Budget time: here's 5 questions to ask about yours

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.

Why the UK tax year ends on 5 April

Today is 5 April, the final day of the UK tax year. It is unusual for an annual period to end on the 5th day of a month. I can’t think of any others. Generally, we like to use the first or last day of the month for defining periods—and this is especially the case with financial periods. Companies and governments are likely to use 31 December, 31 March, 30 June, etc as dates for the end of their financial years. In fact, as far as UK public sector bodies are concerned their budgets and statements of accounts use 1 April to 31 March as their financial years. So why does the UK government collect taxes on the basis of a year that runs from 6 April to 5 April?

Historically, in Britain taxes were due on the first day of the year, which was Lady Day, the 25 March. When Britain (and its empire) moved from the Julian calendar to the Gregorian calendar in 1752 it was necessary to ‘lose’ 11 days so that 2 September 1752 was followed by 14 September 1752. The change made the year 1752 11 days shorter and taxpayers did not want pay their taxes on 25 March 1753 because that was, in their view, 11 days too early. To settle this the first day of the tax year was moved from 25 March to 5 April. Then, in 1800 another day was lost because in the Gregorian calendar 1800 was not a leap year but it was in the Julian calendar. The result was the change of the first day of the tax year to 6 April, where it still remains. (There was another day was ‘lost’ in 1900 but by that time the British government had clearly had enough of moving the dates.)

Benchmarking: an incentive to improve, a distraction or a red herring?

In the question and answer session of the presentation I gave a couple of weeks ago I was asked how I thought a process of benchmarking should fit into the annual budgeting process. I gave an answer at the time but I don't think I expressed my view as well as I could have so I thought I would have a go in writing.

The question was posed to me in terms of unit costs: if we are preparing our budget for a service how should we take into account the fact that our neighbours or peers deliver the service for a lower (or higher) unit cost? On the face of it this seems like a good idea and I'm sure there must be some sound theories to support it. My answer to the group, though, was sceptical, borne from experience rather than theory.

I think that the "information" a public sector organisation gets from such benchmarking is unhelpful. I think carrying out a benchmarking exercise is "busy work"; it feels like you're doing something positive but in practice you're using up a lot of resources and getting very little in return. They say you don't fatten a pig by measuring it. Well, benchmarking is the equivalent of trying to fatten your pig by measuring someone else's.

I've been involved in numerous benchmarking activities over the years (it was a key feature of the Audit Commission's work in the 90s and 00s) and the first problem is agreeing common definitions so that the information is at all comparable. The development of accounting standards and financial reporting standards has no doubt improved the consistency of treatment by public bodies, but that does nothing for the second, and bigger, problem: that public managers will cling to favourable comparisons and find reasons to criticise unfavourable ones. (I once has a manager who was very quick to claim successes were the result of his management but failures were the result of external factors beyond his control. Sound familiar?) If you want an academic reference for this, Demeere et al (2009), writing about the use of activity-based costing in healthcare, said:

"... healthcare managers might argue about the accuracy of the models estimated costs and pro"tability rather than address how to improve the inef"cient processes, unpro"table products, and considerable excess capacity that the model has revealed."

Demeere et al actually touch on the potential negative consequence of benchmarking: complacency. If a public manager's unit costs (or whatever) are good they do not need to try harder; if they are poor, they might try hard to make a defence but they can avoid the need to improve their service.

Many aspects of public management these days are informed by or developed from private sector practice. Do private sector organisations benchmark with each other? Perhaps, but it seems unlikely that an organisation could benchmark with competitors directly so they are more likely to use competitors' prices as the benchmark. They may ask themselves, Can we sell our product for the same price as the competition and still make an adequate return? If the answer is no then they either have to find a way to make their product more cheaply, charge a higher price and compete on the basis of quality/design or cease to produce the product. If the answer is yes then that's great, but it would not stop them from seeking efficiency improvements in order to improve their gross profit margin.

How does that compare with a public service? Well, there are some services where charges are made but generally there is not a market because public bodies usually have a monopoly on the service in some geographic area. But there are some areas where there are comparable private sector providers whose prices could be used as a signal. Except, how many local authorities would compare the unit costs of their schools with fee-paying private schools, or compare their access-for-all leisure centres with members-only private gyms? "They're not offering the same things as us," would be the cry so of course our unit costs are different from theirs.

So, based on my experience, what would I recommend? In my view the answer is much easier to find than carrying out benchmarking exercises because the organisation already has it. The answer is to compare our own unit costs over time. This avoids all the problems of alternative accounting treatments, geogrpahical differences in prices, etc. and it builds on the idea that however good a service is the managers should strive to improve it. I'm sure that if all the time and energy spent carrying out benchmarking work and then defending or criticising the results was spent on improving services the benefit for the public would be significantly improved.

Reference

Demeere, N., Stouthuysen, K., & Roodhooft, F. (2009). Time-driven activity-based costing in an outpatient clinic environment: Development, relevance and managerial impact. Health Policy, 92(2-3), 296–304. doi:10.1016/j.healthpol.2009.05.003

Will a strategic partnership save money for a police force

Last week I gave a short presentation to the joing national conference of the Police Authority Treasurers Society and the Directors of Finance of police forces. I have helped the police in Lincolnshire and West Midlands with the procurement of strategic partnerships but this talk was not about those projects. Instead I was commissioned to talk about the pros and cons of having a strategic partnership. I hope I achieved that. One treasurer said to me afterwards that is was "as balanced an exposition of the issues of outsourcing" as he'd heard. I guess that means I did what was asked of me.

I've posted the slide presentation on Slideshare.net and they are embedded below. They give a flavour of what I spoke about but I like to think that you get more from a presentation when I'm presenting it than from looking at the slides in isolation. So if you want to know more about this subject please feel free to get in touch with me.

Minor roadworks

I live in the north west corner of Derbyshire where there aren't major roads or motorways. Over the last few weeks I have come across roadworks on lots of the local roads. Not major roadworks, just one of those machines that scrapes off the top few centimetres of the road surface so that it can be replaced with fresh, smooth tarmac. However, I am sure that I won't be seeing any more of these small schemes next week, or again until next March because it is the end of the financial year.

If I were being cynical I would suggest that these works were only being done to make sure that the budget for 2011/12 was as fully spent as possible. That might be the case but I don't know because I don't have the budgetary control report for Derbyshire County Council. What I do know, though, is that public managers still measure their importance and their success by how much money they spend. Until a few years ago the value of public service as measured in national statistics was deemed to be equal (exactly equal) to how much was spent. So, spending more on the roads (or in hospitals, schools, libraries, wherever) meant more value was created. That's changed now (but I won't go into the detail here) but for many managers it is still the case that if they spend more on their service, they deliver more outputs and that must mean they deliver more value for the public. Sounds fair enough, doesn't it?

If I were being more positive, though, I could suggest that these schemes are taking place now because the council's managers operate in the same way that most people do when faced with a deadline; they leave things until the last possible minute to start and then finish just in time.

Whatever the reason, there are several hundred metres of improved roads all around my neighbourhood and, as a cyclist I value it because it will make my riding in the summer a bit faster and a lot smoother and more comfortable. If they hadn't done it no value would have been created but the question is, would more value have been created if they spent the money on something else?

What causes inflation?

The day that the Chancellor caps public sector pay whilst prices rise for all manner of commodities seems like a good day to think about what causes those prices to rise in the first place. I'm not an economist so I'm not as well placed to explain this as many. But this article by John Harvey that I found on the Forbes website does a very good job indeed.