Exploring Decentralized Budgeting
October 27, 2015
From the Finance Director’s desk…
In this post, I look at issues around decentralizing budget work within a government. Decentralized budgeting, if done well, empowers members of the entire management team to make their own cases and tell their stories directly by entering their budgets into the system.
Decentralizing budget development can improve how a government plans for the future. But it can also spawn chaos, major mistakes, and unfavorable resource allocations; too many people may work on too many ideas at the same time without proper controls in place. There are ways to decentralize properly and precautions that can be taken to avoid the pitfalls. Let’s start with five reasons governments should consider decentralizing the budget process.
Reason I: Save Time
Our best budget analysts and managers have far more to do than they can ever get done. And the to-do lists just keep growing. Manually performing clerical tasks to develop budgets for the entire organization, balancing totals, documenting interim reconciliations, and preparing briefs for management consumes our best people’s precious time.
Every budget leader knows that the hours and dollars spent on these tasks are staggering — months, if not years, of skilled high-cost labor. Imagine the ROI from making those hours available to conduct research on best practices, to consult with the operating departments, to compare with other governments, to negotiate with vendors or test new ones, and to explore historical costs to build better forecasts. All the things everyone knows should be done — if we could just get that reconciliation cleaned up and balanced before midnight. Democratizing the budget process spreads the hours across more stakeholders.
Reason II: Engagement
A centralized budget process virtually guarantees that the uninvolved managers will not “own” the final results or internalize the assumptions going into their budgets and will struggle with the budget’s constraints all year long.
Think of the transformational difference between reviewing a pre-calculated budget and the much more difficult intellectual process of defining and justifying the business case, and developing the revenue and cost plans required to execute it.
When a department’s management team works through the budget puzzle together, they own the compromises and choices that must be made in the process. When outside stakeholders are engaged earlier, they develop a better understanding of the trade-offs and constraints the government must work under.
Reason III: Accuracy
Of course all budgets are estimates. But estimates built closer to the “ground truth” are more likely to track actual results. Budgets built around current work practices, taking all associated activities into account, produce more reliable estimates at the detail level. An overall budget composed of accurately forecast activities at the lowest level will be more accurate and reliable at every summary level
Reason IV: Vision
Vision and Mission. Council Priorities. Strategic Initiatives. We all have high-level long-term goals representing the good work we want to accomplish for our residents and stakeholders. The resource collection and programs authorized in the budget bring vision, strategy, and priorities to life. Engaging the entire management team and other stakeholders by decentralizing budget development is critical to success in the government’s daily work.
Reason V: Results
When we properly decentralize our budget process, the reward is an accurate budget that enables the government to perform at a high level — adequately funding each department’s important work, minimizing budget updates, funding scrambles, and last-minute shortfalls. It allows for long-term planning and efficient overall use of resources.
Decentralization can also lead to chaos. But there are ways to do it right and precautions that can be taken to avoid pitfalls. Lets look at four of the dangers of decentralization.
Risk I: Crowding
“Too many cooks in the kitchen” is a common fear and sometime reality. We all use Excel for its power and flexibility. And we all do everything we can to keep files uncorrupted and totals accurate. We spend much time reviewing, combining, and testing our Excel budgets.
Giving even more people with different skill levels access to our carefully crafted budget worksheets is troublesome. To contain the risk, we build thoughtful procedures and do careful analysis, investing valuable time in managing our numbers throughout the budget cycle.
Ultimately, tools beyond Excel, provide more powerful solutions using database technology for accurate real-time totals, simple structured input, audit trails and workflows that carry the story forward through the entire budget lifecycle.
Risk II: Exorbitant spending
Giving managers more general access to the budget process with the ability to create their own budget proposals must not be confused with giving them the “keys to the kingdom.” Budget processes must maintain the chain of command and ensure leadership makes the final decisions.
Risk III: Training Burden
Empowering the larger management team necessitates more training. The ease of use of the budget software, in Excel or otherwise, has a major impact on the training burden associated with decentralizing the work.
Risk IV: Violating Council and Executive prerogatives
Democratizing the budget process must not threaten the prerogatives of the legislative and executive offices. These bodies are the representatives of the people and are ultimately responsible for the government’s actions and vision. Training, socialization, and engagement processes must all make clear that the leadership will execute final decision making authority, and may have different priorities and needs to honor.
We hope this discussion generates some ideas for planning your next budget cycle. In the next few months, this we will explore personnel, revenue forecasting, alignment with strategic goals, capital budgets, performance measures, and much more.
Mike McCann moved into government service in Ukiah, then Monterey CA, after beginning his career in corporate (ADP, Wells Fargo Bank, Blue Shield of CA), not-for-profit (Blue Shield of Ca, Mendocino Private Industry Council), and start-up accounting. For the last 20 years, Mike has been hands-on with budget, financial reporting and accounting operations, including City budgets and CAFRs. He holds a B.S. in Accounting from SJSU and M.S. in Instructional Technology from CSUMB.
Category: Government Finance