2. Budgeting Basics Dr Rodney Dormer Victoria University of Wellington

3. define a budget; explain how budgets, corporate objectives and long-term plans are related; set out the main components of the budget- setting process and explain how the various budgets interlink; identify the main uses of budgeting Objectives Dr Rodney Dormer Victoria University of Wellington

4. Corporate objectives - identify the broader goals of the organisation Long-term plan - defines the general direction of the organisation over next (e.g.) five years, covers matters like: Segment(s) of society that the organisation aims to serve Production / service methods Financial / financing requirements and methods Personnel and other resource requirements The Planning & Budgeting Process Dr Rodney Dormer Victoria University of Wellington

5. Planning and management in a public service organisation No ‘bottom line’ Different perspectives on performance: public servants – legacy of managing inputs front line staff – fairness, equity, realised human potential accountants – rational linear models of cause and effect Dr Rodney Dormer Victoria University of Wellington

6. Plan - an intended course of action and objectives Budget - essentially a financial plan for a future time expressed in largely financial terms converts the long-term plan into an actionable blueprint for the future The Planning & Budgeting Process Dr Rodney Dormer Victoria University of Wellington

7. Identify business objectives Consider options Evaluate options and make a selection Prepare long-term plans (long-term budgets) Prepare budgets (short-term) The Planning & Budgeting Process

8. Long-term plans are typically 5 or more years and budgets are typically set for 12 months Not set in concrete - management has discretion Depends on industry e.g. 5 years in an I.T. business would be too long due to rate of change Budgets may also be done on a ‘rolling’ monthly basis Limiting factors - aspects of the organisation and its environment that stop it from achieving objectives and which must be factored in to the budget Planning Timeframes Dr Rodney Dormer Victoria University of Wellington

9. Budgets and forecasts are distinctly different: a budget is a plan for a future time, expressed mainly in financial terms forecasts tend to be predictions of the future state of the environment forecasts are useful to the planner / budget setter Budgets vs. Forecasts Dr Rodney Dormer Victoria University of Wellington

10. 1.Promote forward thinking and the possible identification of short-term problems; 2.Help co-ordinate various sections of the organisation; 3.Motivate managers to achieve better performance; 4.Provide a basis for a system of control; 5.Provide a system of authorisation for managers to spend up to a limit Why Budget Dr Rodney Dormer Victoria University of Wellington

11. Why Budget?

12. In an enterprise there is not one budget, but several – each relating to a specific aspect, or function, of the organisation. Ideally there should be a separate budget for each person in a managerial position. Budget Accountability Dr Rodney Dormer Victoria University of Wellington

13. Budgets are prepared for each of the individual responsibility centres that are defined within the organisation’s structure. Responsibility centres are the various decision centres throughout the organisation for which a manager is responsible for a set of specified activities. Those activities are commonly based on a functional, product or geographical basis. Responsibility Centres Dr Rodney Dormer Victoria University of Wellington

14. Incremental Budgeting on the basis of last year’s budget with some adjustment for factors, such as inflation, that are expected to affect the new year. Used in areas such as research and development or staff training where a sum of money is allocated to a budget holder (manager) who is given discretion as to how it will be spent. Zero-based All spending needs to be justified. Just because a training programme was funded last year it will not be funded in the future if a justification can be provided. Incremental vs. Zero-Based Budgeting

15. A periodic budget is prepared is prepared for a particular period – usually twelve months; and is broken down into smaller time periods – usually monthly. A continual budget (or rolling budget) is continually updated – adding a new month (or quarter) to replace the month (or quarter) that has just passed. Periodic vs. Continual Budgeting Dr Rodney Dormer Victoria University of Wellington

16. Operational planning - a top down bottom up dialogue How do we link the reality of internal metrics, with the demands of external accountability? Planning should be an ongoing dialogue between managers at the centre and at the operating edge. Dr Rodney Dormer Victoria University of Wellington

17. 1.Establish who will be responsible for the budget setting process. Someone must run the process and someone, at a very senior level, must sign off on the final product (e.g. a divisional manager, chief executive or senior management team). The Budget Setting Process Dr Rodney Dormer Victoria University of Wellington

18. 2.Communicate budget guidelines and expectations to relevant managers. Budget guidelines and instructions should provide a clear statement of the organisation’s strategic objectives, the nature of the external environment (i.e. expected inflation rate, demand growth, social environment, etc.) and the limits or boundaries that are applicable to each responsibility centre's activities The Budget Setting Process Dr Rodney Dormer Victoria University of Wellington

19. 3.Identify the key or limiting factor. What is the limiting factor that constricts the organisation from achieving its objectives to the maximum extent? Normally this will be customer/client demand; but it may be the capacity of the organisation to meet that demand. 4.Prepare the budget for the area of limiting factor. The limiting factor such as product or service demand, will normally determine the overall level of activity for other elements of the enterprise. The Budget Setting Process Dr Rodney Dormer Victoria University of Wellington

20. 5.Prepare draft budgets for all other areas. Each responsibility centre manager can then develop their own budget and plan in the context of the budget guidelines and limiting factor constraints. The Budget Setting Process Dr Rodney Dormer Victoria University of Wellington

21. Top-down an approach to budgeting where senior management originates the budget targets. Bottom-up most of the budget input comes from lower level staff such as social workers or doctors, within the context of high level organisational objectives and agreed operational constraints. Top Down vs. Bottom Up Dr Rodney Dormer Victoria University of Wellington

22. 6.Review and coordinate the budgets. In complex organisations it is perhaps inevitable that plans and budgets will not ‘mesh’ across the organisation as a whole. Decisions and direction will need to be given to ensure this is remedied. Similarly, if budgets are developed on a bottom-up basis, managers will tend to develop plans and budgets that are favourable – i.e. that contains goals that are not challenging and funding that is generous. The ‘reasonableness’ of each responsibility centre’s plan and budget will also need to be confirmed. The Budget Setting Process Dr Rodney Dormer Victoria University of Wellington

23. 7.Prepare the master budgets. The master budgets are the budgeted income statement, the budgeted statement of financial position (balance sheet) and a summarised cash budget. These financial statements draw together the information from the individual plans and budgets of the responsibility centres. The Budget Setting Process Dr Rodney Dormer Victoria University of Wellington

24. 8.Approve and communicate the budgets to all interested parties. Formally agreed/approved plans and budgets are passed to individual managers who will be responsible for their implementation. In effect, this is senior managers agreeing with, and communicating to, individual managers the targets that they are expected to achieve The Budget Setting Process Dr Rodney Dormer Victoria University of Wellington

25. 9.Monitor performance relative to the budgets. Generally the above processes will be pointless unless each responsibility centre’s actual performance is monitored and compared with the benchmark provided by the budget. The Budget Setting Process Dr Rodney Dormer Victoria University of Wellington

26. The Planning and Budgeting Process WHAT RESOURCES WILL THAT TAKE? WHAT ARE WE GOING TO DO? WHAT WILL THOSE RESOURCES COST?

27. WHAT RESOURCES WILL THAT TAKE? WHAT ARE WE GOING TO DO? WHAT WILL THOSE RESOURCES COST? BUDGET PLAN The Planning and Budgeting Process

28. WHAT RESOURCES WILL THAT TAKE? WHAT ARE WE GOING TO DO? WHAT WILL THOSE RESOURCES COST? BUDGET PLAN Units of Activity Units of Resource Units of Funding ($) The Planning and Budgeting Process

29. WHAT RESOURCES WILL THAT TAKE? WHAT ARE WE GOING TO DO? WHAT WILL THOSE RESOURCES COST? BUDGET PLAN Units of Activity Units of Resource Units of Funding ($) Quantities of resource per unit of activity Cost per unit of resource The Planning and Budgeting Process

30. WHAT RESOURCES WILL THAT TAKE? WHAT ARE WE GOING TO DO? WHAT WILL THOSE RESOURCES COST? BUDGET PLAN Units of Activity Units of Resource Units of Funding ($) Quantities of resource per unit of activity Cost per unit of resource Demand Constraints The Planning and Budgeting Process

31. WHAT RESOURCES WILL THAT TAKE? WHAT ARE WE GOING TO DO? WHAT WILL THOSE RESOURCES COST? BUDGET PLAN Units of Activity Units of Resource Units of Funding ($) Quantities of resource per unit of activity Cost per unit of resource Demand Constraints Balance The Planning and Budgeting Process

33. Child, Youth and Family Services Care & Protection services Youth Justice services Adoption services Development & funding of community services Prevention services Policy Advice

34. In New Zealand Child, Youth and Family Services receives and responds to reports of concern in respect of the neglect or abuse of children and young people. Those reports may come from other family members, teachers health professionals, the Police or the general public. After an initial assessment Child, Youth and Family may take no further action or may formally investigate and intervene. Child, Youth and Family Services

35. On an average day Child, Youth and Family… supports the more than 5,000 children living with caregivers or extended whānau builds strong networks with agencies, community organisations and child and family service providers to better support children and their families visit key groups and agencies in the community to raise awareness about child abuse, how to report it, and how to get help. Dr Rodney Dormer Victoria University of Wellington

36. On an average day Child, Youth and Family… receives 230 notifications of child abuse or neglect meets more than 100 families to talk about their situations and children's safety facilitates around 20 care and protection and 40 youth justice family group conferences houses just over 100 young people in youth justice residences The following slide summarises the care and protection social work process.

38. A simpler model would look something like this: Report of Concern Investigation Family Court Family Group Conference Family/ Whanau Agreement A Plan or Order No Further Action 80% 50% 10% 30% 10% 100% 20% Child, Youth and Family Services

39. If the Porirua office receives 10,000 reports of concern a year: Report of Concern 10,000 Investigation 8,000 Family Court 800 Family Group Conference 2,400 Family/ Whanau Agreement 800 A Plan or Order 4,000 No Further Action 6,000 80% 50% 10% 30% 10% 100% 20% Child, Youth and Family Services

41. Challenges and Responses When funding does not match demand, how do we allocate the shortfall? Different mixes of qualified and unqualified/support staff. Differing availability of community providers Different patterns of front line practice Projects to develop new ways of working Dr Rodney Dormer Victoria University of Wellington

42. Input-based Management and ‘the Coping Organisation’ Little or no understanding and active management of the links between service provision and resource requirements. Budgeting independent of planning. Resourcing and funding decisions based largely on historic practice. Resource retention in silos. Confused accountability. Dr Rodney Dormer Victoria University of Wellington

43. Resource-Based Management For a required level of goods and services, what resources will be required, and what will they cost? For a given level of funding, what resources can be available, and what services can those resources provide? Dr Rodney Dormer Victoria University of Wellington

44. Volume–Based Services Volume-based Services are those that we are able to plan in quantifiable terms and subsequently monitor or count. Dr Rodney Dormer Victoria University of Wellington

45. A “Master Schedule”

46. Capacity-Based Services Capacity-based Services encompass those groups of work that we are (at least currently) not able to plan and monitor in quantifiable terms. Rather it is necessary to assign a given amount of resource on the basis that it will undertake a generic, or undefined, group of activities. Dr Rodney Dormer Victoria University of Wellington

47. Projects Project-based Services are more discrete or non- recurring pieces of work that have some specific deliverables, a beginning and ending and to which we will assign particular resources. Dr Rodney Dormer Victoria University of Wellington

48. Resource Balancing

49. It is necessary to consider:  Reviewing the plan against last year.  Revisit major cost categories.  Review the standard resource requirements.  Prioritising the services and costs.  Look at the resources required for efficiency.  Escalation. Balancing Costs & Funding Dr Rodney Dormer Victoria University of Wellington

50. Public sector organisations need to: Manage the resources that they have to ensure they are fully and optimally used. Justify the retention of those resources. Be able to clearly and logically demonstrate to ministers and their advisors the relationship between service provision and resource requirements. Be able to provide ministers with practical options for changing the level and mix of services. Dr Rodney Dormer Victoria University of Wellington

51. Planning and budgeting are two sides of the same coin – i.e. budgeting is not just about the dollars Budgets need to be developed in the context of the overall corporate strategy and objectives Budgets must also be based on a commonly agreed and understood set of organisational definitions To be effective budgets need to contain explicit links between workload and resources The operational planning and budget process should be owned and driven by senior management Summary Dr Rodney Dormer Victoria University of Wellington

52. How are budgets created in your organisation? What freedom do your budget managers have in how they spend their budgets? How do those managers respond to increases in the demand for their services? Budgeting Basics Dr Rodney Dormer Victoria University of Wellington