The Role of Finance and Department Managers in the Budget Process

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The Local Government Budgeting Toolbox

In the annual budget, finance leads the process, department managers bring their operational knowledge and both share responsibility in making it a success.

The Budget is a Management Tool

Our previous article, The Role of Elected Officials in the Budget Process, examined elected officials’ responsibility to review, approve and oversee the budget. Before they ever see the budget, the chief financial officer (CFO) (or equivalent), finance team and department managers put considerable time and effort into developing the proposed budget. Their responsibility does not end with the adoption because a well-managed budget requires ongoing attention throughout the fiscal year. Though the adoption of the annual budget may be the target in budget development, it is only the beginning for finance and department managers.

Budget Development Starts with Clear Expectations

Do managers understand the assumptions and constraints under which the budget is being prepared?

The CFO and the finance department must set the framework from which departments establish their budgets:

• Budget calendar and deadlines. Establish and clearly communicate a budget calendar, recognizing that department managers focused on current-year operations may need reminders about upcoming budget requirements.
  
  
• Instructions and standardized assumptions. Finance should provide guidance, so departments prepare their budgets using consistent assumptions for salaries and benefits, staffing, inflation, revenues, capital needs, baseline information and organization-wide constraints.
  
  
• Salary, benefits and other organization-wide assumptions. A large portion of each department’s budget is not in the control of department managers. There are budget amounts set for salaries, benefits and many other appropriations. The CFO needs to communicate this information to department managers so that they can properly plan their department needs for the budget.
  
  
• Revenue expectations. Departmental requests are ultimately constrained by available resources. The CFO must communicate the organization’s expectations about revenue.
  
  
• Known contractual or statutory obligations. Some appropriations are set with no wiggle room because of contracts or by law. The CFO must communicate these constraints.
  
  
• Capital and debt considerations. Departments may want to request new trucks, other vehicles and heavy equipment. All of these are appropriations that may lead to future debt for the organization and are part of the organization’s capital plan that may also include infrastructure improvements or building and grounds enhancements. The CFO must communicate the capital plan and this plan should be multiple years so that departments are aware of when they can expect their needs to be met.

When the CFO and the finance department provide the information above, it is the department manager’s responsibility to understand their expectations. This means attending meetings, reading materials provided and asking questions to gain full understanding.

Building a Budget that Reflects Operations

Although the finance office understands the organization’s finances, department managers have a better understanding of what is needed to deliver their services.

A department manager should be prepared to explain the drivers behind their budget requests:

• Communicate staffing levels, vacancies and expected overtime.
• Have knowledge of the contractual agreements in place for their department.
• Inventory their current equipment and supplies.
• Communicate new programs or other changes.
• Know their capital needs.
• If applicable, have knowledge of the revenues generated by their department.
• Take an active role in securing grants or other restricted funds for their department.
• Communicate significant changes from the current and prior fiscal years.

Everyone involved should lose the mindset of building a budget that is based on last year plus a percentage increase in favor of truly understanding the why behind the results. The CFO must do more than just add departmental submissions together. They must test their assumptions, look for inconsistencies or trends and, when necessary, challenge departmental requests.

The Bridge Between Preparation and Adoption

Once departmental requests have been submitted, the CFO must consider the organization as a whole. This includes available and recurring revenues, use of fund balance, cash flow, debt and capital requirements, long-term commitments and competing organizational priorities. The CFO must also look beyond the upcoming fiscal year and consider how today’s budget decisions will affect future budgets.

Department managers need to defend and explain their requests. They need to be able to distinguish between what they need and what they want. Prioritizing their needs and wants will prepare them for when reductions are required. Advanced preparation will provide them with the ability to discuss the service implications of cuts or additions. Department managers should take a constructive approach to resolving matters in defense of their budget.

In the relationship between finance and the departments, forgo a simple negotiation over numbers and have a constructive conversation about connecting resources, services and priorities as this collaboration will turn individual department budgets into a cohesive organization-wide budget that is financially sustainable.

Budget Adoption Moves to Budget Execution

Now that the governing body has adopted the budget, a department manager cannot effectively manage a budget until they have reviewed and understand the final adopted budget. What has been adopted may not be the same as what they requested. The CFO should communicate changes made during the review and adoption process. Department managers should review the changes and understand their final appropriations, staffing authorizations, revenue expectations and any significant restrictions. The job now moves from budget preparation to budget execution.

Managing the Budget throughout the Fiscal Year

In the previous article, elected officials were provided with warning signs that they should look for in their role as oversight. There are actions that finance and department managers should be taking before such warning signs ever reach the governing body.

The CFO and the finance department should monitor organization-wide indicators including looking for inconsistencies or red flags:

• Reviewing and understanding actual results versus the budget.
• Monitoring revenue collections.
• Addressing cash flow.
• Monitoring payroll, benefits, overtime and vacancies.
• Monitoring major contract executions and encumbrances.
• Comparing capital spending to the capital plan.
• Monitoring compliance and collection of receivables for grants.
• Monitoring budget transfers and amendments in accordance with budget laws.
• Project year-end results.

Department managers should monitor their own areas. Finance will produce information for them, but they must act on it:

• Review the spending versus the budget and with the prior year.
• Awareness of remaining commitments.
• Monitor staffing and overtime.
• Manage program or operating changes.
• Monitor unexpected purchases or contractual overruns.
• Monitor department revenues.
• Confirm that planned initiatives are proceeding as expected. 

Variances Require Explanation and Sometimes Action

A variance is not necessarily a problem, but an unexplained variance or one discovered too late to address can be. When actual results differ significantly from expectations, managers should ask:

• Why are we over or under budget?
• Is this timing or a permanent change?
• Will it continue for the remainder of the fiscal year?
• Does it affect the fiscal year-end forecast?
• What corrective action is available?
• Does management or the governing body need to be informed?

The Management Mindset

Effective budget management is not about each budget line hitting its target exactly; it means understanding what is happening financially and operationally so that changes can be recognized early and communicated so that appropriate action can be taken. Finance provides the financial perspective and the departments supply the operational perspective. Neither is sufficient alone. When finance and operating departments treat the budget as an ongoing management tool rather than an annual exercise, this will result in a well-managed budget.

Looking Ahead

Upcoming insights in the Local Government Budgeting Toolbox will explore key areas, such as revenue planning, capital strategy, performance, accountability and long-term financial sustainability.

Contact Us

If you have any questions, please contact your PKF O’Connor Davies client service team or:

Scott Clelland, CPA, RMA, PSA
Partner
sclelland@pkfod.com | 908.956.0031

Maryann Holloway, CPA, RMA, PSA, CMFO
Director
mholloway@pkfod.com | 856.455.3082