budget planning and management

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Budget Planning and Management - Noel Lawas MD -

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Page 1: Budget planning and management

Budget Planning and Management

- Noel Lawas MD -

Page 2: Budget planning and management

Definitions• Budget

– A statement containing the list of commitments by a body to provide the required resources with a given monetary value, to perform the activities that are expected to attain a given objective.

– In an organization, the budget is the final act of commitment to the strategies it has set forth to do in the future in order to achieve its desired strategic objectives.

Page 3: Budget planning and management

Pre-requisites Before Arriving at an Optimal Budget

• A sound organizational strategic plan that considers the available funds that can be provided at the time these are needed.

• Relevance of the budgeted activities to the attainment of the strategic objectives.

• Outputs of the budgeted activities can be objectively measured and assessed.

• Revenues from activities to be undertaken can be predicted with acceptable degree of accuracy

Page 4: Budget planning and management

Strategic Planning Cycle vis-a vis Budget Cycle

Page 5: Budget planning and management

Conceptual Framework to Budget Planning in an Organization

Strategic Planof the Organization

Program / Departmental

Plan

OperationalPlan

Budget PoliciesCapital Budget

Medium-termBudget Plan(3 to 5 years)

Annual BudgetPlan

Page 6: Budget planning and management

Principles Underlying Budget Planning and Management

• Budget as a control instrument of management– Resource allocation: priority setting and

spending plan– Financial control and planning: containment of

expenditure, financial forecasts– Improving efficiency and effectiveness of

organizational resources/activities– Communication: between different levels/units

of organization and its stakeholders

Page 7: Budget planning and management

Principles Underlying Budget Planning and Management

• Types of Budget– Income and Expenditure Budget

• sets out the anticipated (recurrent) costs of the institutions and shows the source of funds to cover them.

• annual income and expenditure budget is often broken down into shorter periods for better monitoring

– Capital Budget• Budget for capital projects and acquisition of equipment or fixed

assets• need separate budget and monitoring because it usually involves

major expenditure items and non-recurrent costs• need to consider the effect of capital investment on recurrent cost • e.g., Vehicles, building hospital, medical equipment

– Cash Budget (Cashflow Forecast)• aims to monitor the availability of cash: whether sufficient cash is

available in the bank to meet the payments needs as they arise• based on the income and expenditure budget and capital budget

Page 8: Budget planning and management

Principles Underlying Budget Planning and Management

• Approaches to Budgeting (Process of budget formulation)– Incremental Budgeting

• Increase the amount of budget based on the budget of the previous year

• Idea of historical budgeting: historical funding allocation plus adjustment for inflation, usually based on inputs (personnel, bed) not taking into account actual utilization

• simple and little requirement for management and clinical information: incremental budgeting can be used when annual policy and plan is stable

• perverse incentive and reward for spending more (to get greater budget next year)

• lack of incentive for efficiency and effectiveness: little incentive to improve outputs and outcomes, little incentive for innovation and change in management and service delivery

• cannot reflect changing needs

Page 9: Budget planning and management

Principles Underlying Budget Planning and Management

• Approaches to Budgeting (Process of budget formulation)– Zero-based Budgeting

• considers the previous year’s budget as zero• re-evaluates all the projects, and allocate budget

according to priority• takes much time and cost• idea of needs-based budgeting: budgeting based

on the resources required to meet health care needs of population (epidemiological and health profiles, needs for health care and prevention)

Page 10: Budget planning and management

Principles Underlying Budget Planning and Management

• Budgeting Systems (Budget allocation structure) – Line-item budgeting

• Distribution of expenditure item by item, to make it possible to control budget expenditure

• budget allocation by input classes: salary, drug, equipment, fuel, etc.• usually short-term, no link to outputs or outcomes• Indicators: total cost, % of labor cost…• Pros

– expenditure list and amount is clear and accurate– clear budget and accounting responsibility

• Cons– Inflexible: hard to deal with unexpected incidents or changing needs– Focusing on budget items and monetary inputs (expense items), not

the result of a project → can fail to achieve initial goals of government programs

– Limited attention to the value for money: difficult to monitor and evaluate the efficiency and effectiveness of funding

Page 11: Budget planning and management

Principles Underlying Budget Planning and Management

• Budgeting Systems (Budget allocation structure)– Performance-based budget

• budget allocation based on outputs (not outcomes)• budget allocation by programs: maternal health, primary care,

immunization, hospital inpatient care, HIV/AIDS, etc.• Pros

– helps stakeholders understand what organization is doing and why– can better establish long-term plans, and use organizational

resources more flexibly– can include performance objectives in the budget– budget as a management tool: compare actual and planned

performance– e.g., No. of hospital admissions, No. of fully immunized children

• Cons– Setting performance is tough: quality of performance indicator,

consensus on performance measure, track/measure performance, etc.

– may be hard to control public expenditure

Page 12: Budget planning and management

Program/Operational Budget Planning Methods

1. Create a chart of accounts for revenue and expense with corresponding account codes– Examples

• Revenue accounts – revenues from drug sales, ancillary services, service fees, rentals, donations, subsidies, retainer fees, etc.

• Expense accounts– Personal Services – salaries, hazard pay, Christmas bonus,

13th month pay, honoraria, etc.

– MOOE – transportation, supplies, utilities, services, communications, repairs, etc

Page 13: Budget planning and management

Program/Operational Budget Planning Methods

2. Review budget guidelines and policies that may set the environment for budget planning

– Note the budget amount limits imposed under the budget guidelines

3. Identify sources of revenues and develop forecasts for the period covered.

– Note if the use of revenues for each source has restrictions

Page 14: Budget planning and management

Program/Operational Budget Planning Methods

5. For each activity identified in the operational plan, compute budgetary requirements specifically needed to implement the activity. These requirements should consider personal, mooe and finance expenses for each activity.

– Note: Some types of expenses cut across different units and programs (eg. Salaries, utilities). In this situation, each of these expenses are assigned to one program or unit. Example: salary and electricity expenses are assigned to general administrative services program.

Page 15: Budget planning and management

Operational Budget Planning WorksheetProgram/ Operational Unit: _________________________

Page 16: Budget planning and management

Managing Implementation of Budget

Page 17: Budget planning and management

Budget Management System Framework

Government Model Private Model

Fiscal Year Fiscal Year

Am

ount

Am

ount

Working Capital

Allotted budget

Expenditures

Expenditures

Allocated Budget from Income

Page 18: Budget planning and management

Budget Management System Flow

Request for ExpenditureVerification of

Budget Allotment

Approval of Request

Earmarking of Funds

Start of Procurement Process

Purchase Order

Delivery of Goods / Services

Obligating of Funds

Payment of Expenditure

Operations Management Budget Management

Verify Availability of Funds

Account Payables

Accounting Mgt

Page 19: Budget planning and management

Budget Management Activities During Implementation

• Verification of budget allotment– Expenditure requested is within the approved budget– Availability of funds is confirmed based on the

revenues collected and/or the presence of “Notice of Cash Allocation” for public offices

• Earmarking of budget allotment and available funds– The act of setting aside specific amounts from the

available funds for possible future payments• Obligating of funds

– The act of recognizing specific amounts from the available funds as spent.

Page 20: Budget planning and management

Budget Implementation Monitoring Worksheet of a Budget Officer

Page 21: Budget planning and management

Dept / Unit: _________________________

Page 22: Budget planning and management

Example of a Budget Utilization Monitoring Plan(Tools for Operations Manager)

Page 23: Budget planning and management

Example of (Tools for Operations Mgr)