Happy New Year to local governments that kicked-off a new fiscal year starting July 1! With a team that has personally served in your shoes, we know firsthand the long hours of dedicated staff time and hard work that goes into preparing and presenting a balanced budget. The last few years have made this process even more challenging for many agencies in the wake of the financial effects of the COVID-19 Pandemic among other increasing financial resource constraints, so achieving a balanced budget is no easy feat. While you may be eager to shift your time to other departmental priorities, this may be the opportune time to evaluate the tools you have in place to accurately monitor your agency’s financial performance.
Budget monitoring and timely financial reporting, including period-ending closing processes, are best practices to ensure prudent financial management and ensure the ability to timely, accurately report on financial performance. How often have you wanted to evaluate how your agency is pacing in certain expenditure categories or department accounts? When you review a budget versus actuals report, do you know whether the data contained in the report through the current period is reliable or subject to change based on the close of the prior month? It can be incredibly difficult to make projections in a central budget office for your agency, or on a departmental basis, if the information you’re using as the basis for your projections is subject to change.
Budget Monitoring:
The best place to start is usually the simplest. As yourself, “What, if any, budget monitoring processes does your agency currently have in place?” The processes should include an analysis of indicators that can best inform your agency’s financial performance. Key items that you should analyze as part of your monitoring procedures include revenues, operating expenditures, economic indicators and trends, and performance measures (if your agency if those are in place at your agency).The latter performance measures may surprise you but is an important indicator of performance and an item to review regularly, particularly if you have gone through the exercise of linking your performance measures to specific agency priorities and financial outcomes.
Revenues:
When reviewing pacing for your agency revenues, it is important to take note of the source of the revenue to your agency while being mindful of the seasonality of certain types of revenues, the timing of receipts, and economic trends related to key revenue sources – particularly the sources that make up your tax base. Additionally, a key element in your monitoring practices should include a comparison against your projection and the data that served as the basis for it. Remember, your current year budget is only as reliable as the information that you are using at the time you are making the projections on what you expect to receive and use. Understanding and being able to communicate any variances between your projections and the revenue you’re realizing is key to understanding and recommending any amendments to your projections throughout the fiscal year.
Expenditures:
All expenditures should be carefully monitored, including one-time and recurring uses. Operating expenditures include two key categorizations that should be reviewed in detail: personnel and non-personnel (maintenance and operations).
When analyzing personnel expenditures, key items to note are regular payroll, special leaves and pay, and vacancy savings. If your agency uses a vacancy factor, regularly analyze whether your agency is realizing the budgeted savings and achieving the budgeted factor. If your agency does not use a vacancy factor, the analysis would calculate the year-to-date savings from vacant positions.
When analyzing non-personnel expenditures, reviewing both on an agency wide by fund basis as well as by department can be helpful to consider spending by fund, department, and categorization. Key items to note beyond general pacing targets include encumbrances and major contracts. When considering the general pacing targets, it is helpful to compare these actuals to prior year actuals or an average of several prior years through the same period. When reviewing maintenance and operations expenditures, consider whether the current pacing with expenditures is in line with expectations and take note of any change in overall operations that may contribute to changes in spending trends.
Method/Communication:
We’ve seen different organizations approach this differently. Some organizations run a budget versus actuals report and highlight anything that should be further reviewed. Other organizations have employed the above while completing an additional one-page memo to accompany the report and provide some additional information. Depending on your agency’s size, this may also happen a lot more informally. Ultimately, whether this budget monitoring remains an internal tool or is presented as a budget update to the Council, it is important that the revenues and expenditures at the department level are communicated to each respective department to foster an environment of information sharing and help to facilitate an atmosphere of working together to stay on budget. This includes moving beyond just identifying deviations from the budget but working to analyze the contributing cause. Working together with departments equips them with the information they need to run their departments and provides you with an opportunity to get ahead of any changes that they may be anticipating.
Timely Accounting Reporting:
Another critical part of monitoring your agency’s financial performance is regularly completing a period-end close to ensure that the accounting information that is used for budgeting and projecting purposes is accurate. If your accounting team completes a month-end close process that takes the first one to two weeks of the next month to complete where journals may be posted that will change the figures being analyzed, it is important that the budget versus actuals report that is used for the budget monitoring analysis is not ran until after that process is complete. This ensures that the data that serves as the basis for your monitoring is reliable and is not subject to change based on the close of the prior month.
LSL has worked with many clients to implement a month-end close accounting procedure to supplement the year-end close process that relies on a closing checklist to ensure that all of the necessary steps are performed consistently. Reach out to us if you are interested in learning more about this checklist and how we could assist you in customizing one that fits your agency’s needs and processes.
The Bottom Line:
Budget monitoring is a best practice and is key to keeping your pulse on your agency’s financial performance. This post outlines some key items to take note of to ensure your practices set up your agency for success. From budget monitoring to period-end closing processes, LSL can serve as a resource and extension of your department if your agency needs support in implementing these types of processes. Contact us today!
