Show and tell: 10 best practices in public sector financial planning

Photo (cropped): rawpixel/Pixabay, CC0

June Matte and Christian Wall offer tips on how council finance directors can present councillors and senior managers with realistic options to face their challenges.

Without thorough planning, financially stressed local authorities sometimes try to limp along from year to year, spending down reserves or using various one-off revenues to sustain their budgets.

But the practicality of those strategies is limited.

As we have seen in the recent news, councils have discovered that putting off painful decisions doesn’t make problems disappear – in fact, it usually makes them worse.

“Financial problems that remain hidden for a long time have a way of emerging suddenly as full-blown financial crises.” (Empire Center for Public Policy.)

Although local authorities in the UK were relatively unscathed by the global financial crisis of 2007-09, the eight years of austerity since 2010 have put them under significant fiscal pressure, with some now perceived to be in crisis.

An annual budget cycle tends to consider only incremental changes to spending and services, leaving councils quite unprepared for unexpected events and long-term fiscal threats.

Forward-thinking finance directors know they need an early warning system for emerging financial challenges.

The short-term view provided by traditional budgeting systems falls well short of what is needed to understand, plan for and control the financial future of a council.

It’s like driving at top speed down a motorway on a moonless night with your headlights off.

You’ll be fine until you hit a curve in the road.

CIPFA is taking a step in this direction with its resilience index, but at best it is a current snapshot of the health of a council, not a forecast of potential outcomes and sustainability.

A council should not be preparing a precise budget for three to 10 years into the future.

Rather, it should be ensuring it understands the opportunities, threats and risks that may financially impact on the council in the future.

Gaining this understanding clarifies what needs to be done and presents councillors and senior managers with realistic options.

So given this understanding, what is a finance director to do?

Here are 10 best practices in public sector financial planning to consider:

1. Focus on what matters: When drafting a long-term financial plan, most councils develop a projection by grabbing their budget and other financial data, dumping it into a spreadsheet and then extending myriad line items into the future. It is a common mistake to think that every single line item in a general ledger needs to be modelled. Doing so makes the planning process overly complicated and introduces false precision – “spurious (in)accuracy” if you will. Far better to identify the key issues and drivers, then focus sensitivity and what-if analyses on those.
2. Make it comprehensive: The multi-year plan must be comprehensive enough that it accurately represents the operations of your council. Revenue and expenditure drivers are key to accurately assessing your bottom-line. A good multi-year plan will include the general fund, and housing revenue account where applicable, covering both capital and revenue so that the interaction between the two is properly taken into account. Where applicable, any additional revenue and reserve funds should also factor into your projection. If the council is relying on income from investments, particularly trading and property companies, to ensure its financial viability, these need to be modelled too.
3. Create a full-field view: Flexibility in the types and number of scenario analyses and sensitivity testing is critical. Traditional budgeting and forecasting tools generally limit modelling to “best”, “expected” and “worst-case” scenarios, with each including a vast range of tacit, often poorly understood, assumptions and logic. The process that creates long term plan should include the modelling of the likely and not-so-likely permutations of key variables and scenarios. Anything less means the plan is likely to be little more than poorly understood guesswork.
4. Collaborate: There are many stakeholders in the multi-year planning process. Finance officers, services, elected Members, key partners, residents and others such as MPs and the media need to understand and buy-in to the process. Opposition to savings is greatly reduced where key stakeholders have been involved in formulating those cuts and understand the need for them.
5. Communicate well: Too often budget setting and the preparation of longer-term financial plans are slowed down and impaired by basic failures in communication between parties. The root cause is often version control and dissemination of up-to-date data. This is where static spreadsheet models really demonstrate their limitations. Only one person at time can use a spreadsheet model and other parties rely on sub-workbooks, tables, reports and presentations that they have previously been sent to participate in the exercise. Too many versions, too many opportunities to make mistakes, too much scope for someone to amend a spreadsheet and a burden to maintain. Councils need the ability to capture and consider multiple voices and opinions and react to those opinions to create a robust forecast. All too often, the impacts of decisions taken in meetings are not certain until someone feeds the decisions into a spreadsheet to determine to arrive at the answer. “I’ll get back to you,” should not be part of the planning process and all too often leads to a cycle of unnecessary emails and further meetings.
6. Tell your story: The whole point of strategic planning and modelling is to tell a financial story that compels decision-makers to action and clear enough that other stakeholders, particularly residents, the media and MPs understand the key issues. It is not enough to head to a meeting, presentation or press release with reams of numbers and complex tables. Sophisticated analysis needs a narrative.
7. Make It visual: Most people are visual learners or find it easier to understand pictures and charts rather than numbers. Even if you have developed the best financial plan underpinned by complex analytics and clearly understand the various sensitivities and effects of the numerous assumptions in your financial forecast, graphics illustrating your financial story are better understood by your audience. Charts produce richer, better discussions, which lead to better decisions.
8. Make it personal: Presentation should varied to meet the needs of different audiences. The level of detail and simplicity of both the narrative and data should vary with the sophistication of the audience and the issues you need to convey. Discussions with the cabinet member for finance should be substantively different to those with a journalist and different again when presenting to a residents’ focus group.
9. Make it defensible: In this difficult environment, there is a temptation to emphasise problems and the worst possible range of outcomes. When faced by swingeing “cuts”, stakeholders are likely to challenge every assumption and conclusion. Projections should be realistic and their antecedents fully understood. You should be able to answer with confidence the question, “Where did that number come from?”
10. Make it interactive: Static spreadsheets and presentation decks only get you so far. Show your audience an answer in real time, moving the discussion to a more productive place. For example, if a resident or backbench councillor asks about the effects of a change in the level of the council tax, it is better and very impressive to be able to show them visually in real time. Offering to “get back to them” or regaling them with an explanation of gearing risks losing their attention or at worst, can unfairly make you look evasive or not on top of your data.

Is instituting these best practices worth the effort?

There is one undeniable and universal truth for every public sector organisation and finance director: bad news does not age well and the organisation is often erroneously blamed for it.

The best defence is to be well prepared and to ensure that all various key questions can be answered, such as:

• How will a change in economic conditions affect the council under 75% business rates retention?
• As the work progresses, what are the possible impacts of the Fair Funding Review?
• How will the pension scheme, auto-enrolment and changes in contribution rates affect the council?
• What impacts will capital expenditure have on the council’s revenue budgets and council tax?
• Is the council well prepared to weather the next economic downturn, with sufficient reserves and manageable risk exposure?
• How might investment in commercial properties be affected by any or all of the above?

June Matte is managing director and Christian Wall is director, both at financial adviser PFM.