Budget Monitoring

Monitoring the budget is important to ensure that the financial, operational and capital plans that were developed and approved for implementation as part of the budget processes are being implemented. Budget monitoring is crucial for an organization to be able to enforce accountability related to spending. In addition, regular, comprehensive monitoring of the budget allows a government to evaluate service level provision, ensure any new initiatives are making expected progress towards goals/expectations, learn more about trends and other deviations that may impact future operations, and finally demonstrate transparency by sharing findings from this regular monitoring.

Budget monitoring must include examination of a broad set of functions in order to fully inform what actions need to be taken if significant deviations are found. Comparison of budget to actuals is the starting point for budget monitoring, but it should be expanded to include how the organization is performing related to service delivery and other programs/initiatives. To ensure this, governments should clearly articulate not only the elements and who will analyze, but also how the analysis will be utilized. If conducted consistently, thoroughly and effectively, the budget monitoring process will provide information that may lead to corrective action or operational improvement.

1. What elements should be reviewed:
   1. Revenues. Governments need to carefully analyze sources of funds with particular attention to:
      • Seasonality, and whether comparable to prior observations
      • Any potential volatility and the resulting impacts
      • Trends and comparison to projections
      • One time sources
      • Timing of receipts
      • Relationship to economic indicators and potential impacts
      • Changes in policy/practice of overarching governments involved in disbursement of revenues
      • Review of patterns at other similar/related governments
   2. Expenditures. Governments need to carefully monitor all expenditures as well – including one-time uses and also examining key aspects of the following:
      • Personnel. Examine additional detail beyond just regular payroll expenses, including analysis related to hiring and vacancy information and also, depending on magnitude, analysis of part-time, overtime, leave pay out and special pay. In addition, conduct analysis of re-class/promotions to see if on-track with expectations. And whether fringe benefit costs are within budgeted expectations as well.
      • Non-personnel. Monitoring needs to include more than just current expenses. Governments need to analyze draw down of encumbrances, outstanding purchase orders, and its major contracts to develop a better picture of not only what was spent, but what remains to be spent.
   3. Operations. Are services being provided as anticipated? Are any services being provided that were unanticipated? What trends are being observed that may impact whether or not spending remains on track?
   4. Capital. Governments need to monitor the budgets of capital projects as well – see GFOA's Best Practice on 'Capital Project Monitoring and Reporting.'
   5. Economic Trends. How is the broader context of prices for labor, services, commodities and other items impacting expenses versus the budget?
   6. Performance Measures. Governments should incorporate into their budget monitoring process an examination of performance measures and linkages to financial outcomes. The analysis should include any changes to goals/initiatives since budget adoption and are there any new initiatives not initially included in the budget.
2. How the elements should be analyzed
   1. Root cause. Governments should move beyond just identifying deviations from budget versus actuals and work towards analyzing and articulating why deviations occurred in order to move towards resolution.
   2. Time frame. Is it anticipated for any identified variance to continue or is there an underlying reason for the variance? How does the current spending pattern impact the subsequent year's budget?
   3. Requirements. Structure budget monitoring to meet any interim reporting requirements that the government may have, if possible.
   4. Basis of comparison. Governments should also ensure that reference points for comparison are logical and appropriate and account for any major organizational changes that would impact any comparisons. In addition to comparison of current results to budget, government should expand their basis of comparison for more robust analysis to include:
      • Previous year actuals
      • Averages of several prior year actuals
      • Projections and forecasts
3. At what level of detail should the analysis be conducted. This will vary depending on revenue/expenditure type. Organizations should discuss benefits of more versus less detail and its impacts on the timeliness, usefulness, and degree of difficulty to compile, among other factors. Potential levels at which to monitor the budget should mirror an organization's chart of accounts, including the following:
   1. Fund. Use for high level analysis and also may be the only monitoring needed for minor revenue/expenditure areas
   2. Department. Analysis at this level can be used to establish budget accountability for department heads
   3. Sub-department/division. Appropriate to analyze in particular if budget accountability resides at the sub-department head level.
   4. Function. Use to track expenditures by major organizational responsibilities, i.e. public safety, public works, etc.
   5. Object/account. Utilize for examining key types of expenditures at an organization-wide basis, such as overtime.
   6. Project/program/grant/activity. Use to track revenue/expenditures of specific activities associated with areas that need additional scrutiny or for reporting requirements
4. Who is responsible and outlining roles
   1. Production. Who produces the analysis, reports, etc. related to budget monitoring should be clearly articulated and disseminated.
   2. Roles. Collaboration and ownership within the organization should be promoted to help provide context related to any potential issues.
   3. Ownership. Identify who is responsible for resolving variances related to both spend and service delivery as well as any other problems identified that need attention.
5. Tools for conducting the analysis
   1. Electronic system. An organization's enterprise resource planning (ERP) system should drive data gathering and analysis related to budget monitoring. Use of the ERP system allows for real time information to be readily accessible for encumbrances and other time sensitive information as opposed to reliance on static, stand-alone reports.
   2. Automation. Budget monitoring data and reports should be integrated into and generated by an organization's ERP system to ensure efficient use of staff time and also consistency of information.
   3. Overspend Protection. Governments should also ensure that mechanisms are in place in their ERP system to automatically prevent overspending of budget and notify the organization's financial leadership.
   4. Consistency. Off-system analysis should be consistently applied to all aspects of monitoring the budget and clearly articulated to both staff conducting the analysis and end users.
6. Communications. This will vary on type of size of jurisdiction as well as the intended audience
   1. Frequency. The frequency of how often budget monitoring reports and information is generated should be agreed upon at all levels of the organization, but may vary for different program areas.
   2. Delivery. The government should describe the point at which the monitoring process is achieved and how the information is communicated and to which stakeholders, both internally and externally, needs to be clearly structured.
   3. Format. The format for how information related to budget monitoring needs to be clearly established as well, including considerations for the audience and their level of expertise.
   4. Transparency. How can the information be shared on a wide spread basis to the community and include the proper context to best inform the public and minimize additional request for more information.
7. Action. A government's budget monitoring process does not end at the time of communication. Following the steps above, governments will conduct comprehensive monitoring and communication that will ensure timely corrective action and operational improvement.

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