing budgets

Systems to support budget management

Closing the accounts

Managing joint or 'pooled' budgets

Unit costs

Management accountability

Management accountability must be identified at all levels and there should be no ambiguity about what managers at the different levels in the organisation are accountable for nor between the responsibilities of managers and finance support staff - read more (Good Practice Example: Lincolnshire County Council).

• There should be clarity about which budget heads managers are responsible for. Ideally this should be all the budget heads relating to the area of service for which they have management accountability. Too frequently, budget heads such as those relating to pay or income are not included in the range of budgets managed by the manager who is directly responsible for the service area. This can result in financial decisions being made by others who may not appreciate the impact on the service or have to manage the consequences.
• The council's scheme of delegation should make clear any limits to the amounts the responsible manager can commit within their budgets. If expenditure needs to be authorised by managers (or members) at a higher level, then the budget management accountabilities need to be explicitly stated. For example, if a budget for community care services for older people is the responsibility of a team but the manager is only authorised to agree the cost of packages of services up to £10,000, responsibilities will need to be clarified as both the team manager and a more senior manager will be committing expenditure against it.
• The accountable manager must indicate their understanding of the agreed budget together with the levels of activity which the budget is intended to reflect. Accountability for service activity levels is as important as accountability for managing the budgets to support that level of activity. For example, if a budget for the purchase of residential care is set to reflect a given level of activity, the budgetholder's performance should not be judged solely in terms of staying within budget but also the number of placements purchased which have contributed to staying within budget. An unplanned adverse variation in the activity levels may reflect a less cost-effective delivery of the service for which the manager should be held equally responsible.
• There should be clarity about the price base for the budget and how the issue of inflation is to be dealt with. There are two approaches usually adopted by authorities in this respect:
• The level of price increases are anticipated at the time the budget is set and an allowance built into the budget. This leaves the budgetholder responsible for managing the implications of actual price rises within the budget which has been set.
• The authority retains funding in a contingency to be allocated when price rises are known. This leaves corporate finance staff responsible for managing the contingency, and being accountable for the implications of the level of the rise being at variance with the contingency sum.
• A mixture of these approaches (say when most price increases are built into budgets but where some high cost and high profile areas are dealt with through a contingency - for example, pay increases being dealt with through the latter approach).
• There should be clarity about budgetholders' accountability when others have responsibility for agreeing price increases in services for which they have financial responsibility. This is particularly important when an allowance for inflationary price increases has already been built into base budgets, but the responsibility for agreeing actual price increases rests with someone other than the budgetholders. An example might be where the budgets for the purchase of home care rests with team managers, but the responsibility for negotiating annual price increases with the service providers under the terms of their contract with the council rests with staff in the 'contracts' section whether within Social Services or a corporate unit within the council.
• Changes to the accountability arrangements within year need to be clearly articulated. Faced with extreme budget pressures, (such as children's placements), a decision may be made to remove decision making from the budgetholders to a higher level of management or to a 'decision-making panel'. In these circumstances, the implications for the budgetholder and those assuming responsibility should be clarified. It is inappropriate for the original budgetholder to be held responsible for the decisions made subsequently, or for those in the new decision-making arrangements to be held accountable for the decisions made by the original budgetholder. A 'line needs to be drawn' under the performance of the original budgetholder to reflect the timing of the change in accountabilities. The same applies to management reorganisations within a financial year. Note: If such changes are made, it is important to ensure that the accountabilities for financial and service decisions continue to rest in the same place. It is inappropriate, for example, for the financial decisions to be removed from a budgetholder, but they remain accountable for the service implications. Tension within the service and the potential for confusion about decisions are likely to occur on the frontline if this happens, always to the disadvantage of the service user.

The role and accountabilities of budgetholders

• Budgetholders are responsible for contributing to the budget setting process by inputting information about service trends and activity levels upon which the budget can be calculated, and reaching agreement with finance support staff that the budget is a fair reflection of the cost of these activity levels.
• Budgetholders are responsible for responding to budget reports and taking the necessary action to tackle projected budget variances. This may include moving resources between budgets to respond to the variations identified in the monitoring processes in line with the council's rules regarding virement. They are responsible for producing an action plan to deal with the underlying problems.
• If budgetholders are not in a position to respond to variances identified in monitoring reports, they are responsible for reporting the issues to a more senior manager. If the variances are such that management action will be unable to address the problem before the year end, then this needs to be reported. Members should be kept aware of the overall position.
• Budgetholders are responsible for working with finance support staff to analyse data by inputting their knowledge of the area of service and recent developments in the service.

(See Good Practice: Lincolnshire County Council)

The role and accountabilities of finance and support staff

The roles of finance and other support staff and budgetholders are complementary:

• Finance and support staff are responsible for the budget setting process and engaging budgetholders in the process.
• Finance support staff are responsible for setting the budget monitoring framework, reporting arrangements and timescales, and are accountable for ensuring that these are delivered.
• Finance support staff are responsible for the analysis of financial data, determining the implications for budgetholders, the quality of financial advice they give to budgetholders, and the timeliness of that advice.
• Finance and support staff are responsible for putting in place arrangements to inform budgetholders of financial decisions made by other staff in the council which affect their budget. For example, finance staff are responsible for advising of the implications of decisions which affect the cost of legal services or the cost of transport which have an impact on service budgets. Budgetholders should be made aware of these and their financial implications before budgets are set, and immediately they are known for budget monitoring purposes.
• Finance support staff are accountable for the quality and timeliness of the financial data which is used for budget monitoring purposes.

Budget structure

This section deals with the structuring of budgets to meet the requirements of the accounting code of practice, reflect management accountabilities, and the decision-making structures and processes which support these arrangements.

The Best Value Accounting Code of Practice (BVACOP) provides the framework for a budget structure and this must be followed (Read more). It should be further developed to reflect the hierarchy of budget management responsibility within the organisation. To achieve this, the following need to be addressed:

• All the budgets which are identified as being the responsibility of a particular manager should be identified and grouped for accounting and reporting purposes. This means that there needs to be an additional coding indicator to enable different services to be grouped in this way, as well as being grouped to meet the requirements of BVACOP. For example, BVACOP requires that all the budgets for council provided residential homes for older people, in-house home care services, or social work teams should each be grouped for accounting and financial management purposes. But it may also be necessary for the council to group budgets for all of these areas of service which fall within the responsibilities of one locality manager (Exhibit 14).

Source: Joint Reviews

• Budgets for a number of managers should be grouped to reflect the reporting arrangements to a more senior manager. This may require a further coding indicator to group these together, and to incorporate those budgets that may have been specifically identified as the responsibility of the more senior manager (for example the budgets to support children's residential placements may be the responsibility of a more senior manager).
• Budget structures also need to identify which managers are responsible for non-operational budgets. Where there is a relationship between these budgets and operational budgets, these need to be grouped for a more senior manager who will have overall responsibility for the area of service and the implications for those non-operational budgets which are directly related to the area of activity. Examples include the legal services budget and its relationship with the levels of children's court work, or the costs of financial assessments and debt management which are directly related to levels of activity in adult services.

Monitoring and reporting arrangements

Councils need to ensure effective monitoring and reporting of budgets by putting the following arrangements in place:

• Timetables for budget monitoring must be set and met. This requires systems to ensure that data (both finance and activity) will be up to date and provided on time, that budget reports are made available to managers by finance support staff on time, and that aggregated reports are made available to senior managers in a timely fashion. This should also allow frequent reporting to councillors to reflect the arrangements in place to meet the requirements of both the executive and scrutiny functions for both budget and service performance. To achieve this requires clarity about the management accountability and budget.
• Reporting timescales should be at least monthly and should commence from the first month of the financial year. This requires an efficient approach to closure of accounts and incorporating essential information like outstanding debtors and creditors into the new year accounts, otherwise the information for the early monitoring reports will be inaccurate.
• While reporting arrangements need to be from the 'bottom up', the response to monitoring information needs to be from the 'top down'. While it is appropriate for local managers to start to take action to deal with any areas of concern identified in the monitoring process, it is essential that budgetholders are seen to be held to account by the person at the top of the organisation. The active involvement of the Director of Social Services or equivalent, supported by councillors, is essential to ensuring a proactive response to budget monitoring and to the development of a culture of financial accountability.
• Monitoring reports need to include statements of actual expenditure and forecasts of expenditure to the year end arising from known commitments and expected changes in terms of new commitments and termination of services. This requires a sophisticated approach to the forecasting of future commitments, the implications of which are dealt with below.
• The outcomes from budget monitoring need to be regularly reviewed and the strategic significance of this evaluated against the financial plan. A quarterly review should be undertaken alongside the exercise for the annual budget setting process.

Forecasting commitments and expenditure trends

Forecasting is critical to an understanding of the complex Social Services budget. It is essential that budgetholders are engaged in the development of forecasts as they will be aware of the impact of demand or delays for services on new financial commitments.

Features of successful forecasting:

• Post expenditure accurately. Expenditure must be coded against the correct budget, a simple enough task in its own right, but one which some Councils fail to achieve.
• Understand the length of time a known financial commitment is expected to last. For example it is not appropriate to forecast that a placement of a young person in very expensive secure accommodation will commit expenditure for the duration of a financial year when the order placing the young person is only for three months. However, where duration is uncertain then it is wise to assume that the commitment will continue until the end of the financial year.
• Ensure that the impact of tackling delays and waiting lists is accounted for. An investment in undertaking assessments to tackle a waiting list will result in a sudden increase in service provision, and such activity must be anticipated in financial forecasts. This again requires close collaboration between finance and operational staff.
• Agree the rate whereby services cease to be needed. An analysis of recent trends is necessary to get a reasonable estimate of the net growth or reduction in demand (for example the mortality rate of older people accommodated in residential or nursing homes).
• Estimate the ongoing levels of demand for services. This will require both an analysis of recent trends plus an assessment of the likely impact of any recent policy changes (for example, an investment in intermediate care services intended to reduce admissions to residential care). This needs to be compared with the estimated cessation rates to enable a forecast to be made about the net change in the level of services to be provided and how quickly this change will take place.
• Estimate the level of income recovered through fees and charges. The above forecasts, once the basic financial details have been established, are based on estimates of activity levels. Councils need to build into this income collected through contributions and any fluctuations in this. This should be adequately accounted for in terms of existing financial commitments, but when forecasting changes such as a growth in placements or cessations, then an assessment of average income levels needs to be undertaken. This will identify any changes in average levels of user contributions which can be taken into account in the forecasts.
• Put in place adequate IT systems to support budget management. Accurate forecasting relies on tracking many thousands of transactions on a large population of service users. Councils must have in place robust business processes and systems to track these changes. A system integrating frontline care management processes with financial and activity systems is clearly the most desirable, but as a minimum councils must have in place accurate databases of existing commitments if they are to keep a handle on the budget.
• Undertake regular 'reality' checks with operational managers on the assumptions made in forecasts to ensure that these remain as accurate as possible.

Flexibility in managing budgets

The management of budgets needs to be as flexible as possible if frontline staff are to be able to target resources where they are most needed - read more (Good Practice Example: Derbyshire County Council). However, a balance needs to be struck between the need for budgetholders to have as much flexibility to manage their budgets on a day-to-day basis as possible, and the broader interests of the organisation to ensure that policy objectives are not being undermined by this freedom. Clear guidance needs to be in place on virements (the movement of money from one budget to another) which needs to include:

• The cash value for which virements are permitted. It may be appropriate to have a hierarchy of cash values ranging from a value for a first-line budget manager to the level which would require the authorisation of the Director or Head of Service.
• Whether virements can be actioned across service areas. For example, are budgetholders free to vire money from budgets for the purchase of community care services from external providers to meet the additional costs of in-house provided services?
• Whether any cash values are for individual transactions or whether they apply to the cumulative total of a number of transactions.
• Whether the virements allowed are short term or long term. Freedom to vire short term would only apply to the financial year in which the action was taken, and the longer-term implications would have to be addressed when budgets are set for the following year. Freedom to vire longer term would commit the change for future years.
• Reporting arrangements to senior managers and councillors. This enables senior managers and members to monitor the budget virements which have been actioned and to evaluate their impact. Managers may use virements to help to shift the emphasis of services to reflect known priorities and objectives, or they may be simply responding opportunistically to presenting problems in a way which may undermine the delivery of priorities and objectives.

Systems to support budget management

Computer-based budget management systems

An historical context

• Computerised corporate financial accounting and budget management systems started their development many years before social services client information systems. Corporate systems generally recorded the actual levels of social services spending and income, derived from the associated corporate computer systems that processed debtor payments and creditor records. Frequently, details of budgets were also held in the corporate systems to enable comparisons to be made between expected and actual financial activity.
• Early social services client information systems were designed to hold mainly client, rather than financial, data. Over recent years, as the social services systems have continued to develop, many more functions have been added to them, such as payment processing (debtor management), budget management and contract management.
• In local authorities that have failed to fundamentally review the interaction between their financial and client information systems, it is frequently the case that the financial records of a social services directorate will be duplicated and/or held in a number of different places/directorates:
  • in a computerised social services client information system
  • in the computer based corporate financial processing and accounting systems of the local authority
  • in spreadsheets and other stand alone computer records
  • in manual lists.
  • Periodic reconciliation of separate financial data held in corporate accounting, social services client information and manual systems is a time-consuming, complex, inaccurate and unrewarding exercise.

Closing the accounts

councils are required to undertake annual closure of accounts to meet legal requirements and ensure public accountability is upheld.

• While it is a only a single point in time for budget management, it is the point at which actual performance can be most accurately judged, and when managers are most held to account within the council and to the general public for that performance.
• It is when the most rigorous analysis of the budget position is undertaken, because all creditors and debtors have to be identified and details incorporated into the accounts and when all internal budget transactions have to be completed.
• The degree of variation between what was expected to be the budget outturn and the actual outturn is an indication of the quality of the ongoing budget management system. If large variations from the previous budget monitoring statement and forecasts occur, this needs to be investigated to establish which element of the budget management system has failed to deliver accurate information or forecasts.
• It is the point at which decisions have to be made about performance. There are a number of issues which need to be considered in this respect:
• It will determine how the outturn for individual budget managers is to be handled. Will individual budgetholders be allowed to carry forward any underspends or be expected to 'claw back' any overspends; or will the outturn be dealt with at the highest level, with any total overspends or underspends allocated or 'clawed back' more strategically within Social Services? Alternatively, will the council deal with the overall outturn thereby meeting any total overspends from balances or retaining any underspends for future allocation or to replenish balances? There are tensions in deciding this which need careful consideration - including the potential for undermining the accountability of individual budgetholders, encouraging end-of-year 'spending sprees' by managers keen to avoid losing resources, undermining the ability to direct available resources to priority areas or to replenish balances, and the potential for rewarding poor performance and penalising good performance at all levels in the organisation.

Managing joint or 'pooled' budgets

The key issues to be addressed regarding the management of 'pooled' budgets which include guidance issued by the Department of Health relating to pooled budgets established using Section 31 of the Health Act include - read more.

• Clarity about how much of the pooled budget has been contributed by each partner
• How much variation in a financial year is acceptable
• How each partner anticipates how the budget will be managed and what methods will be deployed
• How variances in projected outturns will be dealt with, and budget pressures (including inflationary pressures) will be managed
• Monitoring and reporting arrangements
• The responsibility of the partners for accounting for expenditure and income
• Who is accountable for managing the budget.

Unit costs

When financial information is linked to activity levels a view can be taken about the value for money of the use of resources.

Unit costs allow this to be taken a stage further by identifying all of the costs associated with the delivery of a unit of service and allowing this to be compared with the costs of other similar services, the cost of alternative services, or the cost of alternative ways of delivering the service, to determine the value for money of a particular service or approach.

The accounting regulations which ensure that the approach to unit costing is consistent and therefore capable of meaningful comparison are specified in the 'Best Value Accounting Code of Practice'. It is essential for councils to follow the Code of Practice if any attempt to compare Unit costs is to be meaningful and reliable.

Two approaches to identifying unit costs are identified in the booklet produced by the Department of Health, 'Unit Costs - not exactly child's play' (A guide to estimating unit costs for children's social care) - read more.

All relevant expenditure to the delivery of a service is assembled and divided by units of activity.

Advantages: This approach is relatively simple to apply and can be used as a useful starting point for discussion about costs incurred in the provision of services. It is particularly appropriate when units of activity can be consistently measured and allocated to expenditure and useful for managers in monitoring changes in performance and efficiency.

Disadvantages: It is difficult to ensure consistency of definitions when making comparisons across different organisations or that all relevant expenditure has been identified. Examples might include comparing the cost of family centres or day services for mental health service users where the functions of different centres may be very different.

'Bottom-up' approach

Identifies the different resources tied up in the delivery of a service and attaches a value to each.

Advantages: As the application of this approach requires every detail of every element of a service to be identified, it encourages a good understanding of the service being costed and careful consideration of the relationship between patterns of work in an organisation and the way that services are delivered. It can be used to show where variations in cost are occurring and can be adjusted to reflect planned or hypothesised change. Costing family support services which may have a range of different elements to the service is an example where this approach would be more helpful.

Disadvantages: The main disadvantage is that this approach is more complex and requires more input to achieve the information required, and the required information may not be readily accessible.

The 'bottom up' approach generally provides a more accurate assessment of costs for each unit of activity, and is more likely to ensure that comparisons are accurate and meaningful. However, the ease of the 'top down' approach commends itself to any situation which requires a quick analysis of unit costs for broad decision-making purposes or where differences in the detail of the service being delivered is less likely. Finance support staff can provide unit cost information using both of these approaches. It is for managers and other decision makers to decide which is the most appropriate approach for their purposes.

Irrespective of which approach to unit costing is used, there are a number of pitfalls to using unit costs which need to be avoided: