A Guide to Budgeting and Financial Performance Management
in the Scottish College Sector
1
A Guide to Budgeting and Financial Performance Management
in the Scottish College Sector
1
Contents
Previously Issued Documents ........................................................................................................................2
Part A - Executive Summary ...........................................................................................................................3
A1
A2
A3
A4
A5
Background ........................................................................................................................................................................................................................... 3
Aims and Objectives of the Guide................................................................................................................................................................................ 4
Drivers for Improvement ................................................................................................................................................................................................ 4
Longer Term Sustainability ............................................................................................................................................................................................ 5
Conclusion .............................................................................................................................................................................................................................. 5
Part B - Budget Construction Techniques ................................................................................................6
B1
B2
B3
B4
Introduction ........................................................................................................................................................................................................................... 6
Incremental Budgeting..................................................................................................................................................................................................... 7
Zero Based Budgeting ..................................................................................................................................................................................................... 8
Other Budgetary Considerations ............................................................................................................................................................................. 10
B4.1 Rolling -v- Static Budgets ........................................................................................................................................................................... 10
B4.2 Imposed -v- Participatory Budgets ........................................................................................................................................................ 10
B4.3 Devolved -v- Non-Devolved Budgets ...................................................................................................................................................... 10
B4.4 Vertical -v- Horizontal Budgets .............................................................................................................................................................................. 11
B4.5 MoSCoW Budgeting .................................................................................................................................................................................... 11
B5 Risk and Sensitivity .......................................................................................................................................................................................................... 11
Part C – Budget Monitoring........................................................................................................................13
C1 Budget Monitoring and Reporting Process ........................................................................................................................................................ 13
C2 Joined-up Performance Management .................................................................................................................................................................. 13
C3 Key Success Factor – Accurate and Timely Management Information ............................................................................................... 14
C3.1 Good Practice Tips for the Generation of Accurate and Timely Management Information .................................................... 15
C4 Quick Quiz ............................................................................................................................................................................................................................ 16
Part D - Improving Financial Performance Management ................................................................18
D1 Overview .............................................................................................................................................................................................................................. 18
Part E - Integrating Financial Performance Management ..............................................................19
E1 Overview .............................................................................................................................................................................................................................. 19
E2 An Integrated Reporting Framework...................................................................................................................................................................... 20
E2.1 Stage 1 – Effective Monitoring and Reporting ................................................................................................................................ 21
E2.2 Stage 2 – Management Accountability .............................................................................................................................................. 21
E2.3 Stage 3 and beyond – Forecasting Beyond the Actual Results .............................................................................................. 22
E3 The Benefits of Behaviours ........................................................................................................................................................................................... 23
Part F - Conclusion ..........................................................................................................................................25
F1 Monitoring and Reporting Arrangements ........................................................................................................................................................... 25
F2 In-year monitoring ............................................................................................................................................................................................................ 25
References .........................................................................................................................................................26
Appendix A - Financial Information Contents of Monthly Finance Report .................................27
Appendix B - Example of College Management Accounts ................................................................28
Appendix C – Balanced Scorecard............................................................................................................28
Appendix D – Working Group Membership ..........................................................................................28
A Guide to Budgeting and Financial Performance Management
in the Scottish College Sector
1
Previously Issued Documents
Readers may find the following previously issued documents useful when read in conjunction with this guide:-
ºº A Guide to Costing and Pricing in the Scottish College Sector
ºº Guidance for developing a framework to support institutional sustainability and scenario planning Circular SFC/31/2009
A Guide to Budgeting and Financial Performance Management
in the Scottish College Sector
2
Part A - Executive Summary
A1 Background
Budgeting and Financial Performance Management are key financial processes in all Colleges, with integral inyear monitoring and reporting being essential control elements in managing College performance.
However, budgeting is often done using a very traditional process which is repeated annually without any
real changes or improvements being incorporated. Particularly in the public sector budgeting is usually done
using a roll forward of the previous year which is then inflated or deflated based on available information. This
approach is understandable given that a large element of income and expenditure is set by the parameters
of the activities being undertaken. There is a question as to whether the traditional budgeting and reporting
methods are entirely the best methods for Colleges with possible scope for improvement in budgeting through
the use of other techniques.
The traditional budgeting approach has the following disadvantages:-
ºº It provides short term budgeting rather than medium term budgeting.
ºº It focuses on inputs and outputs rather than outcomes.
ºº It doesn’t promote improvements in efficiency or links to performance reporting as well as some
other budgeting techniques.
This guide proposes that the comfort zone of the traditional annual budgeting and reporting cycle should be
reviewed to consider whether there could be improvements made through the use of some other budgeting
approaches and techniques. These improvements could lead to new engagement of staff, better informed
reallocation of resources to meet organisational needs, greater alignment of the College budget to planned
outcomes, and a greater link to drivers towards improved efficiency.
A number of budget construction techniques and other budgetary considerations are outlined in this guide and
it is proposed that Colleges could benefit from considering adopting some of these along with a greater focus
on continuous forecasting of income and expenditure streams.
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A2 Aims and Objectives of the Guide
Through the use of this guide it is intended that Colleges will be able to:-
ºº Improve their longer term planning.
ºº Achieve greater integration between financial planning and performance management.
ºº Make greatest use of budgeting and financial performance management towards ensuring future
financial sustainability.
A3 Drivers for Improvement
There are a number of drivers for improvement in budgeting and financial performance management within
the College Sector which include the following:-
ºº Joined Up Performance Management – The integration of financial and non-financial data is
fundamental to effective performance measurement in Colleges and systematic approaches to
performance improvement should be adopted.
ºº Longer Term Planning – There has traditionally been a strong focus on current year and current plus
one year for any forecast. Colleges need to look beyond this period and create stronger forecasting
for future years to provide a better basis for longer term planning and to achieve greater scope for
delivering planned outcomes.
ºº Efficiency Improvements – There is a drive for efficiencies to be achieved annually and Colleges
are targeted to achieve best value from the public funds they receive. Efficiency gains need to be
effectively built into budgets to ensure they are delivered and maintained and they should enable
headroom to be gained to accommodate pressures from elsewhere or new activity.
ºº Strong Financial Performance Management and Awareness - To ensure financial security is
maintained in the Sector and that Colleges have a sustainable financial position for the medium to
longer term. Colleges need to have good financial understanding and awareness, this should extend
beyond staff in the financial function.
ºº Risk Management - Risk management is a key issue in the College Sector and this needs to include
financial risks and should be integrated into College’s planning processes. Key financial risks need
to be captured and ranked regarding impact and probability and ensuring appropriate mitigating
actions are in place. Appropriate budgeting and financial performance management techniques will
be essential in recognising and mitigating financial risks.
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A4 Longer Term Sustainability
Any change in budgeting and financial performance management techniques will involve an element of risk
however the impacts of the change should be fully thought through in advance and changes will naturally only
be taken forward where there is a benefit for the College. The changes should lead to improvements which
will enhance longer term planning for the College and provide better information for institutional financial
sustainability.
A5 Conclusion
It is recognised that all Colleges already use some form of budgeting and financial performance management
modelling. It is generally accepted that there is some scope for development in regard to budgeting and
financial performance management modelling in the Sector and that Colleges need to refocus on long term
sustainability.
The complexity of budget and forecast modelling differs with the size of College and this document is intended
as a general guide on issues to consider.
It is intended that this document will assist Colleges in reviewing their current budget and financial
performance management techniques and assist Colleges in recognising the importance of effective budget
and financial performance management.
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in the Scottish College Sector
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Part B - Budget Construction Techniques
B1 Introduction
There are a number of budget construction techniques available to Colleges but whatever the technique
chosen, there should be a consistency in application.
The choice as to which technique or mixture of techniques to use is a matter for each College but it is the
responsibility of the lead finance professionals to ensure that there is clarity, and an understood rationale for
both the chosen technique and the advantages and disadvantages of competing techniques. Any variation
from existing techniques must be explained and current figures have to be re-stated to enable comparability.
The starting point from which budgets are constructed is a fundamental factor in determining future variations
and equality of treatment of competing resource bids. Budget construction techniques include the following:-
ºº Activity Based – A method of budgeting that develops budgets based on cost drivers and expected
activities, assigning the cost of each activity resource to all products and services according to the
actual consumption by each.
ºº Capital – A method of budgeting that ranks and selects investment alternatives and allocates
capital expenditure accordingly.
ºº Flexible – A method of budgetary control, mainly used in manufacturing environments, that “flexes”,
whereby the original budget is amended depending on activity levels and applying standard costs or
prices per unit.
ºº Incremental – A method of budgeting that takes the previous year as a base and adds (or deducts) a
percentage to arrive at the current year budget.
ºº Performance Based – A method of budgeting that is completely results oriented, focusing on
objectives and activities to achieve the final outcome.
ºº Priority Based – A method of budgeting that allocates funds in line with strategic priorities with
resources allocated to priorities in rank order until the resources are exhausted.
ºº Programme – A method of budgeting in which budgets are allocated to programmes (projects)
rather than to cost centres and all programmes are added to produce the final budget.
ºº Zero Based – A method of budgeting that ignores historical budgets and allocates funds ‘from the
ground up’ in line with the expenditure necessary to implement agreed strategies.
ºº The above list is not exhaustive but in terms of relevance to Colleges, setting aside the (often
separate) Capital budgeting process, the main (revenue) budgetary techniques used are Incremental
and Zero Based. In truth there is probably a hybrid of techniques used and within an organisation
it is common to find elements of other techniques within the principal techniques used. The main
advantages and disadvantages of the most popular techniques of Incremental and Zero Based
budgeting can now be looked at in greater detail.
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B2 Incremental Budgeting
Incremental budgeting is a technique which normally was the previous period’s budget or actual performance
as a base, with incremental amounts added or deducted to form the new budget. This is the traditional
approach to budget setting where the allocation of resources is based upon allocations from the previous
period. Incremental budgeting in its ‘purest’ sense, whilst being straightforward and easily understandable, has
its critics as it fails to take into account changing circumstances. It also promotes the practice of spending
the full budgeted amount to ensure a similar allocation in the following period, perhaps leading to potentially
avoidable expenditure.
Advantages of Incremental Budgeting
Disadvantages of Incremental Budgeting
The system is relatively simple to implement and
easily understood.
The budget may become out of date and bear no
relation to the activities being carried out.
Stable budgets are produced and any change is
minimal and gradual.
Resource priorities may have changed since the
budgets were originally set.
The impact of any budgetary change is easily
recognisable.
Promotes dysfunctional behaviour through the
practice of spending to budget maximums, to
‘safeguard’ budgets next year.
Managers can operate their departments and
manage their budgets on a consistent basis.
Budget co-ordination over a period of time is
easier to achieve.
Departments are, on the face of it, treated the
same therefore conflicts are minimised.
No incentive for expenditure reduction.
No incentive for entrepreneurial behaviour.
Assumes business practices and activities will
continue in the same way.
Managers may build in budgetary slack by over
estimating their past requirements in order to
obtain a more favourable budget and achieve
more favourable results.
Assumes the current year’s expenditure level is
justifiable and this may not be true.
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B3 Zero Based Budgeting
Zero Based Budgeting (ZBB) is a budget technique where every departmental function and activity is reviewed
comprehensively and all resource allocations must be approved, rather than just movements from the previous
period. The assumption is that the function for which the budget is being prepared does not exist.
Each departmental (cost centre) budget manager must start from a zero base, and examine its activities
and allocate resources as though the budget is being prepared for the first time. ZBB is designed to help
in achieving a more cost-effective delivery of services, where each activity must be justified in terms of its
“continual usefulness”. It is often known as ‘budgeting from the ground up’ as the technique discounts prior
behaviour and starts from a completely clean slate at every budgetary period comparing units of costs with
units of benefit.
As there are no preconceptions, previous inaccuracies are not carried forward (unlike in incremental
budgeting) and all costs are challenged and justified. However in practice, ZBB is generally based upon the
‘survival’ level of expenditure where a minimum base is established and expenditure above that level must be
justified.
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Advantages of Zero Based Budgeting
Disadvantages of Zero Based Budgeting
Efficient allocation of resources, as it is based
on needs and benefits, therefore forces
prioritisation of activities.
It is a time-consuming and exhaustive process,
and it is often difficult to isolate and rank the
individual priorities.
Managers are driven to find cost effective ways
to improve operations and review outputs.
Forced to justify every detail related to
expenditure which may lead to some
departments being favoured over others, e.g.
teaching over back-office support.
Inflated budgets can be detected.
Wasteful and obsolete operations can
be identified and eliminated, and perhaps
alternative courses of action will be
recommended, e.g. outsourcing.
Staff motivation may be increased through
promoting initiative and responsibility in decision
making.
Organisational communication and coordination
may be improved.
Departments (cost centres) are required to
identify their mission and their relationship with
organisational goals.
Endeavours to redirect resources from lower
priority current services to higher priority new
services, improve efficiency and effectiveness,
and reduce spending.
Depends upon the honesty and integrity of
managers as any manager that exaggerates will
distort the results.
Necessary to train and educate the managers
as the techniques must be clearly understood at
all levels to enable successful implementation.
More managers are involved in the process
therefore it is difficult to administer and
communicate the budget outcomes.
In a large organisation, the sheer volume of
paperwork may be so large that no one person
could read it all. However, summarising the
information into a more manageable format may
remove details of critical importance.
Where there is an interdependency of crossfunctional activities, it could be possible that one
department’s request could be approved whilst
the other departments was denied, resulting in
either over-staffing or under resourcing.
Emphasis is on the short term rather than
the long term by consistently assuming new
activities.
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B4 Other Budgetary Considerations
Once the budget construction technique has been decided upon, there are a number of other factors to take
into consideration.
B4.1 Rolling -v- Static Budgets
Whilst static budgets work to a finite end date, rolling (or continuous) budgets involve maintaining a budgeting
plan for a specified time period in the future. Rolling budgets build a degree of flexibility into the model, by
adding a new time period as the current time period elapses. For example, after the strategic plans are
integrated into the annual operating budget, the budget may be constructed as four quarterly periods, and
as one period finishes, another quarter is added. As each new quarter is added, changes are made to reflect
changes in the economic and financial environment. It should be recognised that rolling budgets are not simply
annual budgets done more frequently. This is therefore a robust tool for planning and control as one eye is
always on the “horizon”.
However, many of the “problems” with annual static budgets are not really budgetary problems as such but
are really organisational problems where development and utilisation of the budgets is flawed. For example if a
budgeted income stream is achieved early in the year, this could be followed by a period of “coasting” which is
not really a budgetary problem but a cultural one that could be addressed by proper review systems.
Rolling budgets can often be complex and time-consuming to manage and often expensive software is required
to properly implement rolling budgets. It should be recognised however that expensive software will not
improve organisational and cultural concerns, which is often at the root of problems in “static budgeting”.
B4.2 Imposed -v- Participatory Budgets
Another consideration for Colleges is the style of budgeting. An imposed budget is one developed by senior
management with little or no input made by operational personnel (budget holders), who are simply then
informed of the budget and constraints. Although these budgets are relatively simple to construct and are
only resource intensive for senior management, unless senior management have a full understanding of the
business on an operational basis, this practice may be flawed. Imposed budgets may be de-motivating for staff
who can feel undervalued or it may lead to budget mismanagement under the premise of being perceived as
“unrealistic” in the first place with unachievable targets.
Participatory budgets on the other hand involve a degree of input or are indeed developed in full by operational
personnel. Although the budgetary process may be lengthy and complex given the number of “participants”,
this style may lead to a sense of ownership from the budget holders with less “surprises” likely to crop up.
B4.3 Devolved -v- Non-Devolved Budgets
Devolved budgets are those rolled out from the centre (senior management) to operational personnel (budget
holders) who are charged with managing their budget subject to the agreed budgetary constraints. NonDevolved, or centralised budgets on the other hand are kept at the centre and senior management take full
budgetary responsibility.
In terms of the advantages of devolved budgets, they may be motivational for managers in that they obviously
result in less strain for senior management and perhaps lead to more effective budget management.
However, unless the budgets are devolved to those fully versed in budgeting, and the communication channels
to senior management are clear, there may be a lack of “live” control perceived at the senior level.
It is important to recognise that a “non-devolved” budget is not necessarily a “non-participatory” budget.
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B4.4 Vertical -v- Horizontal Budgets
Vertical budgets are those where the budget holder manages the full range of account codes/budget lines
within their own particular area/cost centre. In contrast, horizontal budgets are those that are restricted to
a few account codes/budget lines but stretch across all cost centres. Horizontal budgets are most prevalent,
although not restricted to, estates, utilities, rent, rates, repairs etc., although allocated to every cost centre are
managed by the Estates Manager. In smaller Colleges, horizontal budgets may be extended to staffing.
B4.5 MoSCoW Budgeting
MoSCoW is a method used in budgeting, derived from business analysis techniques, to arrive at a prioritisation
of budgetary requirements.
M – MUST have this (to deliver outputs).
S – SHOULD have this if at all possible (to deliver outputs).
C – COULD have this if it does not affect anything else (nice to have).
W – WON’T have this time but would like in the future.
All requirements are important but they are “prioritised” to deliver the most immediate and greatest business
benefits.
B5 Risk and Sensitivity
The statement of the context and assumptions upon which the financial plans and forecasts are based is
important. A full environmental scan considering the wider political and economic context, using techniques
such as a PEST analysis, will help inform this part of the process. This provides management and the Board a
clear indication of the basis upon which the budget has been prepared. However, it must be recognised that
there are uncertainties and that the assumptions made or implied by the budget may turn out to be incorrect
to some degree. Robust risk management procedures should now be routine and most Colleges will have a risk
register in place and appropriate processes for the recording, monitoring and management of risk. It would
also be expected that the risk register will include a series of risks which relate to the financial security or
sustainability of the College. One strategy to mitigate financial risk will typically be robust in-year reporting and
monitoring of financial performance.
The consideration of risks associated with the preparation of the annual budget and the monitoring of
performance against the budget will help ensure the overall College risk management strategy is effective. It
should be recognised that the likelihood and potential impact of risks will change as time progresses.
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The table below provides examples of some of the items that may have to be considered on a regular basis as
part of the risk management process of a sample college. The data presented is for illustrative purposes only.
Risk
Probability Materiality
Estimated
Action / mitigation
Potential Impact
Pay award breaches
public sector /
treasury guidelines
and exceeds budget.
Low
High
£15k per 0.1%
Good staff relations,
improve staff efficiency
including redundancy,
detrimental changes
to other terms and
conditions of staff and/or
re-deployment.
Failure to achieve
foreign student
income targets.
Medium
Medium
£30K - £50k
Monitoring of recruitment
/ contracts. Increase
marketing effort.
Failure to achieve
100% of the fee
waiver grant.
Medium
Medium
£90k
Monitor activity in-year.
Increase in staff
absence rates.
Medium
Medium
£150k
In-year monitoring of staff
budgets.
Overspending on
Medium
Student Support as
a result of excess
demand and or
improved attendance.
Medium
Up to £100k
Careful monitoring of
spend and commitment
throughout year, SFC inyear reallocation process.
In some Colleges that operate a devolved budgeting system it may be helpful to put in place a formal risk
management process which places the responsibility for this aspect of financial management with the budget
holder. Appendix B provides an example template of how this might work at this level.
The Financial Forecast Return (FFR) also provides a helpful starting point for examining the sensitivity of
financial plans. Colleges should have scenario planning processes in place to proactively prepare for future
changes. It may be helpful to add additional scenarios to the FFR framework and incorporate this into annual
and medium term budget planning processes.
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Part C – Budget Monitoring
C1 Budget Monitoring and Reporting Process
Budget monitoring and reporting is critical and “It is more than just monitoring the numbers”. The following
section provides an introduction to the ultimate aim of providing Joined-up Performance Management and
to highlight the fact that budget monitoring is more than just “a numbers exercise”. The ultimate aim of any
reporting tool is to provide Joined-up Performance Management and whilst this aim maybe some way off for
Colleges, the individual elements are probably all there.
C2 Joined-up Performance Management
The integration of financial and non-financial data is fundamental to effective performance measurement in
Colleges. It is also fundamental to efforts to adopt systematic approaches to performance improvement.
However, it is not uncommon for the wider performance management processes to be carried out separately
from financial management. Nor is it unusual for the existence of a departure from plan/budget to remain
unacknowledged until relatively late in the year.
Performance management frameworks and reporting models include a variety of different approaches. In
general, this is an area in which much good progress has been made in many Colleges over recent years.
Nevertheless, the Audit Commission in its discussion paper World Class Financial Management highlights that:
“
In many public sector bodies, the annual financial planning
process is often only loosely connected to the strategic and
service planning process. The Board or its equivalent should
receive reports that cover the information they require to manage
the strategic direction of the organisation.
”
Integrating the budgeting, financial performance management, monitoring and reporting cycle with the
performance management framework and providing the necessary financial reporting elements for effective
performance management is critical to the overall process. Its achievement is likely to rely upon a mixture
of processes, techniques, leadership and behaviours. There will not be one right way of doing it. Critically,
the Board needs to encourage cross-College development and ownership of plans and their subsequent
monitoring.
The approaches to integrating planning and how these can be made to work better are explored in the 2006
CIPFA publication Integrated Planning: An Overview of Approaches. In a College-wide process, where underperformance in one area may have to be offset by action in another, the speed with which an adverse situation
is detected and acted upon is critically important. As well as having an appropriate process, it is important to
maintain a culture in which early exposure of problems is positively encouraged.
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C3 Key Success Factor – Accurate and Timely Management Information
This section will look at both sides of the discussion and highlights that the availability of accurate and timely
management information is central to any performance management system. However, this task often
presents serious problems for Colleges. Arrangements frequently fail to produce the information necessary
to run Colleges well and cost effectively; consequently, managers are ill equipped to manage performance
and make evidence based decisions. Managers can also struggle to provide accurate information for
national, as well as local, scrutiny and monitoring purposes. Too often, the cause of the problem is cited as
information technology when in reality there is lack of clarity as to what information is required to support good
management.
Mechanisms for performance management are now widening from the traditional methods to those including
balanced scorecards as advocated by the Scottish Funding Council.
Nevertheless, the nature of the task is complex. Some of the challenges are caused by:-
ºº The number and complexity of individual transactions that have to be tracked.
ºº Data is often held on more than one system making reconciliation difficult.
ºº Capacity problems on IT networks. Often, new systems are implemented without a thorough analysis
of the impact on the College’s network.
ºº The above lack of capacity in IT networks can result in slow response times. Frustrated staff then
develop paper systems. This duplicates data collection and requires the data to be input at a later
date, increasing the risk of error.
ºº Responsibility for data management is usually spread among many staff in the College and through
different management streams, with little clarity about the accountabilities of individual members of
staff or managers.
ºº The staff responsible for inputting data are usually not the same staff that has to use the data.
This means that those responsible for input are often unaware of how critical their work is to the
College or of the needs of managers and other staff who need the data. Equally, those who use the
data can be ill informed about the problems and difficulties faced by those staff responsible for data
collection.
ºº The role of administrative staff, who are key to effective data collection, can sometimes not be given
a high enough priority.
ºº Problems of reconciling finance and activity data prevent managers from being clear about the
expenditure implications of decisions regarding service delivery and so undermine efforts to improve
efficiency.
Management Information is central to effective performance management in any College. There are a number
of key issues for College managers to address if these problems are to be avoided (see good practice tips in
next section). Primarily though, there needs to be a culture in place that sees information as central to the
management task. Colleges that are information conscious and evidence driven are more likely to solve the
day-to-day practical problems that thwart access to good information. ‘The more you use it the better it will
get’.
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C3.1 Good Practice Tips for the Generation of Accurate and Timely Management
Information
Management action will be needed to ensure accurate and timely management information as indicated
below:-
ºº Be clear about what is needed and why.
ºº Expect information to drive decision-making. Use information routinely at all levels. Expect it to be
reliable. When staff know this it will help to improve accuracy.
ºº Ensure that staff responsible for data management are clear on how they will be held to account.
ºº Ensure that one senior manager is designated as having overall responsibility for management
information, and has the authority to address any problems of staff performance, IT system
performance, and business processes.
ºº Ensure that the full implications of implementing and then running College IT systems have been
evaluated and addressed. This must include the impact on areas which are usually the responsibility
of College’s IT support teams, and a re-engineering of business processes to ensure that they align
with the operational functionality of IT systems.
ºº Undertake regular audits of the quality of management information.
ºº Ensure there is a robust process for linking finance and activity data.
ºº Ensure that the administrative functions that generate, analyse and report management
information for performance management purposes (national and local) are adequately resourced
and that staff are appropriately skilled.
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C4 Quick Quiz
Take this quick quiz and see where you believe your College sits in terms of the arrangements that are in place
to ensure effective monitoring and reporting of performance.
Attributes of a
best practice College
This College
meets the
attributes of a
best practice
College
This College
exhibits some of
the attributes of
a best practice
College
This College
exhibits none of
the attributes of
a best practice
College
Score 4
Score 2
Score 0
Timetables for financial performance
monitoring are set and met, and
reported at least monthly.
There is active involvement by the
Senior Managers, Managers and
Board in budget setting and financial
performance management.
Activity and expenditure information
is integrated and the College has a
clear view of the cost of all elements
of delivery and monitors changes on a
regular basis.
Board members , managers, staff
know how well their College is
performing.
The implications of in-year
performance monitoring results are
built into future service plans.
Performance management is
supported by effective and integrated
IT systems.
Outcomes from performance
management are reported internally
at different levels in the College and
externally.
Performance monitoring leads to
problem identification and decisions to
solve problems.
The College regularly reviews its
financial performance data to other
colleges in key areas.
Total score
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There is no right or wrong answer to the above quiz. There is also no scoring grid that says if you have above
20 you exhibit joined up effective management practices. All College are different and at different stages of
integration and development. However if a number of the answers were in the middle and right hand columns
it is potentially time to move performance monitoring up the agenda within your College and the following
section puts in some context why a College management should be aiming to be more towards the left hand
side of the above grid.
The closure of the accounts is traditionally viewed as a technical finance exercise in a College. As a
consequence it may have previously failed to engage the interest and attention of the Board and management
of the College. Consideration of final outturn results was often fleeting, taking place several months into the
succeeding financial year. By this stage the College’s leadership may have been actively engaged with the
budget process for the succeeding year. As a consequence, so long as there are no major surprises in its
headline outturn results, the Board may not question in detail the variances presented.
If this is happening then the College is missing a vitally important opportunity to engage in detail with the actual
financial performance of the College.
Colleges are however moving away from the previous practices where the separation of in-year monitoring
from the production of the final accounts and reporting externally only once in the cycle, and some time after
the close of the year in question, was the norm. More and more Colleges are attempting to emulate the very
different world of private sector counterparts where interim results on a quarterly basis are frequently the
norm.
The consequences for a leadership team’s lack of focus on actual results are potentially very serious. It can
result in a Board which has only a tenuous and infrequent understanding of the College’s actual financial
performance, for which it is ultimately accountable.
The good news is that the accounts closure timetables for all public bodies are shortening. This creates the
opportunity for Boards and management to see provisional results rapidly after the year-end and to engage
with them in a more active way, posing questions which also have relevance for the College’s future: most
obviously, what are the implications of last year’s results for this year’s performance and for future years’
plans?
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Part D - Improving Financial Performance Management
D1 - Overview
If the above situation of late or insufficient scrutiny of financial performance data seems familiar then the Audit
Commission report on “Performance Breakthroughs - Improving Performance in Public Sector Organisations
“(2002) indicates eight areas that people concentrated on which made a difference in improving performance.
They started to:-
ºº Make it clear that performance matters.
ºº Join up their thinking and learn.
ºº Concentrate on the things that matter.
ºº Make national agendas work for their organisation.
ºº Sign up their staff.
ºº Find their own frameworks.
ºº Measure what matters.
ºº Help people to perform well.
The report states that although it helps to make progress on several fronts, moving forward in one area is a
good start. A common thread running through each breakthrough is the focus and doggedness that people
showed. Often they have tackled a common problem in a familiar way – but kept at it.
However you cannot take your eye off the ball of financial monitoring but you need to be aware of the risks of
just looking at figures and figures alone.
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Part E - Integrating Financial Performance Management
E1 - Overview
Without losing its control and accountability mechanisms, modern budgeting needs to better support
performance management by integrating known financial outcomes with frequent re-forecasting of the
budget and linked to analysis of performance trends. A College’s performance management reporting
systems will draw on a number of information sources and reflect the range of stakeholder perspectives.
There are a variety of approaches to developing the performance metrics and the reporting of performance.
But without integration of the financial resources consumed, the College cannot measure value for money
or make informed choices about future resourcing and service priorities. One way in which the in-year
operational performance and financial information can be integrated more closely is to develop a system which
encourages the issues to be considered together and to develop management reports that provide a rounded
picture.
Colleges should develop an approach that consciously attempts to consider the financial and non-financial
processes together. A key feature is that before any review of the financial variances takes place, the
College asks questions about the expected position, based on the understanding of what has happened,
what happened that was unexpected and what planned events did not take place. It needs to structure its
responses and planned management actions into those that can be taken in-year and those that require a
longer timeframe, with consideration of what specific financial actions may be required as well as substantive
operational actions.
The best management reports tell a story about what has happened and what is expected to happen in the
future. Appendix A gives a list of items that should be considered for inclusion in a set of monthly management
accounts and report.
The accounts and report provide the information needed to take any corrective action required. Such action
needs to take place for the College as a whole, so it is important that all areas are covered. This implies that
the operational data and financial data are presented together in a comparable and consistent form. It also
implies that risk and other aspects of performance are reported along with the financial headlines. The risks
are thus quantified financially and uncertainty in the financial forecasts is made explicit. Some Colleges have
found it helpful to present a regularly updated board-level report of risks and opportunities, in which the main
possible financial up- and downsides are shown alongside each period’s forecasts. This permits focus on a
range rather than a spot forecast.
Where big deviations from budget have occurred, it may be necessary to formulate and report on a recovery
plan alongside the routine budget profile. Getting the reporting framework right is critically important so that
the Board has the full picture on which to base its decisions. It ensures that everyone is considering issues
within the context of a consistent reporting template and using a consistent language. For management it
brings the benefit that a common framework for reporting can enhance co-operation between the operational
managers and the finance function.
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E2 An Integrated Reporting Framework
There are a number of stages in creating an integrated reporting framework:
E2.1 Stage 1 – Effective Monitoring and Reporting
The first stage of ensuring effective monitoring and reporting of budgets is to ensure that the following
arrangements are place:-
ºº Timetables - The 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 Board 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.
ºº Reporting timescales - Reporting timescales should be at least monthly. This should ideally
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.
ºº Bottom up then top down - While reporting arrangements need to be from the ‘bottom up’,
the response to monitoring information should 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 budget holders are seen to be held to account by the senior
management of the College. The active involvement of the Senior Management team is essential to
ensuring a proactive response to budget monitoring and to the development of a culture of financial
accountability.
ºº Actual then forecasted - 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.
ºº Evaluate the outcomes - 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.
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E2.2 Stage 2 – Management Accountability
The second stage is to ensure that there is clearly defined 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 College are accountable for, nor between the responsibilities of
managers and finance support staff.
ºº Clarity of Budget Headings - 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 delivery 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 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.
ºº Clear delegation - The College’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 a higher level, then the budget management accountabilities need to be explicitly stated.
ºº Clear understanding - 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. 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.
ºº Clear change control process - Changes to the accountability arrangements within years
need to be clearly articulated. Faced with extreme budget pressures, a decision may be made
to remove decision making from the budget holders to a higher level of management or to a
‘decision-making panel’. In these circumstances, the implications for the budget holder and those
assuming responsibility should be clarified. It is inappropriate for the original budget holder 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 budget holder. A ‘line
needs to be drawn’ under the performance of the original budget holder 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 budget holder, but they remain
accountable for the service implications.
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E2.3 Stage 3 and Beyond – Forecasting Beyond the Actual Results
Developing a forecasting model
Measure what matters then report on it
Continuous Forecasting and In-Year Reporting
Uncertain demand and dynamic external changes necessitate the ability to detect trends which are emerging
over the medium term - two to three years - and to model their implications. A significant threat or opportunity
may not affect the current year but it may be critical that action is taken immediately to maximise or mitigate
its impact next year and beyond.
Rolling forecasts that are formally reviewed and updated each quarter are a potentially powerful tool in these
circumstances. They can be prepared at a higher summary level and overlay the existing budget detail. The
detailed monthly monitoring and reporting will continue, but the summary rolling forecasts and reports offer
a means to connect the performance management framework and longer-term strategic planning of the
College.
Potential Forecasting Model
Quarterly rolling forecasts and in-year reporting operating at a summary level across a College work by looking
ahead a fixed 12 month period, with the first two quarters profiled monthly. As each quarter passes an
additional quarter is added so that the 12-month forward view is maintained. At each new quarter, forecasts
are recast. Actual spend is reported, and combined with the forecast, presented as a trend analysis. This
combines the actual financial position with the forecast to provide a map of the past linked with the predicted
future over an 12-month horizon. Combining the financial map with performance output data and forecasts
also as a trend allows an overall integrated picture of performance to be presented.
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How it works
This diagram suggests a likely process for generating and using continuous forecasts and reports each
quarter.
1
Review plans, progress, prospects and risks at corporate and service levels
2
3
Update operational data
Update central data
4
Produce forecast and trend analysis
5
Produce commentary and
exception narratives
6
7
Reconcile with available funds
Check and approve forecasts
8
Issue Board report
9
Review position, adopt forecasts, and agree funding re-allocations
10
Adjust forecast to reflect funding reallocations
11
Adjusted forecast becomes the new approved plan
12
Return to stage 1 and review
The above process looks forward and aims to provide an 12-month high-level report and forecast.
Each quarter starts with reviewing progress against the previous forecast, identifying any new factors and
revising assumptions and risks, at the same time projecting them forward another quarter (1).
Senior Management Teams review central and strategic issues, including the external economic environment,
while operational managers focus on detailed service issues. Each submits their revised data for modelling and
the production of forecasts (2 and 3).
For many Colleges this process will be aided by their existing systems or can be developed on an excel
spreadsheet. The ideal will be a system that allows people to enter their data and assumptions directly, and
then applies a consistent approach to aggregate the different parts of the College, derive forecasts and
produce monitoring reports complete with key trend analysis (4).
Where forecast or actual spending and performance exceed certain preset thresholds, the responsible
managers should automatically append a commentary explaining the causes of the variance and any proposed
remedy (5).
In reality, a College will want to validate these reports through routine and rapid challenge and scrutiny before
senior managers sign them off (6).
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Finance staff will also identify any decisions that have to be taken, together with any discretionary funds held at
the centre and the options for allocating them to service delivery programmes (5 and 7).
At this stage the forecast and report can go to the board (8), who will wish to understand the implications and
take decisions in the light of what they learn (9). It is possible that the board’s decisions on budgets, charges or
funding allocations will change the assumptions on which some forecasts were made, so these will have to be
revised (10) before the adjusted forecast is issued as the operating plan for the coming quarter (11).
It is important to note that the practice of monthly monitoring and review of expenditure, income and activity
will continue, to ensure that there is due regard to the management and stewardship of assets and funds.
If the information from this process is to be useful and timely for board-level decision making, it will need to
be compiled and reported timely at the end of the period. Forecasts should be prepared after the end of the
month when actual to date figures are available.
The key features of a 12-month rolling forecasts and reporting model are:-
ºº Forecasts always look ahead the same distance into the future. This avoids an increasingly shortterm view as the financial year-end approaches.
ºº Forecasts are routinely updated on a regular basis. Over time they will become more accurate as
managers develop better forecasting skills and a deeper understanding of the key cost drivers and
variables within their business.
ºº Re-forecasting is better focused. There may be a number of budget headings which can be prepopulated by finance staff, e.g. salaries. Some standard costs can also be specified in advance. This
leaves budget managers to focus on re-forecasting areas that are more subject to change and
which require local knowledge, e.g. client numbers or other demand factors.
ºº Trend analysis can be developed. Actual results are not compared against a profiled budget. Instead,
trend analysis is developed, with actual financial results usually being compared against previous
results, e.g. previous month or year-to-date figures. Along with this trend analysis, narrative
explanations are sought from managers to answer the question, “Do we know why we are where
we are?”. The use of graphical trend analysis for key areas of income and expenditure can be linked
to trend analysis of key non-financial data or key performance indicators as part of performance
management. By tracking key operational indicators such as volumes against cost information, any
process weaknesses, such as delays in supplier billing or payments, can be identified. For demandled services, volume trends can give early warnings of rises in demand and alert management earlier
to areas where demand control may be necessary.
E3 The Benefits on Behaviours
Forecasts encourage bottom-up engagement of budget managers. The process cannot be undertaken solely
at a central level, as the managers who are closest to their service need to play a major role in forecasting,
bringing to bear expert local knowledge of the service for which they are responsible. They therefore consider
not only under- or over-spending but also under- or over-performance. Again, this process brings together
service and financial performance and so assists in obtaining agreement and ownership of the outcomes and
level of performance to be achieved. Communication between managers and finance staff is likely to increase
through this process. Ultimately:-
ºº Resources can be redirected on a quarter-by-quarter basis. The quarterly revision of the financial
plan allows resources to be reallocated at regular frequent intervals.
ºº Forecasts are made on a high-level basis. The rolling forecast approach encourages the use of
broader blocks. This helps to focus managers’ time and attentions on key expenditure and income
drivers.
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Part F - Conclusion
F1 Monitoring and Reporting Arrangements
There is no one right way of budgeting, monitoring, and reporting and financial performance management.
What works best will depend on the nature of the College, its culture and the available technology. The
accuracy and reliability of the forecasts underpins and informs the College’s view of its future, its headroom
for investment and service improvement in the long-term, medium and immediate future. Monitoring allows
a College to continuously check reality against its plans and expectations, and adjust its course of action.
Reporting gives the account of its actions. It is an interactive loop that is constantly played and that should be
constantly refined to better support the business.
F2 In-year monitoring
Once the financial year starts, in-year monitoring will get under way, not always immediately. Typically it will
involve the operation of monthly reports and variance analysis comparing the forecast outturn against the
budget target. The Audit Commission highlights in its discussion paper World Class Financial Management
(2005) that:
“In the public sector, top management too often does not focus on financial performance until well into the
financial year, at which point it will forecast significant variances from the plan. This in turn prompts a period of
fire-fighting to bring spending in to line before achieving a bottom line outturn in line with the plan.”
It is a fundamental requirement to ensure that the process takes place in a regular, systematic way
throughout the year, with engagement and intelligent understanding from all budget holders,. Importantly,
Colleges must develop the capability to detect and extrapolate underlying trends early and must be ready to
take action to combat adverse developments and to exploit opportunities.
Good in-year monitoring should take account of accruals, for both revenue and capital spend. The balance
sheet items should also be monitored. Forecasting the year-end position can generate important information
for the future planning perspective, and can also sharpen the focus of accountability questions. Critically,
in-year monitoring must also have an eye to the medium term. An adverse development may have minor
implications in the current year but it may threaten much more serious implications next year and beyond.
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References
Audit Commission November 2005 “World Class Financial Management. A discussion paper.”
CIPFA 2006 “Integrated Planning: An Overview of Approaches.”
The Audit Commission 2002 “Performance Breakthroughs - Improving Performance in Public Sector
Organisations.”
CIPFA 2008 “Improving Budgeting: Modernising the Cycle.”
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Appendix A - Financial Information Contents of Monthly Finance Report
The starting presumption for the submission of financial information to the Board is that the Board will receive
the same monthly financial data that the Senior Management Team receives. Further to this, the monthly
financial report submitted by the Senior Management Team to the Board must include appropriate information
to enable the Board to understand:-
ºº The financial performance of the College in the year to date.
ºº The expected impact of this on:- The likely outturn for the year.
- Any key targets and performance indicators.
Without prescribing the overall contents and format of the monthly information flow, which will reflect the
Senior Management Team’s judgement on what is relevant to giving an informed view of the financial position
and performance of the College, the monthly finance report may include:-
ºº Income and expenditure statements *
ºº Cash position *
ºº Balance sheet *
ºº Student numbers and potentially SUM’s activity
ºº Staffh eadcount
ºº Commercial business performance * *
ºº Opportunities and risks
ºº Performance against key targets and performance indicators **
ºº Borrowings* *
ºº Details of any significant change in accounting policy or treatment and the financial implications
ºº Details of any material reconciling items between the management accounts and published
statutory accounts (if relevant)
* For month, year to date and projected full year, with variances to budget and forecast
** Quarterly as a minimum
Appendix B - Example of College Management Accounts
The Association of Colleges in England have published a model set of Management Accounts along with a
commentary. Although the data in these accounts are based on the English funding model the content can be
adapted for use in any College
The model set of Management Accounts can be found at:
http://www.aoc.co.uk/en/Policy_and_Advisory_Work/finance_and_statistics/finance_directors/finance_
reporting_project.cfm
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Appendix C – Balanced Scorecard
The following are examples of items from a Balanced Scorecard as per SFC circular “Guidance for developing
a framework to support institutional sustainability and scenario planning” issued on 6 October 2009 SFC/31/2009
Financial Strategy
Goals
Evidence
Generate sufficient level of
operating surplus to finance other
key resources
Diversify income streams
Operating surplus as % of total
income
Included in Audit Agencies
Report
Non-SFC income as % of total
income
Buildings and Infrastructure Strategy
Goals
Evidence
Included in Audit Agencies
Report
Provide high quality facilities for
staff and students
Staff and student satisfaction
surveys, estate condition data,
estates strategy, ICT strategy
a
Continuous investment in estate
to address backlog maintenance
issues and/or maintain high
quality facilities
Capital and maintenance spend
on estate/insurance replacement
value, estate condition data
HR Strategy
Goals
Evidence
Effective staff training and
development programme
Number of days per employee
invested in training and
development, external
accreditation, appraisal system
Appropriate levels of staff turnover Leavers in last year as % total staff
Included in Audit Agencies
Report
a
a
Appendix D – Working Group Membership
Iain Clark, Financial Controller, Motherwell College
James Gow, Chief Financial Officer, John Wheatley College
Janet Thomson, Assistant Principal Resources, Cardonald College
Alan Ritchie, Director of Finance and Estates, Clydebank College
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