Module 4: Operational Excellence – Delivering and enhancing organisational outcomes
Topic 4.1: Financial Intelligence and the Budget Process
To address the topic of financial intelligence we explore the government budgeting processes, as the big picture context of financial intelligence, and then the details of the financial reporting and decision-making process. Finally, we link financial intelligence with risk management.
Budgets
The budget cycle is important for public sector managers. Public sector managers, need to arm themselves with the required business acumen and be able to engage in the wider debate about government financial priorities and policy implications (Kelly & Wanna, 2004)[1]. Financial management skills are necessary.
Budgets are used by government for many functions. They assist in planning, to allocate resources, influence economic conditions, to make political statements and signal government priorities. Therefore they are intimately linked with the subject of strategic and operations management.
Governments and organisations use budgeting to achieve fiscal responsibility, accountability and control. Public sector managers need to understand these processes, due to their impact on operations in terms of policy and program delivery.
The debate about government’s financial allocations and priorities is much more significant than the technical details of the budget and accrual accounting. This strategic role of budgets is fundamental to adding public value. Budgets also operate in the constraints of adversarial parliamentary systems and cabinet governments. Budget negotiations can generate central and agency debates or inter-agency disputes about appropriate resourcing, and internal manoeuvring between agency sections or silos to capture resources.
Systems and terminology vary slightly between jurisdictions but financial management typically involves financial, physical and human resources (inputs) used to achieve various desired results (outputs or outcomes) in the government’s financial plans (in the form of the budget) and measured for performance against that budget (through accrual accounting and reporting) for internal and external evaluation.
Budgets formalise agency outcomes, goals and objectives. They provide a yardstick against which financial performance can be compared. The comparison between planned and actual should be a powerful financial management tool.
Budget Concerns at Different Levels of Government
The reason why we need to remind ourselves of federalism when speaking of budgets is because the nature, scope and intention of budgets will differ between federal, state/territory and local governments. At the Commonwealth level, the Budget is largely concerned with the global economic perspective. It is concerned predominantly with strategic economic policy that impacts on the functioning of the Australian economy, both on the domestic scene as well as Australia’s economic position in the global economy.
State and territory budgets, on the other hand, focus predominantly on expenditure allocation and service delivery. The main concern is where, and how much, resources can be allocated to hospitals, roads, police and education and so on. Local, state and territory budgets have fewer economic tools to wield and less scope to influence the drivers of their economies.
The focus and thrust of budgeting in various jurisdictions will differ and we need to distinguish the level of analysis when considering the budget process and the intent and scale of budgeting. However, there are common themes:
Government budgeting is not a discrete process taking place somewhere else of no concern to public sector managers. The higher up managers become located in the hierarchy, the more relevant it becomes. They are required to adopt a higher level, more strategic perspective on the agency’s activities.
Political, Economic and Social Functions of the Budget
Government spending represents a very large proportion of the Australian economy. There are political, economic, social and other functions served by budgets as we will discuss here, commencing with the political. Governments at all levels must address each of these functions.
Table 4.1: Political, Economic and Social Functions of the Budget
Increasingly the inference is that Australians are more focused on the social and other functions of budgeting and performance management rather than purely financial considerations.
Required
30 min
Find your State, agency and section’s budget. You will find relevant budgets at the division, specific workplace, project or team level.
While not every budget is the same, the broad principles are inherent in all government budget cycles and reporting regimes.
Read through the budget document(s).
- How useful is this information for you in your position?
- How it could be more relevant or functional?
- What, if any, actions you would need to take to make it more useful and relevant?
Keep your findings in mind as you develop your workplace project.
The Significance of Knowing Your Costs
While some of you may sense that budgets and budgeting are far removed from your roles and context, local managers are usually tasked with identifying and documenting costs, even at the level of hours and salaries. There are significant implications for public sector managers here in terms of developing business acumen.
You need to be acutely aware of the budgeting and financial requirements of your role, and of course for your workplace project.
Required
20 mins
Find the necessary budget and reporting framework that applies to your workplace project. Check with your Project Sponsor to be sure that is the level of responsibility that you have in relation to your project.
Keep your findings in mind as you develop your workplace project.
Implications for Managers
It is important to understand the significance of costing activities. As a manager, you must have a working knowledge and understanding of the cost of components and processes, which combine to produce goods and services. The ability to manage these costs is fundamental to good management and particularly enables you, as a manager, to influence performance. Public sector managers typically encounter costing concepts when developing projects and proposals for approval in the budget process, when undertaking planning and management activities, and also when analysing projects or proposals put up for consideration.
Cost information should be aligned with, and support, the operational and strategic decisions of managers. This provides the opportunity to evaluate the processes and activities undertaken to deliver outputs.
The Financially Intelligent Manager
Now we turn to your ability to effectively communicate and manage in the domain of financial analysis.
To support you on your journey to increased financial intelligence in your context, in this section we provide a short overview of critical knowledge points that you can use as revision if you are comfortable with budgeting and financial management, or as a set of key concepts to explore if you feel you require additional development.
Required
20 mins
Prior to accessing the Financial Refresher materials, test your current financial knowledge by filling in your responses to the following quizzes. If you were able to answer yes to the questions, proceed to the next section. If not, please visit the Data and Financial Refresher topic on this module to update your knowledge.
You can access all of the Financial Refresher materials and quizzes here.
- Quiz A – Financial Tools
- Quiz B Financial Skills
- Relationships Between a Set of Financial Accounts
- Financial Refresher Learning Guide