3 minute read
Rethinking the Budget Process in Uncertain Times
Legislation requires a local government to adopt an annual financial plan. This process can be taxing and time consuming at the best of times.
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COVID-19 has made budgeting especially challenging for smaller local governments who may have limited administrative resources to invest in deep data analysis and forecasting. For these entities, relatively small items could have a material impact.
Your local government may have already adopted its current year financial plan; however, the plan can be amended by bylaw at any time. Here are some things to keep in mind:
GOOD DECISIONS COME FROM GOOD DATA
The usual starting point in making a budget is the prior year’s actual results. When reports and analysis of historical results are robust, then you have a good foundation for making a budget on the last year’s numbers.
Take the time to examine if your reporting and budgeting tools are appropriate (Excel is not always the answer!), or if the data is disaggregated enough to give useful information. Unusual revenues, expenditures or other transactions from one-time or discontinued programs may be mixed in with normal operating accounts. Ensure the trial balance is classified efficiently so that these unique items can be identified.
This is particularly important for smaller local governments where unusual events can have a significant financial effect. Due to COVID-19, many local governments saw decreases in recreation and parking revenues, and large increases in cleaning and information technology costs. These changes may not be a good indication of next year’s operations without fully understanding which items were one-time occurrences and which are recurring.
INPUT FROM OUTSIDE THE FINANCE TEAM
The financial plan will impact the operations of the entire organization. You must understand each department’s plans and projects for the upcoming year. COVID19 may have created revised expectations for service levels, which will affect each department differently. It is the responsibility of the finance department to work with department managers to translate their needs into a financial budget. Frequent communication and feedback with department managers is important to ensure the budget is accurate and realistic.
RESERVE FORECASTS
Future costs may depend on circumstances or decisions outside of your local government’s control. It is important to understand the financial risk of likely outcomes
and how it will impact cash needs. In addition to budgeting operating revenues and expenditures, it is equally important to create reserve forecasts to fund adverse or unforeseen events. In this current environment of uncertainty, it is prudent to build cash reserves.
REVISITING BUDGETS AND FORECASTS
Without a crystal ball, you cannot create the perfect budget, regardless of how strong the budget process is. There will be changes and uncontrollable events that will skew actual results. It is important to update forecasts so that stakeholders will understand projected results and make changes to the budget, if needed. It is equally important to explain the updates to the forecast in comparison to the original budget. A revised forecast or budget should not be treated as carte blanche for future spending, but rather an adjustment to the original budget based on better data.
KAYAN YU is an A&A Senior Manager at BDO Canada with more than 12 years of experience specializing in public sector, First Nation and NPO organizations. Her experience is diverse, having worked with small NPOs to large government entities. Kayan is passionate about helping her clients achieve efficiency in their accounting and assurance needs.
