Budget season: set yourself up properly for 2018-2019

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Its budget season.

As Boards turn their minds to financial year 2018/19 it’s worth considering five key points. This checklist may be useful for board members who do not have a background in finance or accounting.

  1. Budgets allocate the funding that enables Trusts and Corporations to fulfil their annual and strategic plans. In other words, budget approvals are not an exercise completed in isolation. The starting point is your annual and strategic plan, namely, what are your priorities and what activities are proposed.
  2. Budgets should not be based on the current year numbers. Quite apart from the fact that the annual plan for the forthcoming year may be completely different to the current year plan, a budget based on a prior year numbers cements in inefficiencies and means a critical question has not been considered namely, “what can we do that is better, cheaper or more efficient than in the past?”.
  3. Budget papers presented should include a balance sheet and a cash flow statement. An income statement prepared on a normal accounting basis will NOT include major capital items that are to be depreciated or amortised over an extended period nor include any loan repayments or other changes in funding.
  4. Operating budgets and especially cash flows should be prepared month by month. If the cash flow forecast is indicating funding issues in any one month, a more detailed scrutiny of that period is essential if directors are to properly discharge their duty to not trade insolvent.
  5. Budgets are often circulated without any commentary i.e. just sheets of numbers, with commentary being provided at the meeting. A detailed commentary attached to the budget papers is essential if the reader is to understand the range of options, the assumptions, the linkages to the annual plan and the key risks that directors face in considering the budget. It also provides the reader with the opportunity to properly prepare for the board meeting and be armed with any questions they may have.

The budget review process must be combined with look at the annual and strategic plans. It will be more than a 15-minute agenda item!

Done properly, this exercise may take several hours. Done properly, this exercise will ensure the Board and management team are set up to deliver on the annual plan and the Board will have turned their minds to the solvency question which is a critical and ongoing obligation.

To recap:

  • Link your budgets to your annual and strategic plans.
  • Don’t base the budget on current year numbers but be able to explain why the budget numbers are different.
  • Ensure the budget papers include cash flow statements and a balance sheet. Consider capital expenditure and any likely changes in funding.
  • Prepare monthly income statements and cash flows, include balance sheets in the budget and carefully consider the solvency question.
  • Ensure the budget includes a detailed commentary that sets out assumptions and risks.

And remember, when assessing these risks and assumptions, directors can ask for a set of numbers using different assumptions or scenarios. These “what if” budgets are a common way to present risk.

It is worth investing the time in the budget setting process so the Board, and management team, are properly set up to deliver on their annual and strategic plans.

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