example, suppliers) or to a select number of programs;
applying full zero-based budgeting on a periodic basis (for example, triennially) rather than every
✓
year; and
applying performance-based budgeting using a limited number of cost drivers as ‘intuitive
✓
proxies’—that is, key drivers (such as headcount) which are likely to explain the majority of activity and provide a reasonable approximate of other activity in the absence of more specific drivers.
Automate internal budget processes 3.2.3.
Systems and tools used by organisations to construct the internal budget can have a significant impact on the timeliness and quality of the internal budget. Larger organisations with a mature budget function often use integrated software tools to manage internal budget processes. This may comprise a budget-capable Financial Management Information System, or specialised budgeting and reporting tools. Sophisticated tools facilitate the development of the internal budget and provide timely financial and management information throughout the organisation.
Nonetheless, the use of spreadsheets for all or some internal budget processes remains common.13 The advantage of spreadsheets is that they are available across the organisation, and are well understood and adaptable. Spreadsheets also leverage off existing technology that exists within an organisation and, as such, may represent a cost-effective option, especially for smaller organisations.
However, as a budgeting tool, the spreadsheet has a number of limitations around data integrity, integration, change control, multi-user access and size restrictions. Further, the use of spreadsheets can have a significant hidden cost through time spent on activities such as maintaining and updating models and the manual consolidation of budget submissions.
To facilitate the production of timely and consistent budgets, organisations limit the amount of manual intervention. As detailed in Table 5, it is important that an organisation’s budgeting systems include adequate environment and application-based controls to help ensure they remain available as required, operate as intended, are understood by users, and are not changed without proper authorisation, documentation and testing.
as a budgeting tool, the spreadsheet has a number of limitations around data integrity, integration, change control, multi‑user access and size restrictions.
to facilitate the production of timely and consistent budgets, organisations limit the amount of manual intervention.
Table 5: Better practice functionality and control for budget systems and tools BUDGET SYSTEM ENVIRONMENT
Budget systems are incorporated into an organisation’s information technology planning,
•
and are subject to appropriate governance and review.
Access to budget systems and tools is appropriately restricted.
•
Changes to budget systems and tools, including assumptions and calculations, are
•
governed centrally.
Budget programs, data and documentation are backed up on a regular basis.
•
Comprehensive and up-to-date documentation is maintained for the administration and use
•
of budget systems and tools.
Adequate segregation of duties exists between budget input and budget approval.
•
Budget systems and processes are included in disaster recovery and business continuity
•
arrangements.
Workflow technology is used to manage the budget setting process.
•
BUDGET INPUT BUDGET PROCESS BUDGET OUTPUT
Data collection is
•
standardised across the organisation.
Direct entry of budgets by
•
operational areas.
Built-in data integrity and
•
Ad-hoc reporting and drill
•
down capability.
Budgets are integrated
•
with forecast and actual data, including the ability to report in a single document or file.
Ability to create multiple
•
iterations and scenarios in budget development.
It is essential that internal budget system and tools are re-evaluated on a periodic basis (for example, every three years) so that they remain appropriate to the efficient and effective development of the internal budget.
It is essential that internal budget system and tools are
re‑evaluated on a periodic basis.
Developing and implementing a comprehensive internal budget
effeCtIve oversIght, revIew and CommunICatIon 3.3.
Involvement and commitment of senior management is critical to developing an effective internal budget. One approach to involving senior management is through the establishment of a budget committee (often the same as, or a subcommittee of, the executive committee) to oversight the internal budget process. The functions of a budget committee include:
developing budget strategies and priorities;
•
approving timetables and allocation of responsibilities;
•
approving budget guidelines;
•
oversighting budget preparation;
•
providing policy advice and strategic analysis to the Chief Executive;
•
evaluating budget bids, including alignment with the organisation’s priorities;
•
recommending final approved budgets; and
•
conducting ongoing assessments of budget processes.
•
As mentioned in Part 3.1: Effective planning and coordination, primary responsibility for coordinating the budget process typically resides with the Chief Financial Officer (CFO). It is essential that the CFO has sufficient authority to ensure that budget guidelines and policies are being complied with throughout the organisation. This includes a requirement that the CFO is consulted by operational areas on significant budgeting issues within the organisation, particularly new budget initiatives.
It is important that organisational and area budgets are subjected to quality assurance review before being submitted to senior management. This enables senior management to focus on priorities and trade-offs rather than data quality. Quality assurance is generally performed by the finance area, but may also involve internal audit or specialist assistance, especially for new or complex budget initiatives. The use of checklists can assist in the timely and consistent quality assurance of submitted estimates. Checklists are likely to be more effective when they incorporate a range of data integrity and reasonableness checks and also analytical review procedures (including both trend analysis and ratio analysis14).
Involvement of line areas in budget construction does not end when they have submitted their budget. Invariably, changes are required at the organisational level once budgets are consolidated to accommodate resource constraints or evolving priorities. When this occurs, it is important that managers have been consulted and understand why changes have been made. Collaboration and trust between areas involved in the budget setting process is critical and provides less incentive for managers to inflate budgets.
Making internal budgets available as soon as practicable after approval, enables managers to take timely action to achieve budget targets. Recording approved budgets in an organisation’s Financial Management Information System supports the timely communication of internal budgets.
To effectively communicate the internal budget, organisations can prepare a summary of the budget and make it available to all relevant stakeholders. Ideally, the summary would include an overview of key financial goals, initiatives and financial results by budget allocation, using charts and graphs to better illustrate important points. Appendix B provides an example of an illustrative budget summary.
14 Trend analysis refers to the comparative analysis of an organisation’s financial information over time to identify patterns.
Involvement and commitment of senior management is critical to developing an effective internal budget.
It is important that organisational and area budgets are subjected to quality assurance review before being submitted to senior management.
Collaboration and trust between areas involved in the budget setting process is critical and provides less incentive for managers to inflate budgets.
Monitoring and evaluating budgeting performance