SECTION : 4 BUDGET MANAGEMENT

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1 SECTION : INTRODUCTION Budget Management is the process of planning and measuring an organisation s effectiveness in achieving its aims and objectives. By using methods of Budgetary Control, comparisons between actual results and planned results can be made and necessary action taken. The process relies on timely and accurate management information, so that effective management decisions are made. Budgetary Control should be used as a tool for managers and as a media for sharing information, enabling the Financial Management of a school to become better organised and more effective. 4.2 BUDGETARY CONTROL Budgetary Control may be defined as; The process of comparing Actual Results with Planned Results and reporting on the Variations. Budgetary Control is a tool aiding budget managers, be they Governors, Head teachers or any member of staff with a budget, to compare the actual spending against their original plan. A comparison between actual and plan may be constructed in the form of Budget Monitoring Report. If variations occur, the reasons for them must be identified and a course of action considered if it is felt that a significant deviation from the original plan has taken place. It may then be necessary to revise the original plan. 4.3 INFORMATION NEEDED FOR A BUDGET MONITORING REPORT Resources Available: Governor s approved budget for the Financial Year (representing planned spending in year 1 of the three-year plan). Reserves, i.e. funds earmarked for future years. Unallocated funds. Expected changes to available resources Amounts committed so far against the Budget: All contracted staff for the Financial Year. All orders raised/invoices not yet paid. All income received but not yet reconciled Actual Expenditure: All reconciled staff payments, invoice payments, reconciled income, contractors charges paid Future Forecast Expenditure: All anticipated expenditure up to the end of the Financial Year, which has not yet been committed against the budget. Devon Financial Services Page 4:1 April 2003

2 4.3.5 Total Forecast Expenditure for the Financial Year: The total of Commitment plus Actual Expenditure plus Future Forecast Expenditure. Effectively, a forecast is made of the final or Out-turn position for the Financial Year Variations: The difference between the Resources Available and the Total Forecast Expenditure. Notes: All significant variations in income and expenditure should have detailed notes to explain why the budget set now appears to be incorrect and, in summary, what the implications for the future may be. Changes in resources due to movement in pupil numbers or other circumstances should also be clearly explained Collating the information To ensure that quality management decisions can be made, it is vital that the information, upon which those decisions are based, is accurate Resources Available: The total of funds within School Budget Share held in the Local Accounting System (i.e. SIMS FMS or Manual Commitment System) with the latest total allocation shown on the most recent notification. The total income held in the Local Accounting System with the latest allocation shown on the most recent FINEST printout. For Local Payments Scheme(LPS) schools a set of control totals is provided by the authority Amounts Committed so far against the Budget: It is important to ensure that outstanding commitments for staffing and orders/invoices are true commitments. For example: all members of staff have been paid correctly for say June, and all payments show correctly in the local system, (i.e. the amounts match to the FINEST printouts) but there are still commitments outstanding for June. In this case the reason for the commitment appearing should be investigated and if found to be incorrect, it should be removed or corrected. This action will exclude the item from the Budget Monitoring Report. If this is not done the school will project expenditure that will not occur and this will unnecessarily preclude resources being applied to other items in the plan. The same principle applies to orders and invoices. This review and clearance of unwanted commitments should be done as part of the monthly reconciliation Actual Expenditure: The net total of actual expenditure and income held in the Local Accounting System should be reconciled to the total shown in the latest FINEST Printout on a monthly basis. This is a requirement of Financial Regulations. Any discrepancy should be investigated and the true actual total established. It is important to remember that Petty Cash expenditure shown in the Local Accounting System may be more recent than transactions shown in the latest FINEST printout. This is because entries made in the Local System since the last Petty Cash claim do not yet appear in FINEST. LPS schools do not reconcile to FINEST but it is important that pay data and bank accounts are kept reconciled on an ongoing basis and certainly not less than monthly. Devon Financial Services Page 4:2 April 2003

3 Future Forecast Expenditure: To include all of the following; Charges on the budget not subject to official orders. i.e. Contract payments to Devon Direct Services, Electricity charges, Gas charges, etc. Planned expenditure not yet committed. i.e. orders not yet raised. Staff not yet included in commitment record. i.e. contracts to commence at a future date. Income estimated but not yet received. All of the above should be calculated to cover the period from the present to the end of the Financial Year. Relevant historic information should be used as a basis for calculating future forecasts. For example, previous year s energy costs can be used to estimate future costs for similar periods Total Forecast Expenditure for the Financial Year: The total of: Amounts Committed so far against the Budget. Actual Expenditure. Future Forecast Expenditure. The resulting total is effectively the latest calculation of the amount of resources needed to achieve the aims and objectives of Year 1 of the School Development Plan Variations: If there is a difference between Resources Available and Total Forecast Expenditure for the Financial Year this indicates that the latest forecast or calculation of total expenditure within a particular budget line, differs from the original forecast or budget. It is important that the reason for any significant variance is established and then reported to the Budget Manager. It may also be necessary, in the case of a forecast overspend, for Senior Management to re-assess priorities in Year 1 of the School Development Plan and decide upon the relevant course of action. The impact of the action upon Years 2 and 3 of the Plan should be assessed at the same time. Variations agreed to individual budget lines are known as virements. All virements must be undertaken within the overall schools budget allocation and approval sought from the governing body in accordance with delegation limits. It is important to distinguish between those budget variations where the impact is of a temporary nature, e.g. vacancy savings and those with an on-going impact, e.g. the appointment of permanent staff. It is not advisable to use fortuitous savings of a temporary nature to enter into an ongoing commitment as there is a real danger of producing an overspend in future years. It is important to only make virements which are material to the budget. Before changes are made to the School Development Plan, it is appropriate to examine the original plan produced during the Budget Setting stage, in attempting to establish reasons for an apparent change of course. Devon Financial Services Page 4:3 April 2003

4 What is significant? This will vary according to the size of the budget. Judgement is required to decide; for example a few pounds variation on a small budget although relatively large in percentage terms may be easily absorbed. In a large school a variation of 10,000 may be small in percentage terms but it is still a substantial sum of money. The best test to apply is: if the extra cost may be difficult to absorb or has ongoing consequences then it should be reported Suggested Reports and Formats The three suggested reports are as follows: Budget Monitoring Report - Detailed. (Containing information on all lines.) Use of the Monitor programme is recommended for users of SIMS FMS. Non SIMS users should follow the suggested format and may wish to obtain assistance from their Finance Officer in compiling the report. Budget Monitoring Report - Summary. Containing detail on staffing lines but summarising all other Budget Headings. The report can be produced using Monitor as for the detailed report. This format is suitable for presentation to the Governing body. Budget Adjustments Report. (Reporting on virements made.) The report should include information on Original Budget, Latest Budget, Amounts Vired and reasons for virement. This report should always accompany the Budget Monitoring Report and should show only those changes made since the last Budget Adjustments Report. It is essential that the Head Teacher provides a comprehensive commentary relating to the Financial Reports issued to Governors, so that an overall view of the School s financial position can be obtained Use of Budget Monitoring Reports Internal Budget Monitoring: Detailed reports should be produced for the Head teacher, Heads of Department and the Bursar or Administrator. This report should be produced at least monthly and may be used for day to day management of finances, but can also be issued to a wider audience if requested. (Responsibility for production of reports will vary between schools.) Reporting to Senior Management Team: Summary or Detailed Report should be issued at least termly or as and when meetings are scheduled. Reporting to Governors: Summary Reports should be issued at least termly for full Governing Body meetings. Detailed reports may be required by the Finance Committee. Reports must be issued at least seven days prior to meetings, so that examination and digestion may take place. Reporting to the County Council: Four reports per year are required. All schools will have received a copy of the County Council s Policy on Budget Monitoring. Devon Financial Services Page 4:4 April 2003

5 Reporting to DfES/OfSTED: There is no general reporting requirement, but maintaining good quality Budget Monitoring information will enable Budget Managers to compile clear and accurate reports on request. OfSTED intend to make increasing use of benchmark data collected as part of Consistent Financial Reporting (CFR) to challenge schools performance. Schools will find it helpful to use their monitoring reports to support their responses. All documents discussed at the governors meeting must be retained with the minutes to allow future scrutiny Documents: Scheme for the Financing of Schools Sending Monitoring Reports to the County Council is only currently required for School Budget share. Model Policy on Budget Monitoring Levels of Delegation The notes in this section are intended to assist in setting appropriate levels of delegation. They are intended as a guide and individual schools will adjust the suggested levels to suit circumstances. Good delegation requires effective supervision. It also requires a degree of trust and proper control processes. Individuals should own processes and accept responsibility for their decisions. Setting the monetary levels for individuals to exercise authority requires an element of judgement. A number of factors may be significant but local circumstances will generally shape the final decisions. They will reflect the size of individual budgets the costs routinely incurred, the school management structure. A clear policy will draw the distinction between routine items, requiring minimal consideration and the abnormal which may fall outside established policy and thus requires additional authorisation. Governors should be wary of setting monetary limits that unduly constrain but equally need to avoid allowing levels that are too generous. A judgement on what is significant is required. For example 100 in a 25,000 budget is not usually significant but 100 in a 500 budget would be. It is suggested that Governors retain control over staffing. Almost all staffing creates financial commitments beyond the current year and governors will wish to be satisfied that the recommended options are sustainable. It would be usual once the overall level is set for the head to control the supply budget reporting if the heading comes under pressure or if it will release savings to other areas. Non staffing expense falls into three broad groupings routine recurring costs such as rates, fuel and light. These items will be included in the budget and should not require further special authorisation. Authority in this circumstance is defined but the limits open ended. Devon Financial Services Page 4:5 April 2003

6 Development plan costs. These sub divide into items which will have been costed for inclusion in the plan and budgeted for minor items not in the plan items requiring emergency action. This is a difficult area to define but typically ensuring the safety of the school community might require decisions to be made by the headteacher without reference to the governors. Securing premises after storm damage might be a good example. Genuine emergencies will be rare and emergency procedures should not be invoked as an alternative to planning. Through the approval of the plan spending on items in the former category will be authorised by the Governors. If the items are significantly more or less than the guide figures used in the plan these should be matters of report. Governors may wish to stipulate tolerances or maximum levels above which further approval is needed. Costed single items will be included in the detailed development plan at a level set by governors. It is suggested that as a rule of thumb the pupil numbers are multiplied by 2.5 and the answer expressed in pounds and rounded to the nearest 25. A table showing typical values is to be found at the end of this section. Governors will require a mechanism for allocating resources which are released in year. This will involve reviewing the costed items which it was not possible to include in the budget and making specific decisions. Alternatively a prioritised reserve list is compiled and against which, subject to any conditions, the Headteacher is authorised to spend. Governors may choose to delegate significant areas of the day to day management of the budget to the head teacher. It is for the Headteacher to decide what further delegation is needed within the school and who will be responsible for which processes. The Headteacher will apply the principles set out at the start of this section. Additionally the Headteacher should carefully balance the giving of responsibility with ability, knowledge and experience. For clarity the Governors decisions on delegation and the Headteachers decisions will be combined in a single statement. It is necessary to understand that responsibility cannot be avoided simply by delegating. A clearly understood mechanism which ensures that information about decisions passes in both directions is essential. In order to achieve this it is important to define who can delegate and to whom:- for the avoidance of doubt the boundaries must be defined. A clear policy statement will achieve this Table of suggested delegation levels based on pupil numbers Pupils Single item Pupils Single item Pupils Single item Up to Devon Financial Services Page 4:6 April 2003