A few years ago I was asked to give a presentation to some councillors to help them in their work of scrutinising their council's budget proposals. What I came up with were five questions that the councillors could ask in their scrutiny meetings. Whilst these questions were conceived in the context of a scrutiny role it strikes me that they could apply to any budget, whether in the public or private sector or for operating or capital spending.
The five questions I suggested were:
How was the budget made?
There are different methods that can be used to produce a budget. The most common is incremental budgeting, where the new budget is based on the existing budget. This has the advantage of being easier to do but is not quick to respond to policy changes. Zero-based and priority-based budgeting address this weakness but have weaknesses of their own, namely they are time-consuming and complex.
What outputs will the budget deliver?
The thing about budgets is that they express plans in terms of money and that means that they focus on inputs: how many people, buildings, computers, vehicles, etc will we employ next year. However, the whole point of this plan is to achieve the organisation’s goals so it is important when looking at budgets to make the connections between the plans and the objectives.
Who has been consulted?
It is perfectly possible for a budget to be constructed by a team of finance staff without involving anybody else but the chances are that, however good the budget is, no-one will take ownership of it. That means that managers should be consulted on their own budget. In the public sector consultation has to go further, involving relevant stakeholders, even the general public, in the budget making process. There is a growing call for participatory budgeting.
What assumptions is the budget based on?
Budgets are forecasts and there are many assumptions and estimates that underpin the numbers. It is important to understand what assumptions have been made especially the major ones about pay and price rises, interest rates, staffing levels, demand for goods and services and income.
How robust is the budget?
Just because a budget is the result of an orderly, controlled process does not mean that it is any good. It might be that the managers and accountants have been unduly optimistic in their forecasts or there may be some significant risks that need to be understood. It is is fair to challenge the finance director and senior management about how they have assured themselves that the budget is robust.
I think all of the questions are good questions for any budget holder to ask about their proposed budgets but question 4 is especially important for them. If they do not understand and agree with the assumptions on which their budget is based then they are could have serious problems managing within it and yet still be held accountable. Complaining that the budget was wrong when you're already three quarters of the way through the year is not going to sound like you're a manager to be trusted.
You can download a PDF of the handout from my presentation here.