Reading 2 Developing and Managing Internal Budgets

IMPORTANT UPDATE
Developing and Managing Internal Budgets
Developing and Managing

Internal Budgets
top-down
embed
variation
phasing allocation
forecasting
bottom-up
Z00 33335
Better Practice Guide June 2008
www.anao.gov.au
Better Practice Guide
June 2008
IMPORTANT UPDATE
ISBN No. 0 642 81021 4

Commonwealth of Australia 2008
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IMPORTANT UPDATE
Foreword
Developing and managing internal budgets is a fundamental element of an organisations financial
management framework. Effective internal budgeting will significantly contribute to the achievement
of an organisations goals and objectives, particularly when embedded into corporate planning and
aligned to the external budget.
Organisations use internal budgets to establish and communicate funding priorities, support
decision making, set financial controls, and monitor and report financial performance. Effective
internal budget processes, which underpin the efficient allocation of resources, enable Australian
Government organisations to more readily identify and respond to changes in environmental
conditions and government priorities.
The purpose of this Better Practice Guide is to assist organisations better manage internal budgeting
activities. It discusses a range of principles and techniques designed to embed internal budgeting
in an organisations planning, control and accountability systems. It also notes the importance
of cultivating an environment that encourages effective internal budget practicesan important
element of which is to construct internal budgets with direct input from operational managers.
Managers are more likely to achieve budget targets that have been agreed with them and are
limited to those costs over which they have control.
This guide updates the Better Practice Guide on Internal Budgeting issued in February 2003. This
guide reiterates many better practices in the former version and takes into account developments
in financial management and budgeting affecting Australian Government organisations since the
release of the previous guide. While practices described in this guide generally apply to all Australian
Government organisations, it is important that each organisation assess the extent that information
provided is relevant, appropriate and cost-effective in light of their circumstances.
The ANAO consulted with many Australian Government organisations and individuals to
improve the usefulness of the guide. I particularly appreciated the assistance of the Department
of Finance and Deregulation, Department of the Environment, Water, Heritage and the Arts,
Australian Taxation Office, National Library of Australia and the Civil Aviation Safety Authority for
commenting on previous versions of the guide and/or providing examples of internal budgeting
processes and practices.
Ian McPhee
Auditor-General
June 2008
IMPORTANT UPDATE
Contents
Foreword
1. Overview of internal budgetprocesses
1.1. Introduction
1.2. Coverage
1.3. Definition of internal budgeting and other common terminology
1.4. Acknowledgements
1.5. Internal budget processes
1.6. Characteristics of effective internal budgetprocesses
2. Embedding internal budget processes into organisational

planning and management
2.1. Integrate the internal budget into organisational planning
2.2. Align internal budgeting with organisational roles and responsibilities
9
11
2.2.1. Ensure clear accountability for all budget allocations
12
2.2.2. Align organisational structures to outcome, output and

programresponsibilities
13
2.2.3. Present full cost of service delivery
14
2.2.4. Show full financial impacts of budget decisions
16
2.3. Integrate operational and capital budgets
20
2.4. Align internal and external budgets
24
2.5. Harmonise budgeting and reporting
25
2.6. Engage stakeholders in internal budget processes
26
2.6.1. Obtain organisational support for the internal budget
26
2.6.2. Supporting operational managers in internal budget processes
26
2.6.3. Internal budget processes for whole of government initiatives
28
3. Developing and implementing a comprehensive internal budget

3.1. Effective planning and coordination
30
30
3.1.1. Set budget policies
31
3.1.2. Establish budget timetables and milestones
32
3.1.3. Allocate responsibility for budget development
34
3.1.4. Document budget processes and disseminate guidelines
34
3.2. Effective budget construction
35
3.2.1. Budget top-down, bottom-up or both
35
3.2.2. Determining the budget approach
36
3.2.3. Automate internal budget processes
39
3.3. Effective oversight, review and communication
ii
Developing and Managing Internal Budgets Better Practice Guide
41
IMPORTANT UPDATE
4. Monitoring and evaluating budgeting performance

4.1. Monitor and report against internal budgets
44
44
4.1.1. Report budget performance
44
4.1.2. Assist managers assess budget performance
45
4.1.3. Phase the budget to provide meaningful comparisons
45
4.1.4. Analyse and explain budget variances
47
4.2. Revising the internal budget
50
4.2.1. Frequency of budget updates
50
4.2.2. Revising internal budget allocations
50
4.2.3. Understanding and tracking changes in internal budgets
51
4.3. Forecasting to manage gaps between budget estimates and actual results
52
4.4. Review and improve internal budget processes
54
4.4.1. Measure internal budget accuracy and timeliness
55
4.4.2. Identify opportunities for improvement
56
Appendices and Glossary of terms
57
A Illustrative template guidelines for internal budget processes
58
B Budget summaryillustrative structure
60
C Internal budget processesbetter practice checklist
64
Glossary of terms
70
iii
IMPORTANT UPDATE
iv
IMPORTANT UPDATE
Overview of internal budget processes
Part 1
Overview of internal
budgetprocesses
Contents
1. Overview of internal budgetprocesses
1.1. Introduction
1.2. Coverage
1.3. Definition of internal budgeting and other common terminology
1.6. Characteristics of effective internal budgetprocesses
IMPORTANT UPDATE
1. Overview of internal
budgetprocesses
1.1. Introduction
Budget processes within Australian Government organisations are guided by the requirements
of the Financial Management and Accountability Act 1997 (FMA Act) and the Commonwealth
Authorities and Companies Act 1997 (CAC Act). For example, Chief Executives of FMA Act
agencies are required to manage the affairs of their agency in a way that promotes the efficient,
effective and ethical use of the resources for which they are responsible. Similarly, directors of
Australian Government authorities and companies are required to exercise care, diligence and
business judgement in carrying out their responsibilities under the CAC Act.
Since 19992000, Australian Government organisations have budgeted under the accrualbased,
outcomes and outputs framework. The framework was designed to allow parliamentarians and
the public understand the real cost of delivering benefits to the Australian community (outcomes)
and goods and services (outputs). Within each organisation, the framework is intended to
improve governance and public accountability by driving improvement in the way organisations
manage resources and measure results. The adoption of accrual budgeting also aligned financial
reporting and budgeting in Australian Government organisations, providing a consistent framework
for the measurement and disclosure of budget estimates and actuals and providing enhanced
accountability for financial performance.
The 2002 Budget Estimates and Framework Review endorsed the accrual accounting framework
but made several recommendations to improve the quality of financial information provided to
Government.1 The progressive implementation of these recommendations over the last five years
has seen a renewed emphasis on program budgeting and reporting (in addition to, and as part
of, the accrual outputs and outcomes framework) as well as a reaffirmation of the continuing
importance of cash information, particularly in terms of Government decision-making.
In 2006, the Australian Government determined that all organisations in the Australian Government
General Government Sector (GGS) must report annually on legislative compliance and financial
sustainability to their responsible Minister and the Finance Minister. This included a certification from
each Chief Executive (or Board) as to their organisations ability to meet existing program requirements
within agreed resources, including the management of capital and other longterm assets and
liabilities. The Certificate of Compliance program has reinforced the importance of organisations
adopting a longerterm focus in their internal planning and budgeting considerations.
1.2. Coverage
The principles and considerations outlined in the guide generally apply to all Australian Government
organisations, irrespective of size and legislative framework.
The guide focuses on internal budget processes undertaken by organisations to manage
departmental resources. It does not specifically cover those resources administered on behalf
of Government. However, many of the better practices outlined in the guide also apply to
administereditems.
1 Department of Finance and Administration (2002), Budget Estimates and Framework Review, Canberra. The aim of the
review was to assess the accuracy, responsiveness and effectiveness of the budget estimates and advice system in
meeting the requirements of government.
IMPORTANT UPDATE
1.3. Definition of internal budgeting and other

common terminology
The internal budget shows an organisations expected financial performance, financial position
and cash flows disaggregated by area of responsibility. Developing an internal budget involves
making decisions on the allocation, use and administration of resources to achieve the
organisationsobjectives.
The guide uses common budget terms outlined below. A comprehensive glossary is at the end of
the guide.
Budget allocation
Distribution or disaggregation of an organisations budget to its various work

areas, outputs or programs.
Budget phasing
Budget phasing represents the pattern of expenditure (or income) over the
budget period (for example, over the twelve months of an annual budget).
Budget transfer
Moving budgeted funds from one group to another group or from one
account to another account.
Budget variance
Difference between a budget projection and an actual result. Budget

variances can be expressed in absolute or percentage terms.
Cost attribution
Allocation of costs to a particular group, output or program based on

predefined rules and drivers.
Direct costs
A cost that can be directly attributed to an activity or the delivery of an output,

program or project (for example, costs associated with employees assessing
grant applications under a discretionary grant program).
Indirect costs
A cost that cannot be directly attributed to an activity or the delivery of an

output, program or project (for example, costs associated with employees
providing administrative services across an organisation).
The ANAO appreciates the assistance provided by KPMG in preparing the guide. In addition, a
number of Australian Government organisations contributed information and insights that supported
the development of the guide, primarily:
Australian Maritime Safety Authority;
Australian Taxation Office;
Civil Aviation Safety Authority;
Department of the Environment, Water, Heritage and the Arts;
Department of Finance and Deregulation;
Department of Health and Ageing;
National Library of Australia;
National Museum of Australia; and
National Water Commission.
IMPORTANT UPDATE

Effective internal budget processes typically involve a series of integrated activities designed to
align: organisational planning; financial responsibility, accountability and authority; budgeting and
reporting; resource allocation; and the monitoring and evaluation of budgeting performance.
Accordingly, the guide examines internal budget better practices across the following broad
dimensions:
Part Two: Embedding internal budget processes into organisational planning and management;
Part Three: Developing and implementing a comprehensive internal budget; and
Part Four: Monitoring and evaluating budgeting performance.
Figure 1 illustrates the structure and coverage of the guide.
Part Four
Part Three
Part Two
Figure 1: Integrated internal budget processes
Embedding internal budget processes into organisational planning

Align internal
budget with roles and
responsibilities
Integrate operational
and capital budgets
Align with external

budgeting and
reporting
Engage stakeholders
in internal budgeting
Developing and implementing a comprehensive internal budget

Effective planning and
coordination
Effective budget construction
Effective oversight, review and

communication
Monitoring and evaluating budgeting performance

Monitor and report
against internal
budgets
Revise the internal

budget
Forecasting to
manage gaps between
estimates and actual
Review and improve

internal budget
processes
IMPORTANT UPDATE
Part Two of the guide discusses the link between organisational planning and internal budget
processes and the role of the internal budget in financial management.
Planning, budgeting and reporting processes ideally have a cascading effect within an organisation
as strategic goals and priorities flow to operational areas. It is important to allocate internal budgets
consistent with the organisations financial management framework while, at the same time,
aligning with managers specific responsibilities. Managers are more likely to take ownership of their
allocated budget where they have control, not just accountability, over the implementation of the
budget. Close integration between the capital budget and the operational budget further assists
organisations assess the longterm consequences of budget decisions.
Consistency between internal and external budgets and between reporting of budget estimates and
actual results is also important. This helps ensure a close alignment between how an organisation
plans and monitors performance internally and how it is held accountable externally.
A critical element in gaining broad acceptance of the internal budget is the involvement of senior
management and operational management throughout the budget process. Part Two also discusses
better practice principles and approaches involved in engaging relevant stakeholders, including
supporting operational managers. Finally, Part Two deals with the management of relationships
between Australian Government organisations working on whole of government initiatives.
Part Three discusses policies, procedures and systems critical to developing an effective internal
budget. It is vital that the internal budget function is supported by robust processes and systems
for planning and coordination, and that these are clearly articulated and consistently applied across
the organisation. This is likely to generate a budget that is timely and accepted by management.
Part Three also suggests some better practice principles and approaches to manage and support
the development of internal budgets.
Part Four discusses the link between preparing the internal budget and reporting and monitoring
budgeting performance, including the role of forecasting to manage the gap between budgeted
and actual revenues and expenditure. To use resources efficiently and effectively, it is essential
organisations build a continuous improvement culture into internal budget processes. Part Four
also suggests some better practices to measure, review and refine internal budget processes.
IMPORTANT UPDATE
1.6. Characteristics of effective internal

budgetprocesses
Effective internal budget processes incorporate the key characteristics listed in Table 1.
Table 1: Key characteristics of effective internal budget processes

Characteristic
1 Internal budget processes are embedded in organisational planning and
align resources with organisational priorities.
Part 2.1
2 Budget allocations and accountabilities align with managerial responsibilities

and authority.
Part 2.2
3 Operational and capital budgets are seamlessly integrated and multi-year

focused.
Part 2.3
4 The internal budget is consistent with the external budget and this
consistency is retained throughout the budget cycle.
Part 2.4
5 The recognition, measurement and disclosure of internal budgets is

harmonised with reporting.
Part 2.5
6 Relevant stakeholders are engaged throughout internal budget processes.
Part 2.6
7 Internal budget processes are carried out in accordance with clearly defined
expectations and assumptions, a coordinated calendar of activity and
welldocumented and communicated policies and procedures.
Part 3.1
8 The internal budget is constructed with direct input by operational managers

in accordance with strategic targets and priorities established by senior
management.
Part 3.2
9 Internal budget processes are overseen and formally approved by senior

management and subject to rigorous quality assurance processes.
Part 3.3
10 Managers are provided with relevant, timely and accurate budget-to-actual

information appropriate to their level of responsibility and, in turn, provide
clear and consistent feedback in a timely manner about underlying causes
and effects of budget variations.
Part 4.1
11 Internal budget revisions are limited to approved formal updates to retain

clear accountability for budgeting performance.
Part 4.2
12 Rolling forecasts are prepared to quickly respond to changes and to

manage the gap between budgeted and actual revenues and expenditure in
a timelymanner.
Part 4.3
13 The organisation adopts a continuous improvement culture, and has an

ongoing training program, to help ensure the internal budget remains
relevant to the organisations requirements and priorities and is constructed
in the most efficient and effective way.
Part 4.4
Appendix C includes a checklist of better practices covered in this guide.
Reference
in guide
IMPORTANT UPDATE
Embedding internal budget processes

into organisational planning and management
Part 2
Embedding internal budget

processes into organisational
Contents
2. Embedding internal budget processes into organisational
2.1. Integrate the internal budget into organisational planning
2.2. Align internal budgeting with organisational roles and responsibilities
8
9
11
12

13
14
16
20
24
25
2.6. Engage stakeholders in internal budget processes
26
26
26
28
IMPORTANT UPDATE
2. Embedding internal budget

processes into organisational
Organisations use internal budgets for financial planning, to establish performance expectations
and to set financial controls. In addition, the internal budget can be used for purposes such as
identifying costs and determining prices (for example, as part of cost recovery arrangements) and
assessing individual managers financial performance.
The internal budget is a core element of an organisations planning and management framework.
As shown in Figure 2, an integrated planning and management framework is characterised by
close relationships between planning and budgeting and between budgeting and reporting, both
within the organisation and externally.
Figure 2: Integrated planning and management framework
Internal
Budgeting
External
Budgeting
Organisational
Planning
Internal
Reporting
External
Reporting
organisations embed
Better practice organisations embed internal budget processes into organisational planning and
management by:
internal budget
integrating the internal budget into organisational planning;
processes into
aligning the internal budget with organisational roles and responsibilities;
organisational planning
integrating operational and capital budgets;
Better practice
and management.
aligning internal and external budgets;

harmonising budgeting and reporting; and
engaging stakeholders in the internal budget.
IMPORTANT UPDATE
2.1. Integrate the internal budget into

organisational planning
Organisations are better positioned to meet their objectives where resources are deployed
consistent with organisational priorities. Closely aligning internal budget processes with strategic
planning processes will help achieve this. Effective alignment means that organisational plans will
be supported by internal budgets which establish funding expectations for the current year and
future years consistent with the organisations goals and priorities. In this light, organisational plans
have an appropriate financial basis and will be costed in a manner consistent with the delivery of the
plan. The development of the internal budget enables an assessment of the extent to which goals
are attainable or whether change is required.
By integrating the budget setting process into the planning process, organisations are better
positioned to determine budgets and allocate resources based on operational needs and
consistent with approved strategies and priorities. Effective integration also promotes better
understanding among managers of how their individual activities and budgets fit into organisationwide responsibilities.
By integrating the budget
The strategic plan is typically supported by a range of operational and specific plans, including
business plans, group operational plans, workforce plans, capital plans and individual performance
agreements. Each plan or agreement translates one or more areas of the strategic plan into detailed
operational objectives, activities and accountabilities. The planning process requires clarity about
priorities, targets and metrics such that strategic goals can be cascaded down into each plan and
agreement. The internal budget should similarly support each level of planning and performance
management within the organisation.
budgets and allocate

The strategic (or corporate) plan sets longterm goals and priorities which establish the direction for
operational plans within the organisation. Typically, the strategic planning horizon encompasses the
next three to five years, although a longer horizon may be appropriate for significant government
programs and for capital planning. Ideally, the strategic plan describes and quantifies the direction
of the organisation and is endorsed by stakeholders in terms of goals, objectives and timing.
setting process into the

planning process,
organisations are better
positioned to determine
resources based on
operational needs and
consistent with approved
strategies and priorities.
Better Practice Tip: Link the internal budget to workforce planning

The employee budget forms a large proportion of the overall internal budget of many
Australian Government organisations. As such, assumptions made in relation to staffing
levels and staff movements can have a significant impact on the overall budget.
As many organisations face increasingly tight labour markets and higher staff turnover, it
is becoming more difficult to prepare a realistic estimate of staff numbers in the internal
budget, especially for longerterm projections. A key risk in internal budget processes is
that budget assumptions are biased towards current market conditions, including around
workforce availability.
The establishment of a workforce plan is an effective way in which organisations can formally
plan for the future workforce and link workforce numbers to organisational needs. The
workforce plan sets out the organisations priorities and strategies for identifying, achieving
and maintaining staffing numbers and skills to achieve organisational objectives.
The workforce plan can assist the internal budget by providing a reasonable basis for key
employee-related assumptions underpinning budget calculations, including a longerterm
perspective on workforce numbers.
IMPORTANT UPDATE
One means of establishing top-down direction in the budget setting process is to use the firstyear component of the strategic plan as the basis for the internal budget. Figure 3 illustrates how
resources can be directed at achieving organisational goals through the alignment of planning and
budgeting at each level within an organisation.
Figure 3: Integrating the internal budget into organisational planning
Workforce
Plan
10
Planning
Budgeting
Strategic
Plan
Budgeted
Financial
Statements
Operational
Plan
Asset
Management
Plan
Employee
Budget
Operational
Budget
Group
Plans
Group
Budgets
Individual
Performance
Agreements
Budget
Allocations
Capital
Budget
Plan
Budget
Strategic plan (also called Corporate

plan): High-level plan that identifies the
organisations role, key goals and targets over
the medium to long term (for example, three
to five years).
Budgeted financial statements: Key

statements showing financial performance,
financial position and cash flows. Aligns to
externalbudget.
Operational plan: Outlines expected

operational activities to deliver annual
strategies.
Operational budget: Shows the impact of

operating decisions on the organisations
sources of income, expenses and cash flows.
Workforce plan: Identifies current and future

workforce requirements by assessing the
workforce required and workforce available to
support the organisations objectives.
Employee budget: Shows the cost of

employeesgenerally a component of the
operational budget although employees
involved in capital projects may instead be
included in the capital budget.
Asset management plan: A multi-year plan

for capital asset acquisition, maintenance
andretirement.
Capital budget: Shows planned asset

purchases, construction and disposals.
Group plans: Outline expected activities to

be undertaken by each group.
Group budgets: Outline expected

resource allocation and revenue sources for
eachgroup.
Individual performance agreements:

Outline expected performance for the year
including targets and planned development.
Budget allocations: Show allocated

budget for particular positions or areas
ofresponsibility.
IMPORTANT UPDATE
Integration is enhanced when planning and budgeting processes source information from the same
internal and external data sets. This provides greater visibility in decision-making and consistency
in the assumptions made.
The finance area is central to the integration of strategic planning and budget setting processes.
The finance area can help operational areas translate strategic goals and performance plans
into specific budget elements and drivers. The role of the finance area in supporting operational
managers is discussed further in Part 2.6: Engaging stakeholders in the internal budget.
The internal budget is allocated to areas within an organisation to facilitate detailed planning and
performance management and enforce internal accountability. Budget allocations will be more
effective when they reflect the organisations planning and management framework.
Budget allocations will
Participants in internal budget processes typically include:
organisations planning
senior management, responsible for the delivery of outputs and programs and accountable for
the performance and financial viability of the organisation as a whole;
and management
be more effective when

they reflect the

2.2. Align internal budgeting with organisational

roles and responsibilities
framework.
operational or line managers, responsible for the delivery of specific outputs and programs as
well as financial management of their group or team; and
business support managers, including the Chief Financial Officer, responsible for the delivery
of certain support functions (such as the provision of financial advice) as well as financial
management of their own group or team.
It is important that internal budget allocations are consistent hierarchically such that each lowerlevel
budget can be aggregated consistent with the organisations management and accountability
structure. However, this does not require the same level of detail to be reported at each level of
management. It is preferable for relevant summaries of the internal budget to be prepared for each
level of management, such that:
budget reporting to senior management is high-level and strategically focused, for example,
providing budgets for the organisation as a whole with summarised results for each organisational
area, output and program; and
budget reporting to operational and financial managers is more detailed than that provided to
senior management to enable these managers to identify factors that influence budget results.
Ideally, the internal budget is fully allocated across the organisation. Where the internal budget is
not fully allocated there is a risk that there may be components of the budget for which no one
has taken responsibility. Similarly, where budget allocations do not reflect organisational roles and
responsibilities, there is a risk that managers are responsible for multiple allocations of the same
budget or for allocations over which they have no control.
Ideally, the internal

budget is fully allocated
across the organisation.
In allocating the internal budget across an organisation, it is prudent to:

clearly assign each budget allocation to an accountable officer with the allocated budget limited
to those items where the officer has the responsibility, and the associated authority, to take
action;
align budget allocations with output and program structures in addition to organisational
structures (for example, cost centre structures);
allocate the full cost of goods and services across the organisation, distinguishing between
those items that the accountable officer has direct control over from those where control is
indirect; and
allocate all elements of the budget, including balance sheet items, so that officers can view the
full financial impact of their decisions.
These practices are illustrated in Figure 4 and explained further below.
11
IMPORTANT UPDATE
Figure 4: Better practices in allocating the internal budget

Clearly assign accountability. Align with
managerial responsibility and authority
Align organisational structures to output

and program responsibilities
Output
Authority
Accountability
Program
Group
Responsibility
Budget
Allocation
Direct Costs
Income and
Expenses
Indirect
Costs
Cash
Flows
Full Costs
Show the full cost of service delivery
Assets and
Liabilities
Show the full

financial impacts of budgetdecisions

Budget allocations will be more effective when they are assigned to an accountable officer or
position. General or broad statements of budget management responsibility are likely to create
uncertainty about performance expectations and measures of accountability. Conversely, clearly
articulated and communicated budget management responsibilities for financial and operational
managers and staff helps ensure these responsibilities are widely and consistently understood.
An important consideration for organisations is whether the full budget is allocated across the
organisation or whether a component is retained centrally by senior management, for example, as
unallocated contingency. The retention of a contingency reserve gives an organisation flexibility to
cope with uncertainties and to allow adjustments for unanticipated expenditures. However, there
is a risk that the reserve is perceived as a slush fund that can be called upon when areas need
additional funding. Organisations are also likely to encounter difficulties in allocating contingency
reserves to outputs and programs, thereby reducing the accuracy of output and program budgets.
As such, it is prudent to keep unallocated contingencies to a minimum and for specific purposes.
It is also useful for organisations to have clear protocols in place to specify criteria under which
contingency amounts can be accessed.
12
IMPORTANT UPDATE
Ensure budget accountability aligns with responsibilities and authority

Officers should only be held accountable for budgets that they controlthat is where they have
authority to make decisions, allocate resources and commit the organisation to a course of action.
Accountability is enhanced when consistency is maintained between budget allocations and the
organisations overall financial management framework, in particular the organisations delegations
framework. It is often desirable to include accountability for budget performance in an officers
individual performance agreement.
In addition to the allocated budget, responsibility for underlying budget sources and budget
assumptions (for example, standard costs) should also be clearly assigned within an organisation
to help ensure this data is kept up-to-date. Typically, responsibility for these items would reside in
the finance area.

held accountable for

budgets that they
control.

Managers are more likely to take ownership of their allocated budget where they have input into
developing the budget as opposed to having a budget attributed to them.
Officers should only be
Public sector managers have many responsibilities, including to:

allocate funds in accordance with the organisations funding limits and delegations;
implement and administer government programs;
contribute to the delivery of the organisations outputs; and ultimately
contribute to the achievement of the governments desired outcomes.
An effective internal budget structure helps managers plan for, and measure performance against,
each area of responsibility. This provides managers with a clear understanding of, and commitment
to, the organisations goals.
Aligning organisational structures with output and program responsibilities reduces complexity in
linking resources to output and program delivery, as:
managers are held accountable for one rather than multiple budgets;
the time required to compile the budget is reduced as consolidation points are reduced;
organisations can more readily measure the cost of managing administered programs (that is,
there is less attribution); and
there is a direct link between external appropriation sources and internal resource allocation and
between external performance measurements (in the Portfolio Budget Statements) and internal
budget activities.
Better Practice Tip: Align organisational structures with outcomes,

outputs and programs
This degree of alignment best defines management accountabilities and responsibilities, and
enables organisations to directly translate internal activity reporting to external reporting.2
If an organisation is unable to align organisational structures to output and program responsibilities,

it is important to clearly map linkages between each organisational unit and the outcomes, outputs,
and programs to which they are contributing. Some organisations develop a matrix approach to
the internal budget where managers are allocated budgets for one or more organisational units
2 Joint Committee of Public Accounts and Audit (JCPAA) Report 388, Review of the Accrual Budget Documentation,
2002, p. 12.
13
IMPORTANT UPDATE
as well as contributing to specified outputs and programs. Other organisations identify individual
managers with specific responsibility for managing outputs and programs across a range of
organisationalunits.

Including indirect costs
in output and program
budgets is necessary to
present the full cost of
delivering services.
Aligning organisational structures to outputs and programs is less straightforward for internal
enabling activities (such as corporate support services) and fixed organisational costs (such as
rental costs). Ordinarily, these activities contribute to multiple outputs and programs. Nonetheless,
including indirect costs in output and program budgets is necessary to present the full cost of
delivering services. One approach to allocating indirect costs to outputs and programs is to require
each corporate area to identify the program and output they worked on. However, it is often simpler
and more cost-effective for an organisation to adopt attribution rules to allocate indirect costs to
output and program budgets.
As shown in Table 2, a range of approaches are available for attributing direct and indirect costs
to outputs and programs.3 The most appropriate approach to use will depend on the materiality
of indirect costs, availability of information and nature of the organisations activities, outputs
and programsthe benefits of better information must outweigh the costs of collecting it. Many
Australian Government organisations have automated cost-attribution systems to help support
transparent and consistent approach to allocating costs to outputs and programs.
Table 2: Approaches to attributing costs

Attribution
basis
Description
Suggested use
Employee costs and associated costs

in operational areas are attributed
to output and program (or project)
based on a time recording method
(for example, timesheets). Indirect
employee costs (for example,
corporate areas) are also allocated
based on timesheet activity or are
based on another attribution method.
Where staff costs are a

significant proportion of
overallcosts.
Records of
usage
Records are kept on the use of

infrastructure, plant and equipment,
with costs attributed on the basis of
this information.
Where capital usage costs

are a significant proportion of
overallcosts.
Activity
snapshot
Cost attribution is based on

an analysis of activities over a
representative period, rather than
continuously. Examples of activitysnapshot approaches include time
and motion studies and collecting
timesheets for a representative period.
In organisations with a small

number of large projects or
where the pattern of activity is
fairly consistent over the course
of a year.
Time
recording
systems
In projectbased organisations
with a large number of small
projects.
In organisations recovering costs
of activities.
3 Management Advisory Board (1997), Beyond bean counting: effective financial management in the APS1998 &
beyond, Part 3, pp. 7581, contains further discussion on cost attribution approaches.
14
IMPORTANT UPDATE
Attribution
basis
Suggested use
General
ledger cost
centre
structures
Costs directly attributable to an output

or program are identified based on the
cost centre or profit centre structure
in the general ledger. Indirect costs
are then attributed using cost drivers
or through another of the approaches
listed in this table.
In organisations where there

is a close alignment between
organisational structures and
outputs or programs (that is, a
one-to-one mapping).
Activity
Based
Costing
(ABC)
The organisation is broken down

into activities with each activity
representing one way in which outputs
and programs are delivered. Direct
costs are allocated directly to outputs
and programs (cost objects). The
majority of indirect costs are assigned
to activities, which are in turn allocated
to cost objects.
In complex organisations with a

range of material indirect costs.
In organisations where the data
used to capture and measure
activities can be generated at
little cost and effort.

Description
A key advantage of ABC is that it

converts indirect costs into direct
costs which are directly assigned,
rather than allocated, to outputs
andprograms.
Proxy cost
drivers
Indirect costs are allocated to

operational areas (direct cost areas)
based on one or only a few key cost
drivers which are readily measurable,
for example, staff numbers or work
space. While there is not a direct
relationship between the proxy cost
drivers and each indirect cost element,
the proxy(s) are representative of the
organisation as a whole.
In policy or process oriented

organisations with a small range
of activities and where indirect
costs are not a significant
proportion of the overall
costbase.
Internal user
charging or
Service Level
Agreements
(SLA)
Indirect cost areas (for example,

corporate areas) record actual costs
incurred for each operational area
(client), calculate a charge for the
service and invoice (either physically
or notionally) each client on a
regularbasis.
In organisations where indirect

costs are a significant proportion
of the organisations overall
costbase.
In organisations where internal
enabling areas operate
as autonomous business
operations or are outsourced.
In organisations where the data
used to measure usage can be
generated at little cost and effort.
Managerial
judgement
Indirect costs are allocated to

outputs and programs based on
managements assessment of where
costs are incurred.
In organisations where indirect

costs are immaterial.
15
IMPORTANT UPDATE
In addition to reflecting the full cost of service delivery, it is important that the allocated budget
continues to align with managerial responsibilities and authorities. One way to achieve this is to
distinguish in budget reporting between those budget items or activities that the output or program
manager has direct control over (direct costs) from those items or activities used by the output or
program but where control is indirect (indirect costs). Consistent with external budget and reporting
standards, there is also a need to distinguish between departmental and administered activities.
establishing attribution
The involvement of operational managers in establishing attribution rules and identifying key cost
drivers increases the likelihood that they will understand and accept the attribution rules and take
ownership of their allocated budget.
rules and identifying key
The following case study provides an example of the attribution of indirect costs.
The involvement of
operational managers in
cost drivers increases

the likelihood that they
will understand and
accept the attribution
rules.
Case study: Department of Environment, Water, Heritage and the Arts

A simple and transparent approach to cost attribution
Following a cost-benefit analysis of alternate indirect costing methodologies and taking into
account its operational environment, the department concluded that the most appropriate
attribution approach for the purpose of overhead allocation was through the use of a single
cost-driver based on workpoints (floor space). A workpoint is a point at which a person
is able to work, regardless of whether a personal computer is there. It includes storage
areas but does not include common areas. In most cases, a workpoint can be attached to
anactivity.
Indirect costs (that is, indirect activity centres) are attributed to direct activity centres through
a two-phased attribution process. Firstly, indirect activities that directly support more than
one activity within an output or program (for example, divisional executive) are attributed
to the relevant output and program direct activity centres. Secondly, indirect activities that
support all programs and outputs (for example, the Office of the Secretary) are attributed to
direct activity centres based on workpoints.
Activity centre budget reports show separately those revenues and expenses that relate
to direct activities from those items or activities used by the output or program but where
control is indirect (indirect activities).
The approach provides a reasonable and cost-effective attribution to support accountability
and decision-making by showing the full cost of outputs and programs.

Consistent with the external budget, Australian Government organisations generally prepare
internal budgets which include income statements, balance sheets and cash flows. However, a
key consideration for most organisations is the extent to which all elements of the budget are
allocated. For example:
whether noncash items such as depreciation are allocated to operational areas;
the extent to which budgeted revenues (for example, appropriation and revenues from independent
sources, including sales proceeds) are allocated to operational areas;
whether assets and liabilities are allocated to operational areas or maintained centrally; and
the extent to which operational areas are held accountable for cash estimates, accrual estimates
or both.
16
IMPORTANT UPDATE
It is prudent to devolve all elements of the budget, including balance sheet items, to managers
who have control or stewardship over each element. However, the degree of devolution of budget
elements is likely to depend on the nature, size and distribution of the organisations assets and
liabilities.
The degree of devolution
Benefits of allocating integrated budgets (that is, inclusive of income statement, balance sheet and
cash flow impacts) to operational managers include:
distribution of the
the full financial impact of managers decisions are visible to them and they can be held
accountable for the full cost of delivering outputs and programs;
and liabilities.
operational managers are assigned responsibility to focus on, and manage, the organisations
assets and liabilities;
it encourages consideration of alternate asset acquisition options (for example, leasing);
there is greater consistency between budget and actual reporting; and
there is increased awareness of longerterm fiscal challenges.
The following example illustrates an effective approach for allocating depreciation to operational
areas.
likely to depend on the

nature, size and
organisations assets

managers are able to assess budgetary impacts in the same period the underlying activity is
planned;
of budget elements is
Example: Allocating depreciation to operational areas

Depreciation is a noncash expense which reflects the allocation of the cost of using existing
assets over their useful life. The allocation of depreciation provides operational managers
with a more complete understanding of the cost of providing services. Being charged with
this cost gives managers greater incentive to identify surplus assets and assess useful lives
so that the depreciation charge reflects planned asset usage. There is also greater incentive
to consider alternate acquisition options, especially in circumstances where assets are
unlikely to be fully utilised.
Organisations can support and encourage managers to consider the cost of depreciation
when making resource decisions by:
separating depreciation on assets managed by each operational area from depreciation
on assets used (but not managed) by the operational area, such as head office buildings
or fit out. For budget collection and reporting purposes, managers are only required to
act on managed assets;
deriving depreciation from the capital budget so that managers can observe the operational
impact of their investment decisions;
distinguishing between capital expenditure on asset replacement (that is, the depreciation
component) and asset expansion;
integrating the depreciation budget with the asset register so that managers can drilldown
to the underlying assets; and
separating depreciation by class and by nature of funding. For example, some Australian
Government organisations are responsible for specialised assets or heritage assets
which are longlived or irreplaceable and subject to specific maintenance and funding
agreements. The depreciation associated with these assets should be shown separately
from the depreciation charged on other assets.
The above practices assist in providing managers with the full cost of delivering their services
but do not require managers to calculate or estimate depreciation.
17
IMPORTANT UPDATE
The key challenge

associated with the
allocation of full accrual
budgets is the ability of
nonfinancial managers
to understand the
inter-relationship
between the financial
statements and the
different measures for
which they are
accountable.
The key challenge associated with the allocation of full accrual budgets is the ability of nonfinancial
managers to understand the inter-relationship between the financial statements and, as such, the
different measures for which they are accountable. To address this challenge, organisations can:
automate relationships between the income statement, balance sheet and cash flow statement
such that managers do not have to provide the same information in two or more statements.
This may include, for example, the automatic derivation of the cash flow statement from the
income statement and balance sheet; and
separately disclose budgeted gains and losses which are due to factors outside the managers
control (for example, changes in the market value of assets between budget updates).
In circumstances where an organisation determines that central management of a budget element
(including cash) is appropriate, it is important to undertake a formal risk assessment and identify
appropriate compensating controls to help manage each budget element. This is illustrated in the
following two examples.
Example 1:
Each manager is accountable for an employee expense budget, however the employee
provision liability budget is maintained centrally. Senior management have established leave
balance targets (including maximum leave days and average leave days) and managers
are accountable for monitoring and proactively managing staff leave within these targets.
Managers receive regular reports showing employee leave balances and are required to
explain exceptional balances.
Example 2:
Each manager is accountable for supplier expenses, however the creditor liability is not
allocated to operational areas as payment is centrally managed under predetermined
payment terms (for example, 30 days). Under the organisations control framework,
managers are accountable for the monthly reconciliation of creditor suspense accounts and
the review of aged creditors and commitments. All exceptional balances must be explained
and actioned.
The following case study illustrates use of a fully integrated budgeting and reporting system.
Case study: Department of the Environment, Water, Heritage and

theArts
A fully integrated budgeting and reporting system
The Department of the Environment, Water, Heritage and the Arts (DEWHA) has created
an integrated budgeting and reporting system that supports budgeting and reporting by
organisation, program and output. Key aspects of the departments integrated internal
budget process are discussed below.
An established budget framework

The DEWHA budget process is guided by a framework of financial management policy
documents which articulate the departments principles and approaches to budget
management and reporting. These documents include budget policies for the recognition
Continued on next page
18
IMPORTANT UPDATE
and allocation of departmental revenue, including priorities for utilising funding sources to
meet required payments, and the departments methodology for allocating and reporting
corporate overheads.
Defined roles and responsibilities

The DEWHA financial management framework is underpinned by a shared commitment
to financial management across the department. To ensure a consistent approach to
financial management, the department has a documented policy which clarifies roles
and responsibilities in budget management and reporting. This policy is translated into
operational budget guidelines for each internal budget update.

The policy framework was established before the implementation of DEWHAs current
budget and reporting system and, as such, provided the overarching functional requirements
to be met in the system implementation. Key stakeholders within and external to DEWHA
were consulted and their requirements considered in developing the framework. Most
importantly there was significant senior executive involvement in, and support for, the
framework andsystem.
Within the department, budget processes are overseen by the Budget, Finance and
Strategy Committee. The Committees terms of reference, including roles, responsibilities
and accountabilities, are clearly documented in a charter approved by the Secretary.
A flexible financial budgeting and reporting structure

A key requirement for the departments financial reporting system was the ability to budget
and report against multiple accountabilities, including organisational unit, program and
output.
To achieve these objectives, the department established a budgeting and reporting
structure built around activity centres. An activity centre represents a particular activity that
is sufficiently specific that it can be mapped to an organisational unit, output and program
in a one-to-one relationship.
Administered
Special
Public
Moneys
Departmental
Activity
Centre
Organisational
Unit
Program
Sub-output
Continued on next page
19
IMPORTANT UPDATE
Continued from previous page

Activity centres are then classified as direct or indirect (for example, corporate activities).
Direct activity centres must be able to map to one organisational unit, program and
sub-output. Indirect activity centres are allocated to direct activity centres based on the
departments corporate overhead allocation methodology. Each activity centre has only one
accountable manager, but a manager may have multiple activity centres.
This approach provided the department with the flexibility to aggregate activity centre
budgets according to different reporting hierarchies, for example, by program, output
anddivision.
Benefits
All budget and financial reports are from the one system ensuring consistency of
information.
Readily available information for staff and other stakeholders can be produced.
Accountability is understood and recognised for all levels of staff.
There is ownership and acceptance of the budget and it is fully automated.

Integration between the
capital budget and the
operational budget helps
ensure an understanding
of the longterm
consequences of budget
decisions.
Capital investment decisions have longterm implications, potentially affecting an organisations

capital structure and influencing its ability to change operations in the future. Capital investment
decisions also commit the organisation to a stream of costs that extend beyond the current
year (through depreciation and maintenance costs). As such, having close integration between
the capital budget and the operational budget helps ensure an understanding of the longterm
consequences of budget decisions.
The management and associated funding of an organisations capital requirements involves planning
processes that span a number of years. Because of the uneven pattern of capital expenditure,
it is important that sufficient funds are created internally (for example, by creating depreciation
reserves) to finance replacements. A planned cycle of acquisition and replacement will avoid
funding difficulties caused by several major investments taking place in a single financial year and
large-scale obsolescence of equipment.
Capital budget processes provide a longterm assessment of an organisations capital priorities
and associated funding requirements. The capital budget identifies all new asset purchases (that
is, expenditure on items that are expected to provide benefits for more than one year), all planned
disposals and all costs that are to be capitalised, such as enhancements to existing assets or
internally developed assets such as software. The capital budget typically includes:
an overview of proposed capital expenditure by year across the capital planning period;
The timeframe covered

by the capital budget is
dependent on the nature
of the organisations
asset base but should, at
least, encompass the
expected useful life of
current and planned
asset purchases.
20
an overview of sources of funding by year (for example, depreciation reserve, reallocated funds
and external funding), and accumulated impacts on existing capital reserves such as quarantined
depreciation funding; and
a summary listing of proposed capital projects by category, including explanatory detail such as
timeframes and milestones.
The timeframe covered by the capital budget is dependent on the nature of the organisations
asset base but should, at least, encompass the expected useful life of current and planned asset
purchases.
Figure 5 illustrates the effective integration of the capital budget into organisational planning and
management to develop the overall budgeted financial statements.
IMPORTANT UPDATE
Figure 5: Integrated capital planning and budgeting
Strategic
Plans
Long-term capital
priorities
Major
Investment
decisions
Asset
Management
Plan
Operational
priorities
Capital
requirements
Off-balance sheet
capital decisions
Capital
Budget
Capital maintenance

Business Case
Capital Bid
Process
Key
priorities
Operational
Plans
Replacement
requirements
Asset
Register
Replacement
costs
Depreciation
Operational
Budget
As illustrated in Figure 5, key inputs in developing an effective capital budget include:

asset management plan: a multi-year asset management plan provides a framework for
decisions to acquire, maintain, replace and retire capital assets. The asset management plan
translates the organisations longterm priorities and strategic goals (as determined through
the strategic planning process) into capital requirements. It is important that the capital budget
directly links to, and flows from, the asset management plan to help ensure capital needs are
appropriately costed and funded.
It is important that the

capital budget directly
links to, and flows from,
the asset management
plan.
asset register: the asset register is more than an accounting record of an organisations existing
asset baseit also provides key information required for forward planning such as expected
useful lives, replacement values and the purpose for which assets are being used.
Better Practice Tip: Link the capital budget to the asset register
Use the asset register to construct a longterm rolling projection of asset replenishment
requirements based on estimated replacement costs and useful lives of an organisations
current asset holdings. This provides an overview of projected capital expenditure
requirements as well as an indication of annualised funding required to service the
replacement cycle.
operational budget: the operational budget shows the ongoing impact of holding assets through
reporting depreciation. An organisation may also utilise off-balance sheet assets in its day-today operations under leasing agreements or other arrangements that would not show up in the
balance sheet. As such, integrating the operating budget and capital budget enables managers
to more readily assess whole of life costs of purchasing decisions. Furthermore, the operational
budget shows consequential costs to the organisation when capital investment decisions are not
made, for example through increased repairs and maintenance expenditure.
Integrating the operating

budget and capital
budget enables
managers to more
readily assess whole of
life costs of purchasing
decisions.
21
IMPORTANT UPDATE
business cases: given the multi-year significance of capital investment decisions, it would
generally be appropriate for organisations to adopt different, and more extensive, submission and
approval arrangements for capital decisions than those applied to the operational budget. These
arrangements often include requirements to prepare separate capital proposals and establish
separate committees to consider and approve the capital budget.
It is prudent that all new major capital investment proposals are supported by an appropriate
business case for senior management consideration. It is also prudent to apply business case
discipline to major replacement projects to help ensure replacement is appropriate to current
priorities. At a minimum, the business case for capital investment should:
justify the need for the capital investment against the organisations priorities;
concisely, clearly and completely specify what is to be delivered, the overall time and cost
limits, and what benefits those deliverables will support;
identify sources of funding;
describe the implementation in sufficient detail to provide confidence the project is achievable,
and set a means for assessing and monitoring progress;
identify risks associated with the project (including risks associated with not proceeding) and
strategies to address these risks;
obtain validation of the project specification and implementation plan to help ensure that the
proposed approach is an appropriate way to fulfil the organisations requirements; and
help ensure that decisions for the project are clearly stated, properly documented and taken
by the appropriate person.
The extent and depth of each key input into the development of an effective capital budget is
dependent on the value, nature and size of the organisations asset base.
The following case study illustrates the use of formal governance arrangements over major capital
investment decisions.
22
IMPORTANT UPDATE
Case Study: National Library of Australia

Governance over capital budgeting
Each of the three committees meet at least quarterly throughout the year to develop, amend
and monitor progress against annual asset programs. Meetings are also timed to coincide
with overall strategy review and budget timetables. Some staff are members of one or more
committees, which helps provide an integrated approach across capital and operational
budget requirements. Other than the Collections Management Committee, there is a
representative from each division on each committee and that person is responsible for
presenting divisional proposals and discussing progress against agreed plans.

An important aspect of any capital asset replacement process is that effective governance
arrangements are in place throughout the organisation. The National Library of Australia
(the Library) achieves this through various sub-committees of the Corporate Management
Group. There is a Collection Management Committee, a Building Works Coordination
Committee and an Asset Management Committee. The Library Council is responsible for
endorsing overall acquisition programs and ministerial approval is required for any individual
acquisitions or disposals in excess of $1 million.
In October or November each year asset bids for the upcoming year are finalised by the
various committees and presented to the Corporate Management Group for consideration
as part of the Librarys strategy and budget processes. Major capital projects are managed
through the Librarys Balanced Scorecard system.
Planning for capital replacement

As most long-lived assets require active management beyond the budget and forward years
it is important to take a longterm view of their ongoing maintenance and replacement.
Within the Library, the Building Works program is based on:
a 15 year strategic building asset plan which is revised every three years to identify
replacement and maintenance requirements of the various components of the building
over that period;
a strategic building master plan that focuses on library service issues (for example,
collection delivery issues, reading room locations, public program requirements and
staffing issues);
a collection storage plan that aims to optimise collection storage within the Library
buildings and identifies when additional external collection storage is required; and
a conservation management plan.
The Library also has a separate building management system that identifies building asset
replacement and maintenance requirements. This system is also used to help manage
associated contracts.
Any additional whole of life (for example, maintenance) and depreciation expenses are built
into budget proposals as required. Some capital funding is held in reserve each year to
take account of major purchases required in future years. These quarantined funds are
considered as part of budget processes and are held for major categories of assets and the
duration of asset management plans.
23
IMPORTANT UPDATE

Organisations within the Australian Government General Government Sector (GGS) are required
to prepare external budgets in accordance with the Australian Governments budget reporting
standards.4 The timing of budget updates is determined by the governments annual budget cycle
and includes the main Budget, a mid-year update approximately six months after the release of
the Budget, and a revised update before the release of the next years budget. Additional updates
may also be required to support whole of government budget processes and an update is required
when an election is called.
The external budget is prepared by each GGS organisation to support the Governments fiscal
strategy and budget position through a detailed analysis of financial and performance information
at the portfolio and organisational level. The external budget also provides the basis on which GGS
organisations are appropriated. The external budget is tabled in Parliament and reported publicly.
It is critical that each
organisations internal
planning and budgeting
It is critical that each organisations internal planning and budgeting processes deliver an internal
budget that is consistent with the organisations external budget. The benefits of such consistency
include:
internal budget that is
the organisations internal managers are accountable to the Chief Executive (or Board) on the
same basis as the Chief Executive (or Board) is accountable to the Minister;
consistent with the
the internal budget is aligned to the Governments priorities;
organisations external
information compiled as part of the external budget process (for example, information on trends,
risks and opportunities in the external community as well as whole of government impacts) can
be used to guide development of the internal budget; and
processes deliver an
budget.
the external budget is supported by a detailed internal analysis which takes into account available
resources and the perspective of operational managers.
Alignment of internal and external budgets also provides greater consistency in budget reporting
between Australian Government organisations, as the external budget is prepared on a consistent
basis across Government. As a consequence, organisations are better able to benchmark budget
processes and results against similar Australian Government organisations to identify potential
improvements and efficiencies.
The use of a coordinated
plan and timetable that
is consistent with the
Australian Governments
budget cycle assists
organisations to
integrate internal and
external planning and
budgeting processes.
The use of a coordinated plan and timetable that is consistent with the Australian Governments
budget cycle assists organisations to integrate internal and external planning and budgeting
processes. Although it is not always possible due to the timing of government decisions and other
changes in the external budget, it is preferable to complete the internal budget as near as possible
before the release of the external budget. Part 3.1.2: Establish budget timetables and milestones
provides further discussion.
In addition to a coordinated plan, it is important that there is consistency in recognition, measurement
and disclosure of the internal and external budget, including consistency in accounting policies and
the definition of the consolidated budget entity.
As illustrated in Figure 6, having consistent internal and external account structures and reporting
formats can help avoid the need to remap or recalculate results when moving between the internal
and external budget.
Part 4.2: Revising the internal budget provides further relevant discussion on maintaining consistency
between the internal and external budgets throughout the budget cycle.
4 The legislative framework underpinning the external budgeting process is contained in the Australian Constitution; the
Charter of Budget Honesty Act 1998; the annual appropriation Acts, the Financial Management and Accountability Act
1997; and the Commonwealth Authorities and Companies Act 1997.
24
IMPORTANT UPDATE
Figure 6: Integrating the internal and external budget account structure
External
Reporting
Standards
Budgets are reported at a level of detail that is

consistent with generally accepted accounting principles
as reflected in the Australian Equivalent to International
Financial Reporting Standards.
Internal and external budgets are reported at a level of

detail required by central agencies.
Organisational Budgeting
Requirements
Internal budgets are consolidated and reported at a level

of detail sufficient to meet senior management planning
and reporting requirements.
Operational Budgeting
Requirements
Internal budgets are prepared and reported at a level of

detail sufficient to meet operational requirements.

Central Agency
Budgeting Requirements

Consistency between budgeting and reporting is critical to enable senior management to scrutinise
the internal budget fully and accurately. Where consistent policies and formats are adopted for
reporting budget estimates and actual results, the organisation has greater certainty in decisionmaking that actual-to-budget variances are due to operational factors rather than accounting
treatments.
Where consistent
The link between budgeting and reporting is enhanced when organisations prepare a single budget
and reporting plan which:
organisation has greater
sequences budget and actuals reporting activities in a logical fashion;
decisionmaking.
policies and formats are

adopted for reporting
budget estimates and
actual results, the
certainty in
identifies key deadlines relevant to each process;

identifies dependencies and relationships between budgeting and reporting activities; and
allocates resources and responsibilities within the finance area and across the organisation to
provide for peak periods when budgeting and ex post reporting periods overlap.
In addition to an integrated budgeting and reporting cycle, it is important that organisations present
budget and actuals reports on the same basis. This includes:
It is important that
harmonising the revenue and expenditure recognition, measurement and disclosure policies for
the internal budget with generally accepted accounting principles as reflected in the organisations
audited financial statements;
budget and actuals
organisations present
reports on the same
basis.
adopting consistent reporting hierarchies for both ex ante (budget) and ex post (actuals)
reporting;
applying a standardised chart of accounts and reporting formats for both ex ante and ex post
reporting; and
using tools and reporting templates which are able to report budget, forecast and actuals data
in a single document or file.5
Where possible, it is desirable to avoid changing reporting structures across financial years and
budget cycles so that historical information does not lose its relevance for current budgetary analysis
and decision-making. Where changes are required (for example, due to new accounting policies or
5 Part 4.1: Monitor and report against internal budgets provides further discussion on reporting of actual results against
budget.
25
IMPORTANT UPDATE
structural changes), an effective practice is to provide managers and other key stakeholders with
a map showing changes made between the current reporting structures and those that existed at
the last update.
When functions are transferred between Australian Government organisations as a result of machinery
of government changes, accountability and decision-making are enhanced if organisations also
map historical information. In this regard, the good practice guide Implementing Machinery of
Government Changes6 makes a number of recommendations to assist organisations implement
machinery of government changes, including developing information and communications and
records management strategies. It is desirable that these strategies also consider historical
budgetary and actual information.
2.6. Engage stakeholders in internal budget

processes
involved in, and take
Budgeting is not the preserve of the finance area. Finance officers have a leading role to play in
formulating and coordinating the budget process, but it is essential that senior and operational
management are involved in, and take responsibility for, the budget process. Key elements to
effectively engage stakeholders in the internal budget are:
responsibility for, the
obtaining organisational support for the internal budget;
budget process.
supporting operational managers in internal budget processes; and
It is essential that senior

and operational
management are
managing relationships with other Australian Government organisations for whole of government
initiatives.

Planning and coordinating internal budget processes involves input from across the organisation.
In addition to the finance area, this would typically include the participation of senior management
and line management but sometimes also representation from other corporate areas and internal
audit. For example, the human resources area would generally be a key advisor on workforce
planning matters.
The Chief Executive (or Board) is ultimately responsible for the efficient and effective management
of financial affairs within their organisation. It is critical that the Chief Financial Officer is in a position
to provide advice directly to the Chief Executive on the development and management of the
organisations internal budget.

Operational managers are responsible for managing programs and delivering outputs. These
managers may not have expertise in financial management, however, it is important that they have
sufficient skills and awareness to manage the financial resources under their control.7 Collectively,
operational managers are in the best position to understand day-to-day activities, risks and
opportunities that drive the organisation. It is essential to involve operational managers throughout
budget processes. Mechanisms to support operational managers develop and manage internal
budgets include:
Clearly communicating roles and responsibilities: it is important that the organisations
communication strategy helps ensure each operational manager with budget responsibility
is informed about their role in budget processes, including timelines for delivery, sign-off
6 Australian Public Service Commission (2007), Implementing Machinery of Government Changes: A good practice guide,
viewed 18 February 2008, http://www.apsc.gov.au/publications07/machineryofgovernment.htm.
7 National Audit Office (2008), Managing financial resources to deliver better public services, Report by the Comptroller
and Auditor-General, February 2008, p. 14.
26
IMPORTANT UPDATE
responsibilities and escalation arrangements. It is also important that managers understand and
agree to their role in budget processes, for example, through including budget responsibilities in
their performance agreement.
Educating nonfinancial managers about the budget framework: operational managers with
budget responsibility require an understanding of how budget data is generated and reported,
as well as how it is used in decision-making. Organisations can support operational managers
prepare and manage budgets through a combination of targeted training and guidance provided
in nonaccounting language.
budget processes.
managers understand
and agree to their role in

Better Practice Tip: Australian Government Budget and Financial

Essentials training
The Budget and Financial Essentials training program is an Australian Government initiative
established by the Department of Finance and Deregulation and conducted in partnership
with accredited training providers. It provides introductory training on budget processes and
the financial framework for government officials. The training program provides a practical
overview of:
the Australian Governments financial framework and its practical implications for the
day-to-day operations of the Australian Government;
key elements and timeframes of the Australian Governments budget process;
different types of appropriations and how they operate, legislation and conventions that
affect them, and associated key technical and process issues;
external reporting standards used in Australian Government financial reporting, including
the Government Finance Statistics and Australian Accounting Standards;
the impact of transactions on key budget balances and how these balances are derived;
and
Australian Governments charging policies, including cost recovery and competitive
neutrality.8
Enabling managers to input budgets in operational terms: operational managers should

not require accounting or costing expertise to prepare an internal budget. An effective practice
is to allow operational managers to input budget data on the basis of operational drivers (for
example, full-time equivalent employee numbers, beneficiary numbers for transfer payments or
stage of completion for capital programs), with the accounting value and classification based on
predetermined rules and standard costs.
This approach is commonly adopted in the estimation of employee budgets where operational
managers are only required to estimate full-time equivalents by staffing classification. The
employee budget is then calculated through the application of standard salary costs and
predetermined percentages for superannuation on-costs, leave and related entitlements.
Providing access to systems and tools: user-friendly systems and tools allow managers to
easily submit and retrieve data, and drill-down and analyse drivers and model scenarios to
assist in developing internal budgets. Refer to Part 3.2.3: Automate internal budget processes
for further information.
It is important that staff requiring access to internal budget systems receive training in an
organisations budget policies and procedures and the operation of budget systems, including
security principles. In this regard, training will be more effective when it is provided before
staff receive access to budget systems and also after any significant changes to budget
functionality.
It is important that staff

requiring access to
internal budget systems
receive training.
8 Department of Finance and Deregulation website, available from http://www.finance.gov.au/budgetgroup/

Commonwealth_Budget_Overview/budget_and_financial_training.html [accessed 13 February 2008].
27
IMPORTANT UPDATE
Sharing knowledge and ideas on budget practices: in addition to systematic training and
guidance, it is important that organisations provide opportunities for managers to interact and
share knowledge on a regular basis. Examples of how this may be accomplished include:
the establishment of a budget network where finance and operational managers participate in
regular forums and information sessions to discuss issues and share ideas for better practice
internal budget processes;
maintaining an intranet budget site or email forum where managers can access guidance and
advice, post queries and share experiences regarding internal budget issues; and
hold lessons learned sessions after the completion of the internal budget to identify strengths,
weaknesses, and opportunities to improve budget processes.

Many government initiatives have a whole of government dimension. These initiatives are established
and funded in a number of ways, for example, through shared outcomes, special accounts or
purchaserprovider arrangements. While these considerations are outside the scope of the guide,9
it is important that each participating organisation structure its internal budget to support strategic
objectives and accountability requirements for the initiative as a whole. This requires organisations
to work together to develop internal budget and reporting arrangements that meet accountability
obligations of each individual organisation and contribute to the collective achievement of, and
accountability for, the whole of government outcome.
A coordinated approach to internal budgeting requires a shared understanding of different budget
roles and responsibilities. An important component of this understanding is clear agreement about
where overall responsibility for budget development and monitoring lies, as well as individual
responsibilities for different components of the initiative. Arguably, the most critical element in
budgeting for a whole of government initiative is senior management commitment to achieving
the whole of government outcome, including a collaborative and transparent approach to budget
development and monitoring.
One approach to whole of government initiatives is to establish a lead organisation. In these
instances, there is often merit in formalising such arrangements through memorandums of
understanding, agreements or committees.
Another approach is to establish a steering committee with responsibility for business issues
associated with the initiative, including budget strategies and oversight. Ideally, the steering
committee would have senior officer representation from each participating organisation.
It is essential to have
sufficient transparency
of those components of
each organisations
internal budget which
have been allocated to
whole of government
initiatives.
There is also an expectation that organisations allocate, and if necessary reallocate, resources
across organisational boundaries to achieve whole of government outcomes. This requires
flexibility and consistency in internal budget processes between participating organisations. Where
practicable, compatibility between budget policies, assumptions and data will help align budgets
between the participating organisations. In this regard, it is essential to have sufficient transparency
of those components of each organisations internal budget which have been allocated to whole of
government initiatives. To achieve a sufficient level of transparency, it is desirable, in certain cases,
to establish separate internal budget allocations for whole of government initiatives.
Implementing a whole of government program may represent a significant change to the way an
organisation operates and is structured. As such, a zerobased approach to budget development
is often highly desirable to ensure the internal budget is aligned to the Governments objectives
in adopting a whole of government approach. Part 3.2: Effective budget construction further
discusses zerobased budgeting.
9 The Better Practice Guide Implementation of Programme and Policy InitiativesMaking Implementation Matter, issued
jointly by the Australian National Audit Office and the Department of the Prime Minister and Cabinet in October 2006
discusses whole of government considerations in establishing government programs.
28
IMPORTANT UPDATE
Part 3
Developing and implementing a

comprehensive internal budget
3. Developing and implementing a comprehensive internal budget

30
30
31
32
34
34
35
35
36
39
Developing and implementing

a comprehensive internalbudget
Contents
41
29
IMPORTANT UPDATE
3. Developing and implementing a

comprehensive internal budget
Developing and implementing an internal budget is a major exercise for most organisations. It
generally involves a significant amount of an organisations management and staff time and typically
spans many months. As such, the process requires effective:
planning and coordination, including clearly defined expectations and assumptions, a
coordinated calendar of activity and well-documented and communicated policies and
procedures;
budget construction through implementing established and agreed budget methodologies
and automating budget processes; and
oversight, review and communication through active senior management involvement,
rigorous quality assurance processes and structured communication.

Overall responsibility for planning and day-to-day coordination of internal budget processes usually
resides in the finance area, principally with the Chief Financial Officer. Ideally, in larger organisations,
or organisations with decentralised operations, the Chief Financial Officer is supported in this role by
a designated budget unit and a team of budget coordinators located throughout the organisations
operational areas.10 The responsible areas budget coordination duties typically include:
developing budget timetables and identifying responsibilities for budget preparation;
designing calculation worksheets and submission templates;
developing the key planning assumptions to be applied across the organisation;
issuing guidelines and instructions on budget preparation;
advising and assisting line areas to develop budgets;
undertaking quality assurance checking of estimates and requests submitted by line areas;
providing technical advice and guidance to senior management and budget committees,
including advice on the robustness of budget bids and opportunities for savings;
monitoring progress on budget development throughout the organisation and updating senior
management;
preparing estimates that are not captured at group level;
consolidating group budgets into the organisation-level budget;
preparing budget documentation; and
reviewing budget processes.
Many other managers and staff participate in internal budget processes. To contribute effectively
to these processes, it is important that these staff have access to sufficient guidance and support
to understand their budgeting roles, including when key budget activities and decisions will occur.
This will provide them with an opportunity to plan and participate in the process and help ensure the
process is applied consistently. The elements of effective planning and coordination include:
setting budget policies;
establishing budget timetables and milestones;
10 It would generally not be cost-effective for small organisations, or organisations with largely centralised operations, to
have both a designated budget unit and a team of budget coordinators.
30
IMPORTANT UPDATE
allocating responsibility for budget preparation and review; and

documenting budget processes and communicating guidelines.

Effectively integrating planning and budgeting requires the principles, parameters and assumptions
underpinning the development of the internal budget to be consistent with the organisations
strategic and operational plans. A documented budget policy is a useful mechanism for senior
management to articulate budget priorities and constraints and communicate the organisations
framework for budget development and decision-making. The authority and legitimacy of budget
policies are enhanced when they are approved by the Chief Executive or budget committee. Better
practice budget policies would generally include the elements listed in Table 3.
A documented budget
policy is a useful
mechanism for senior
management to
articulate budget
priorities and
constraints.
Table 3: Key elements in an organisations internal budget policy

Internal budget policy would ideally consider the following elements:
the organisations functions, programs, outputs and outcomes and how these relate to
organisational and budget structures;
the organisations current and longerterm fiscal strategy (including, for example, senior
managements position on balancing the budget and drawing on accumulated reserves or
surpluses);
the organisations budget objectives and targets for the budget year and forward estimate
period with sufficient detail to guide operational areas, individually and across outputs
andprograms;
planned sources of income and how these are to be allocated (including receipts from
independent sources);
key measures against which budget allocations and submissions will be assessed;

broad strategic priorities on which the internal budget is based;
key internal and external planning assumptions to be applied across the organisation
(forexample, salary rates, indexation factors, and productivity gains);
the reporting basis on which the budget will be prepared;
expected impacts and treatments of one-off or temporary conditions in the organisation or
in the external market;
circumstances under which a departure from the above principles, parameters and
assumptions is permitted; and
governance arrangements to be followed in developing and approving the internal budget.
It is important that these policies provide sufficient information for line areas to develop business plans
and budgets that align with the organisations strategic directions and priorities. Communication of
these policies throughout the organisations is discussed in Part 3.1.4: Document budget processes
and disseminate guidelines.
Collaborative target setting approaches involve line management in establishing organisational
objectives, priorities and strategy. This can be accomplished in a number of ways, including
representation on a budget committee, establishing a separate advisory committee or through
round-table discussions. Interaction with external stakeholders (including ministers and central
agencies) is also important to identify their needs, priorities and insights for incorporation into
budget planning.
31
IMPORTANT UPDATE
It is prudent to prepare
longerterm internal
budget estimates
consistent with the
organisations strategic
planning process.
A critical consideration in budget preparation is the budget horizon, that is, the time period over
which the organisation will set its budget. Traditionally, organisations have limited the internal
budget to a single year as funding and activity can be estimated with greater reliability. However, it
is prudent to also prepare longerterm internal budget estimates consistent with the organisations
strategic planning process (three to five years). This will enable an assessment of longerterm
financial implications of current and proposed policies, services and assumptions.11
To support integration with external budgets, it is also useful to align the internal budget horizon
with the external budget horizon (which includes at least three forward years in addition to the
budget year). Capital budgets generally require a longer budget horizon to show the multi-year
impact of current and proposed capital investment (depending on the nature and useful lives of the
organisations asset base).
conflicts are managed,
For many organisations, developing the internal budget takes a number of months.12 To help
ensure deadlines are met and resourcing conflicts are managed, many organisations develop a
comprehensive and integrated planning calendar. Ideally, these calendars:
many organisations
identify specific information required for internal budget processes;
develop a comprehensive
describe deliverables in detail;
To help ensure deadlines

are met and resourcing
and integrated planning

calendar.
incorporate key checkpoints;

factor in other relevant deadlines, in particular those relating to the external budget and reporting;
and
highlight relevant internal and external budget milestones.
The following case study illustrates an integrated internal budget development process.
11 It is often more cost-effective for organisations to prepare longerterm internal budget estimates at the higher levels
as there is less certainty about the accuracy of estimates further into the future, and therefore less benefit in preparing
detailed budgets for all operational units.
12 KPMG (2004), 2004 Budgeting and Forecasting Survey ReportProcess Tweak or Process Overhaul?, reported
findings from an international survey of budgeting and forecasting practices in the private and public sectors, that the
average cycle time for developing a budget was around 2.6 months, with 84 per cent of respondents requiring more
than two months and almost one-third requiring more than three months.
32
IMPORTANT UPDATE
Case Study: Australian Taxation Office

Developing the Internal budget
The internal budget development process in the Australian Taxation Office is incorporated
into the Tax Offices annual corporate planning timetable.
The corporate planning cycle begins in October each year and is primarily risk driven.
The process commences with a range of corporate forums that assess the internal and
external environments in which the Tax Office operates. Issues arising from those sources
are then considered in developing a set of risk and priority statements and, in turn, the
corporateplan.
Concurrently, the internal budget planning process is undertaken over a period of about
nine months beginning with input from Federal budget processes commencing with the
annual Senior Ministers review.
The corporate planning timetable requires that initial internal budget allocations are released
in early December each year for discussion at a key internal governance forum. The Tax
Office manages internal budget allocations through a long term finance model that enables
the organisation to model both current and future year internal budgets. The model also
provides the basis on which scenario planning can be undertaken so as to provide the
Executive with a range of resource allocation options.
Early development of indicative budget allocations provides the Executive with the
opportunity to consider budget allocations well before the commencement of the financial
year and consider overall resource allocation to address identified risks and priorities.

Internal budget planning continues as an iterative process, with the corporate planning
timetable providing several other key points during the year at which indicative internal
budget allocations for the following year are updated for discussion and review. This means
that after the release of initial budget allocations in December, budget allocations are
updated as revised resource information is available from decisions made as part of the
corporate planning process and the Federal budget.
Final internal budget allocations are developed after the Federal budget each year and
after the Executive have also considered budget pressure submissions. Budget pressure
submissions allow the Executive to consider the impact of priorities on each sub-plans
resources and provide the opportunity to adjust internal budget allocations.
33
IMPORTANT UPDATE

It is important to clearly
assign and communicate
responsibilities for
Internal budget processes involve many areas and individuals within an organisation. As a result, it
is important to clearly assign and communicate responsibilities for budget planning, coordination
and development at the beginning of each internal budget process.
budget planning,
coordination and
development at the
beginning of each
internal budget process.
Better Practice Tip: Budget liaison and advisory officers

Allocate budget liaison and advisory responsibilities across the budget team with each
budget officer (or selected officers) responsible for one or more operational divisions. This
provides each division with a single point of contact for budget queries and provides budget
officers with the opportunity to obtain a detailed understanding of operational activities.
In larger organisations, out-post budget officers to line areas at different stages in the budget
process. In smaller organisations, coordinate budget liaison through a nominated budget
officer who acts as a point of contact for all budget related queries, ensuring each query is
allocated to the appropriate officer and logging progress to ensure feedback is provided in
a timely and consistent manner.
Given the intensive workload typically associated with preparing internal budgets, it is important
that organisations establish arrangements to cater for contingencies such as the unavailability of
key personnel during the budget process. This is particularly important in small organisations,
which are heavily dependent upon the knowledge and skills of a small number of individuals. To
minimise this risk, it is prudent to provide more than one staff member with exposure to each
budget responsibility, and include budget responsibilities in succession planning.

Clear and direct communication is essential at the beginning of the budget process and throughout
the budget cycle. From preparation through review, it is critical that key budget assumptions are
shared and applied consistently. To help ensure a consistent and timely approach to budget
development, it is important that budget guidelines are communicated to participating managers
and stakeholders at the commencement of each internal budget process.
Better practice guidelines and instructions set out: budget policies (see Part 3.1.1: Set budget
policies); roles and responsibilities; timeframes and deadlines; and processes and protocols
underpinning the budget development process. Guidelines are ideally communicated in written
format as well as any other medium which will assist in the efficient and effective dissemination
of information (for example, through information sessions). Instructions often include sample
forms and checklists to be completed by line areas. It is important that budget guidelines are
sufficiently detailed to address an organisations financial and operating conditions for the given
budgetperiod.
It is also important that organisations document processes, data sources, calculations, and roles
and responsibilities underpinning internal budget processes to provide clarity of roles, responsibilities
and tasks at each stage of the process. This may be accomplished through documentation
techniques such as process mapping and responsibility maps.
34
IMPORTANT UPDATE
Documenting budget processes and responsibilities also helps to:

identify resourcing gaps, including where budgeting and reporting activities overlap;
assign a clear accountable owner for each step in the internal budget process;
identify potential bottlenecks in the process; and
inform each stakeholder in the budget process of the nature of their responsibilities. In particular,
this helps ensure line areas understand their responsibilities in meeting the timetable for
preparation and review.
Appendix A provides an illustrative template for developing budget guidelines, including budget
policies.

An organisations approach to constructing an internal budget is influenced by many factors,
such as the predictability of its operations, extent of change required and the time and resources
available to complete the process. Key considerations in constructing internal budgets include the
extent to which:
the budget is driven through top-down direction or built from bottom-up participation;
budget processes are automated.

The internal budget may be constructed top-down where the strategic planning process drives
development of the budget or bottom-up, where the budget rolls up from operating units and
staff preparing it. In practice, most organisations adopt a hybrid of the top-down and bottom-up
approaches where senior management set broad goals and constraints and operational managers
are involved in the allocation of resources within these goals and constraints.
Most organisations
adopt a hybrid of the

the budget is derived incrementally from previous budgets; each aspect of the budget must be
justified anew; or the budget is constructed through a focus on the cost of inputs or a focus on
the delivery of outputs; and
top-down and bottom-up

approaches.
The relative advantages and disadvantages of each approach are illustrated in Figure 7.
Figure 7: Comparison of budget setting approaches

Time and cost to develop budget
Low |
| High
Risk of under or over allocation of budget
Low |
| High
Risk of inconsistent priorities
Low |
| High
Risk of unrealistic budget estimates
Low |
| High
Potential for lack of ownership
Low |
| High
Key:
= Top-down
= Bottom-up
= Hybrid
35
IMPORTANT UPDATE
The hybrid approach is generally preferred as:

there is greater commitment to, and ownership of, the budget setting process as all levels of
management contribute to the process;
it encourages a broad, organisation-wide perspective consistent with government priorities as
senior management set the strategic targets and constraints which then cascade down through
the organisation;
it leads to a greater understanding of how the actions and demands of individual areas impact
the organisation as a whole; and
the detailed budget is constructed by those that are responsible for delivering the services.
However, an ineffective hybrid approach can result in significant amounts of time and effort being
spent in negotiation and iteration, with senior management ultimately having to impose budget cuts
to satisfy organisational constraints. Approaches to mitigating this risk include:
involving line management in the target setting process;
providing opportunity for operational areas to submit proposals for funding priorities early. These
proposals are reviewed and vetted prior to resource allocation;
ensuring organisational goals, constraints and planning assumptions are clear and communicated
at the beginning of the budget process and throughout the budget cycle;
incorporating longerterm goals and constraints to guide managers in allocating resources; and
integrating budget priorities and allocations into the strategic and operational planning cycle.
There are circumstances where a largely bottom-up budgeting approach might be appropriate to
an organisation. In particular:
when an organisation has undergone substantial change (for example, after machinery of
government changes or where there has been a redirection of government priorities) and a
bottom-up approach is useful in setting the budget baseline;
when an organisations operations change significantly year to year, for example, projectbased
organisations; or
as a periodic zerobased retesting of budget assumptions and resource allocations, for example,
on a triennial basis.
A primarily top-down budgeting approach is the most appropriate approach in some circumstances,
for example, where a organisation has to identify substantial budget savings in a short space of
time or in circumstances where additional budget discipline is needed.

Most organisations prepare budgets using one or a combination of the following methods:
incremental budgeting (otherwise referred to as traditional budgeting);
zerobased budgeting;
activitybased budgeting; or
performancebased budgeting (including programbased budgeting and outputbased
budgeting).
Table 4 describes the key characteristics of each method, and their main advantages and
disadvantages.
36
IMPORTANT UPDATE
Table 4: Budget development methodologies

Method
Characteristics
Incremental
or traditional
budgeting
Description:
The previous years budget or actual results provide a base line for the
current year, adjusted for the removal or addition of one-off budget
impacts, the addition of new measures, the removal of lapsed programs
and otherwise updated for indexed changes, such as inflation adjustments
and productivity gains.
Advantages:
Disadvantages:
close linkage to the way external

budgets are adjusted;
assumes activities are largely

unchanged from last year;
relatively simple and easy to

understand; and
promotes spending to meet

the budget rather than focusing
on identifying savings and
efficiencies; and
provides managers with a stable

and consistent approach to
budgeting.
Zerobased
budgeting
not readily adaptable to changed

organisational priorities.
Description:
This method endeavours to redirect efforts and funds from lower priority
current programs to higher priority new programs, improve efficiency and
effectiveness and therefore reduce spending.
Advantages:
Disadvantages:
greater alignment of resource

allocation to output and program
delivery;
increased complexity, requiring

greater time and cost to deliver
budget; and
more adaptive to changing

priorities and circumstances;
increased workload may

not be justifiable where
an organisations activities
experience little fluctuation.
active involvement of operational

managers; and

Requires preparation of the next years budget as if it was a new, rather

than continuing, budget. That is, every aspect of the budget must be
justified.
focuses on value for money as

each budgeted amount must be
justified.
37
IMPORTANT UPDATE
Method
Characteristics
Activitybased
budgeting
Description:
Concentrates on factors that drive costs and justifies expenditure on the
basis of activities performed in relation to predetermined drivers. Places
responsibility on the manager with responsibility for the driver.
Advantages:
Disadvantages:
enables managers to input and

measure budgets in operational
terms;
greater complexity as it requires

managers to understand what
activities drive their budget and
estimate activity volume.
provides opportunities to examine

work practices and eliminate non
value-adding activities; and
close linkage to operational
planning.
Performance
based
budgeting
Description:
The various performancebased budgeting approaches begin with an
assessment of what the organisation is trying to achieve. The activities
required to achieve each output are identified and costed (generally using
activitybased budgeting).
Advantages:
Disadvantages:
links resources (inputs) to the

organisations deliverables
(outputs);
greater complexity in aligning

organisational and output
responsibilities and in allocating
corporate costs;
strongly integrates the budget and

strategic and operational plans;
greater alignment to source of
appropriation funding; and
budgets are ineffective if

performance measures are not
clearly articulated up-front;
close linkage to external

performance measures in Portfolio
Budget Statements.
greater time and effort involved

in collecting output and program
indicators; and
allocation of internal costs (for
example corporate overheads)
can be arbitrary unless the
organisation has effective
allocation approaches.
Conceptually, a
budgeting approach with
elements of zerobased
budgeting and
performancebased
budgeting would
Conceptually, a budgeting approach with elements of zerobased budgeting and performancebased

budgeting would generally be considered better practice as the budget links to the organisations
goals, priorities and outputs and has been fully justified. However, given the complexity, time
and cost associated with these methods, they are not practicable for all organisations. This is
particularly the case for organisations that exhibit little change year-to-year where the cost is
unlikely to bejustified.
generally be considered
better practice.
38
IMPORTANT UPDATE
Some techniques organisations use to incorporate zerobased and performancebased concepts

into their budgeting practices include:
limiting the use of zerobased budgeting to a select number of discretionary cost items (for
example, suppliers) or to a select number of programs;
applying full zerobased budgeting on a periodic basis (for example, triennially) rather than every
year; and
applying performancebased budgeting using a limited number of cost drivers as intuitive
proxiesthat is, key drivers (such as headcount) which are likely to explain the majority of
activity and provide a reasonable approximate of other activity in the absence of more specific
drivers.

Systems and tools used by organisations to construct the internal budget can have a significant
impact on the timeliness and quality of the internal budget. Larger organisations with a mature
budget function often use integrated software tools to manage internal budget processes. This
may comprise a budget-capable Financial Management Information System, or specialised
budgeting and reporting tools. Sophisticated tools facilitate the development of the internal budget
and provide timely financial and management information throughout the organisation.
As a budgeting tool, the
Nonetheless, the use of spreadsheets for all or some internal budget processes remains
common.13 The advantage of spreadsheets is that they are available across the organisation,
and are well understood and adaptable. Spreadsheets also leverage off existing technology that
exists within an organisation and, as such, may represent a cost-effective option, especially for
smallerorganisations.
spreadsheet has a
However, as a budgeting tool, the spreadsheet has a number of limitations around data integrity,
integration, change control, multi-user access and size restrictions. Further, the use of spreadsheets
can have a significant hidden cost through time spent on activities such as maintaining and updating
models and the manual consolidation of budget submissions.
access and size
To facilitate the production of timely and consistent budgets, organisations limit the amount of
manual intervention. As detailed in Table 5, it is important that an organisations budgeting systems
include adequate environment and applicationbased controls to help ensure they remain available
as required, operate as intended, are understood by users, and are not changed without proper
authorisation, documentation and testing.
To facilitate the
number of limitations
integration, change
control, multi-user
restrictions.

around data integrity,
production of timely and

consistent budgets,
organisations limit the
amount of manual
intervention.
13 ibid., p.19. The report highlighted that in excess of 85 per cent of survey respondents used spreadsheets for some or
all internal budgeting processes.
39
IMPORTANT UPDATE
Table 5: Better practice functionality and control for budget systems and tools
BUDGET SYSTEM ENVIRONMENT
Budget systems are incorporated into an organisations information technology planning,
and are subject to appropriate governance and review.
Access to budget systems and tools is appropriately restricted.
Changes to budget systems and tools, including assumptions and calculations, are
governed centrally.
Budget programs, data and documentation are backed up on a regular basis.
Comprehensive and up-to-date documentation is maintained for the administration and use
of budget systems and tools.
Adequate segregation of duties exists between budget input and budget approval.
Budget systems and processes are included in disaster recovery and business continuity
arrangements.
Workflow technology is used to manage the budget setting process.
BUDGET INPUT
BUDGET PROCESS
BUDGET OUTPUT
Data collection is
standardised across the
organisation.
Automatic consolidation
capability.
Standardised reporting
Tracking of budget
adjustments by account,
area, program, funding
source and reason.
Ad-hoc reporting and drill

down capability.
Direct entry of budgets by

operational areas.
Built-in data integrity and
reasonableness checks.
Automated interfaces
between source systems
and budgeting system(s)
which are reconciled.
It is essential that
internal budget system
and tools are
Ability to create multiple

iterations and scenarios in
budget development.
It is essential that internal budget system and tools are re-evaluated on a periodic basis (for example,
every three years) so that they remain appropriate to the efficient and effective development of the
internal budget.
reevaluated on a
periodic basis.
40
Budgets are integrated

with forecast and actual
data, including the ability to
report in a single document
or file.
IMPORTANT UPDATE

Involvement and commitment of senior management is critical to developing an effective internal
budget. One approach to involving senior management is through the establishment of a budget
committee (often the same as, or a subcommittee of, the executive committee) to oversight the
internal budget process. The functions of a budget committee include:
Involvement and
developing budget strategies and priorities;
effective internal budget.
commitment of senior
management is critical
to developing an
approving timetables and allocation of responsibilities;

approving budget guidelines;
oversighting budget preparation;
providing policy advice and strategic analysis to the Chief Executive;
evaluating budget bids, including alignment with the organisations priorities;
recommending final approved budgets; and
conducting ongoing assessments of budget processes.
As mentioned in Part 3.1: Effective planning and coordination, primary responsibility for coordinating
the budget process typically resides with the Chief Financial Officer (CFO). It is essential that the
CFO has sufficient authority to ensure that budget guidelines and policies are being complied with
throughout the organisation. This includes a requirement that the CFO is consulted by operational
areas on significant budgeting issues within the organisation, particularly new budget initiatives.
Involvement of line areas in budget construction does not end when they have submitted their
budget. Invariably, changes are required at the organisational level once budgets are consolidated
to accommodate resource constraints or evolving priorities. When this occurs, it is important that
managers have been consulted and understand why changes have been made. Collaboration and
trust between areas involved in the budget setting process is critical and provides less incentive for
managers to inflate budgets.
Collaboration and trust
Making internal budgets available as soon as practicable after approval, enables managers to take
timely action to achieve budget targets. Recording approved budgets in an organisations Financial
Management Information System supports the timely communication of internal budgets.
budgets.
organisational and area

budgets are subjected to
quality assurance review
before being submitted
to senior management.

It is important that organisational and area budgets are subjected to quality assurance review before
being submitted to senior management. This enables senior management to focus on priorities
and trade-offs rather than data quality. Quality assurance is generally performed by the finance
area, but may also involve internal audit or specialist assistance, especially for new or complex
budget initiatives. The use of checklists can assist in the timely and consistent quality assurance
of submitted estimates. Checklists are likely to be more effective when they incorporate a range
of data integrity and reasonableness checks and also analytical review procedures (including both
trend analysis and ratio analysis14).
between areas involved

in the budget setting
process is critical and
provides less incentive
for managers to inflate
To effectively communicate the internal budget, organisations can prepare a summary of the
budget and make it available to all relevant stakeholders. Ideally, the summary would include an
overview of key financial goals, initiatives and financial results by budget allocation, using charts
and graphs to better illustrate important points. Appendix B provides an example of an illustrative
budget summary.
14 Trend analysis refers to the comparative analysis of an organisations financial information over time to identify patterns.
Ratio analysis refers to the calculation and comparison of different sets of financial information to identify relationships
between different activities.
41
IMPORTANT UPDATE
42
IMPORTANT UPDATE
Part 4
Monitoring and evaluating

budgeting performance
Contents
4. Monitoring and evaluating budgeting performance
44
44
44
45
45
47
50
50
50
51
4.3. Forecasting to manage gaps between budget estimates and actual results
52
54
55
56
43
IMPORTANT UPDATE
4. Monitoring and evaluating

budgeting performance
Organisations monitor and evaluate actual results against approved budgets to guide current and
future decision-making and hold managers accountable for performance.
Key processes to effectively manage approved budgets include:
monitoring and reporting against internal budgets on a consistent and regular basis to
assess whether targets are being met, to guide decision-making and enforce accountabilities;
revising the internal budget through a controlled and coordinated process that maintains clear
lines of accountability between budget estimates and actual results;
forecasting to manage gaps between budget estimates and actual results to quickly
identify and respond to changes in the external environment or internal activities; and
reviewing and improving internal budget processes by monitoring the accuracy and
timeliness of budget setting processes to identify areas for improvement.

Monitoring budget
accuracy is the
responsibility of all
managers.
To measure budget performance, organisations monitor the extent to which budget estimates
match actual results. This helps ensure financial control and identify where change is required.
Monitoring budget accuracy is the responsibility of all managers.
Effective monitoring of budget performance requires that managers are provided with relevant,
timely and accurate information appropriate to their level of responsibility. It also requires
managers to provide clear and consistent feedback in a timely manner about underlying causes
and effects of budget variations, as well as planned actions to manage variations for which they
areaccountable.

Internal reporting processes follow the monthly financial close and typically involve the finance area
preparing or releasing details of actual results against budget to line management for evaluation and
explanation. Results of this process are summarised and provided to senior management to assist
decision-making at the organisation level, and to the Department of Finance and Deregulation to
enable whole of government reporting. It is important that results of senior managements review
and analysis of budget performance are communicated to relevant operational managers.
Reviewing actual results
against budget estimates
on a regular basis is
critical to effective
monitoring and reporting
of budget performance.
Reviewing actual results against budget estimates on a regular basismonthly for most
organisationsusing a process that is understood across the organisation is critical to effective
monitoring and reporting of budget performance. Careful design of financial reports is fundamental
to effective review and analysis of budget versus actual information. For example, financial reports
should be easily understood, user-friendly and relevant.15
The effectiveness of internal financial reporting is likely to be enhanced when reports are prepared
for each level of budget-accountability and summarised appropriately for each level of management.
When output and organisational accountabilities differ (for example, where a manager has both
branch and output responsibilities), budget-to-actual financial reports should be designed to enable
the assessment of budget accuracy against both accountabilities.
15 Relevance means that financial information is only provided to managers who control, or have stewardship over, the
activities impacting on the information and also that they are expected to act on the information.
44
IMPORTANT UPDATE
Better practice organisations provide managers with details of actual results against budgets
within three days of the close of each period. Standardising reporting across the organisation is
ideal and is made easier when managers source actual and budget data directly from the same
financialsystem.
Better practice
In organisations with responsibility for capital expenditure projects or capital grant programs,
monitoring budget estimates against actual results helps identify project variations (such as cost
overruns or delays in key milestones) early enough to take corrective action. Routine reporting
of detailed information on individual projects, such as milestones, percentage of completion and
phasing of total projected costs, provides decision-makers with useful information on current and
future impacts of project activity. In organisations with a large number of projects, this information
should be presented on a summarised basis with more detailed information provided by exception,
that is, where projects are not progressing to plan.
budgets within three
organisations provide
managers with details of
actual results against
days of the close of
eachperiod.
To provide a comprehensive analysis of achievement against goals and targets, it is essential that
financial information is complemented by nonfinancial performance indicators, including efficiency
and effectiveness measures.16

As previously mentioned managers with operational responsibility are generally in the best position to
assess current and expected budget performance for functions under their control or stewardship.
In addition to year-to-date and monthly budget-to-actual results, it is important that managers have
direct access to reports which show:
out-year forward estimates to examine future risks and prospects;
comparative results for the same period in previous years to assist with the identification of
trends that may affect current and forecast budget performance;
key financial ratios and percentage comparisons (both budgeted and actual) to highlight key
issues; and
budget-to-actual data on underlying drivers for example, budget-to-actual staffing numbers.
It is useful to identify external factors likely to impact budget performance and monitor them
regularly (for example, economic indicators and demographic movements). Results of such analysis
could then be provided to relevant managers to factor into their analysis of program and budget
performance.
It is useful to identify
monitor them regularly.
external factors likely to

impact budget
Phasing involves apportioning the approved budget over sub-periods within the relevant budget
period according to a recognised pattern of expenditure (or revenue). Internal budgets are typically
phased using monthly intervals.
Phasing the internal budget assists managers with the timely identification and analysis of budget
variances. In phasing the current year budget, it is important to adjust for known fluctuation factors
where material, including where cash and accrual timings differ. To support the rolling assessment
of budget impacts it is useful to prepare phasings for the next one to two financial years.
Phasing the internal
Advantages of comparing actual year-to-date results to a properly phased budget include:
analysis of budget
removing known timing variances, which allows managers to focus on real or unanticipated
variances;
variances.
budget assists managers

with the timely
identification and
performance and
identifying likely underspends or overspends before year-end so that management can take
appropriate action to deliver outputs within legal limits, including the redistribution of resources
where appropriate;
early detection of errors in monthly financial reporting processes, for example, where accrued
revenues and expenses are unreported for one or more months;
16 Performance reporting by Australian Government organisations is outside the scope of the guide.
45
IMPORTANT UPDATE
greater precision in forecasting the organisations working capital needs; and

identifying ineffective or unnecessary expenditure within the organisation (for example,
disproportionate unplanned capital or operating spending towards the end of the financial year
to meet annual budget targets).
Organisations adopt
differing approaches to
budget phasing, based
on the nature of the
underlying budget item.
Organisations often adopt differing approaches to budget phasing, based on the nature of the
underlying budget item. For example, appropriation revenue, depreciation and some transfer
payments can exhibit little monthly fluctuation and, as such, a simple pro-rating of the annual
budget is appropriate. However, for capital expenditure, revenue from independent sources and
discretionary expense items, budget phasing should specifically account for any foreseeable
fluctuations.
Table 6 provides a list of factors that influence phasing of common departmental budget elements
(that is, factors impacting on the timing of revenues and expenditures).
Table 6: Internal budget phasingpotential foreseeable fluctuation factors

Budget element
Budget phasing accounts for:
Income statement
Employee expenses:
Salaries
Planned staff movements and certified agreement increases.
Leave entitlements
Seasonal holiday periods.
Supplier expenses
Contract milestones.
Price escalation factors.
Seasonal usage requirements (for example, air-conditioning
andheating).
Grant expenses
Timing of grant agreements and milestones.
Depreciation
Planned capital acquisitions and disposals.
Balance sheet
Cash
Property, plant and
equipment
The budgeted cash balance is derived from movements in the

various cash flow elements as discussed below.
Planned capital acquisitions and disposals.
Employee provisions:
Accrued salaries
Monthly timing of pay dates.
Leave entitlements
Seasonal holiday periods and planned staff movements.
Supplier payables
Scheduled payment terms.
Cash flow statement

Appropriation receipts
Planned drawdown schedules (which sometimes correlate to pay

run dates).
Employee payments
Monthly timing of pay run dates (for example, months with three
fortnightly pay dates rather than two).
Planned staff movements (for example, redundancies).
Scheduled certified agreement increases.
Supplier payments
Contract payment terms.

Scheduled annual payments (for example, insurance).
Purchases of property,
plant and equipment
46
Planned capital acquisitions.

Contract payments terms for assets under construction.
IMPORTANT UPDATE
Operational managers are commonly in the best position to identify factors influencing budget
phasing as they are aware of the day-to-day operations of the organisation. Analysis of historical
data may also assist managers identify trends, including seasonal impacts.
Although generally more difficult to interpret, external measures also provide insight into the
operating environment to support appropriate phasing of internal budgets. For example, the annual
State of the Service Report17 prepared by the Australian Public Service Commission provides an
analysis of demographic and structural patterns and trends in Australian Public Service staffing.
This information is of value to organisations when identifying staffing trends and developments for
inclusion in budget assumptions.
External measures
provide insight into the
operating environment
tosupport appropriate
phasing of internal
budgets.

In addition to monitoring and reporting actual-to-budget results, it is important to evaluate and
explain reasons for variations. This involves considering what changed since the budget was set,
why and, more importantly, implications for the organisation and, where relevant, the government
and community.
It is important to
evaluate and explain
reasons for variations.
As detailed in the Table 7, analysis of budget variance information serves many purposes, ranging
from holding managers accountable through to the assessment of the efficiency and effectiveness
of service delivery arrangements.
Table 7: Issues to consider when analysing budget variances

Description
Accountability for variances
Understanding and explaining why the variance has occurred

and what is being done to manage it. This often includes an
assessment of the validity of original planning assumptions.
Management of variances
Evaluating implications of the variance for future financial

performance and financial sustainability of the organisation
and the outcomes, outputs and programs provided by the
organisation and taking appropriate management action.
Continuous improvement
inbudgeting
Utilising variance information to improve budgeting practices.
Continuous improvement
in outcome, output and
program delivery
Utilising variance information to assess the efficiency and

effectiveness of current service delivery mechanisms and
improve current budgeting practices.
In addition to the focus on accountability for, and management of, individual budget variances,
undertaking formal reviews of consolidated variance information on a periodic (say quarterly) basis
enables organisations to challenge underlying budget assumptions and estimation techniques.
Formal reviews of
The explanation of budget variances better supports and guides decision-making when
accompanied with sufficient nonfinancial information. Ideally, the explanation:
periodicbasis enables
focuses on key financial results;
challenge underlying
refers to the influence of underlying key planning assumptions (such as salary rates, indexation
factors, and productivity gains) or drivers (such as quantity, price, and timing) rather than merely
the nature of the variances;
consolidated variance
information on a
organisations to
Purpose
budget assumptions and

estimation techniques.
identifies causes of variances, including the extent to which they are due to internal or external
factors;
17 The most recent report was: Australian Public Service Commission (2007), State of the Service Report 200607,
Canberra, November 2007.
47
IMPORTANT UPDATE
identifies impacts on the organisation and key stakeholders in output terms (for example, programs
impacted) with an assessment as to whether the impacts are permanent or temporary;
clearly identifies what, if any, action will be taken to address or manage variances and expected
outcomes of those actions; and
projects expected impacts on the areas, organisations and governments key financial results
for the current and future financial years, including an assessment of risks associated with the
projected outcome.
It is important to
evaluate whether the
variance is temporary or
whether it will have
ongoing consequences.
It is important to evaluate whether the variance is temporary (for example, due to timing) or whether
it will have ongoing consequences. If the variance is ongoing, assessing the impact on the current
year budget and future years will assist the organisation determine whether remedial action is
required. Forecasting is a useful means of projecting revised outcomes without changing the
underlying budget. Part 4.3: Forecasting to manage gaps between budget estimates and actual
results provides further discussion.
The availability of internal guidance on the analysis and explanation of budget variances helps ensure
a consistent approach to commentary across the organisation. Figure 8 provides a framework for
analysing and explaining budget variances. The extent of analysis and explanation undertaken
is dependent on the size of the budget variance, its complexity and any likely impacts on the
organisations current year or future activities.
Figure 8: A framework for analysing and explaining budget variances

Identify current variances
for key financial results.
Based on expected
outcome detail projected
current year and future
budget impacts.
Explain expected
outcome for the
current and future
financial years.
Explain what action, if any,

will be taken and when.
48
1.
CURRENT
VARIANCE
7.
PROJECTED
VARIANCE
2.
UNDERLYING
DRIVER
6.
EXPECTED
OUTCOME
3.
CAUSE
5.
ACTION
4.
CURRENT
IMPACT
Assess underlying
reasons for the variance.
Identify causes of
the change in the
underlying driver.
Explain the impact
on the organisations
outputs and programs.
IMPORTANT UPDATE
Element
Consideration
1. Current variance
What is the impact on:

resourcing; and
financial and nonfinancial results.
2. Underlying driver
Are the underlying key planning assumptions still valid, or has the
variance resulted from a discrepancy in:
timing (for example, milestones);
quantity (for example, full time equivalents, beneficiary numbers);
price (for example, salary rates, inflation, average claim size);
structure (for example, restructures); or
revenue or expenditure recognition, measurement and disclosure
policies.18
3. Cause
Was the variance caused by:

events which were controllable or uncontrollable?
a deliberate decision or unanticipated event?
internal or external factors?
supply or demand side issues?
4. Current impact
What outputs and programs are impacted?

Without further action, is the variance permanent or temporary.
Iftemporary, will it turn around in the current financial year?
5. Action
Will the organisation:

modify service delivery?
renegotiate arrangements?
rephase or redistribute resources?
accept the variance and continue to monitor?
6. Expected outcome
After action has been taken, what is the expected outcome on:
current year resources?
future year outputs, programs and resources?
7. Projected variance
After action has been taken, what is the expected financial impact on:
agency resourcing?
projected underspend or overspend?
future year outputs, programs and resources?
What risks are associated with the projection?
current year outputs and programs?
18 Refer to part 2.5: Harmonise budgeting and reporting.
49
IMPORTANT UPDATE

For Australian Government organisations, the budget is not just a planning tool. It also becomes
a statement of intent in terms of spending and priorities, with linkages to the external budget for
which the organisation is held accountable to the Parliament. However, the budget is based on a
set of assumptions that generally does not exactly match actual results.
In monitoring budget performance, organisations seek to maintain an appropriate balance between
providing senior and line management with meaningful information to make real-time decisions
while, at the same time, limiting the frequency of updates to the internal budget.

Organisations may plan whole-of-organisation internal budget updates to coincide with the external
budget cycle, including updates to coincide with the mid-year update and other formal updates.
This provides the opportunity for formal consideration of the impact of government decisions, new
projects and changes in the external environment on the organisations own priorities, activities
and allocations. It also helps ensure the internal budget remains consistent with the latest external
budget provided to Government.
Additional budget updates are warranted when unforseen events or structural changes render the
original budget irrelevant, for example, machinery of government changes.
Budget updates should
not be undertaken
simply to adjust for
actual results not
meeting expectations or
if original estimates
However, updates should not be undertaken simply to adjust for actual results not meeting
expectations or if original estimates were wrong. Such revisions may lead to blurred accountability,
hide poor budgeting practices, and create a disconnection between the internal and external
budget.
were wrong.
Without revising the overall budget, organisations require flexibility to internally transfer funds
and resources between areas or projects to reflect changed priorities, both internal and external
(for example, the governments), or to accommodate relative changes in funding requirements
provided the transfers are permissible under the organisations funding structure.19
Internal budget transfers
In most cases, internal budget transfers should be authorised by senior management and be
countersigned or recommended by the CFO, or by an approved delegate in the CFOs unit.
Alternatively, forecasts can be used for managing and monitoring budget revisions without changing
the original budget. Part 4.3: Forecasting to manage gaps between budget estimates and actual
results discusses forecasting.
should be authorised by
senior management
andbe countersigned
orrecommended by
theCFO, or by an
approved delegate in
theCFOs unit.
Reporting changes to the internal budget to those affected within the organisation and key external
stakeholders helps ensure the changes are properly understood and, as necessary, that use of the
budget is adjusted. The timing and manner in which this is done depends on the stakeholder group
and the level of materiality of changes.
19 A key consideration when transferring funds is whether this is permitted under the outcomes and outputs framework
and appropriation acts.
50
IMPORTANT UPDATE
Better Practice Tip: Approving internal budget transfers

Use a standard questionbased approval template to help ensure transfers are adequately
justified and appropriately documented. Matters to address and document before an
internal budget transfer is approved include:
1 Is the transfer permissible under the organisations funding structure?
2 Has the reason for the transfer been sufficiently justified, for example, is it due to program
delays?
3 Is the transfer required to implement a specific government decision or a decision made
by the organisations executive team?
4 Does the requesting area have sufficient funding to meet its commitments if the transfer
is not approved (including from other program activities contributing to the same budget
outcome)?
5 Is there sufficient unexpended appropriation at the outcome level (not just at the output
or program level) to enable the transfer?
6 Should the funding be re-phased from the areas forward year appropriation?
7 Have the affected areas adjusted their plans and targets to reflect the impact of the
transfer?
8 Does the requesting area have appropriate financial delegations to spend the funds
transferred?
9 Will the transfer have a net impact on the organisations budget balances, either in the
current or future periods?
10 Has the transfer been recommended by an appropriate official?
It is desirable that organisations implement procedures to track and understand what has changed
since the last budget update with sufficient detail to identify individual variations by area, program
and cost element.
Maintaining accurate historical documentation of budget adjustments also assists organisations
improve the accuracy of the budget process by facilitating the identification of trends and common
areas of budget variation.
Maintaining accurate
historical documentation
of budget adjustments
assists organisations
The internal budget is, overall, a forward-looking plan. However, it is also important that managers
analyse and track what has changed since the budget was set. This assists in monitoring budget
performance, reporting to Government and identifying common budget variations that are likely to
be best addressed through changes to existing processes.
improve the accuracy of

the budget process.
51
IMPORTANT UPDATE
Better Practice Tip: Track budget variations

The Department of Finance and Deregulations Central Budget Management System (CBMS)
requires Australian Government GGS organisations to update external budgets through
a journalbased adjustment process,20 with separate journals for each program and for
each type of variation. Adopting a similar process for updating internal budgets provides an
audit trail for accountability purposes. A journalbased approach also assists organisations
to identify causes and effects of budget variances and movements for decision-making
purposes.
4.3. Forecasting to manage gaps between budget

estimates and actual results
Effective forecasting processes quickly identify and respond to changes in the external or internal
environment and assist organisations manage gaps between targets and actual results.
The purpose of a forecast is to provide an objective and realistic assessment of likely budget
results on the basis of actual trends, current assumptions, and plans. It is a periodic estimate that
reflects changes and impacts actually being experienced within an organisation and within the
wider community.
Forecasting is more than just an extrapolation of variances. It provides managers with the tools
and information to identify underlying drivers and, as a result, likely impacts on the current year
and beyond.
Forecasts provide an
updated view of the
likely outcome without
amending the underlying
A budget forecast is typically prepared in circumstances where a budget-to-actual variation has

been identified. Forecasts provide an updated view of the likely outcome without amending the
underlying budget. However, a monthly review of forecasts is also a useful means of identifying
potential budget variations that are anticipated but have not yet arisen.
budget.
With a focus on responsiveness, the planning horizon for forecasting is typically less than that of
the internal budget. Some organisations focus on the current yearthey finalise the annual budget,
review it on a monthly basis and re-project the balance of the annual results.
The interpretation of
Better practice organisations use a rolling planning forecast that extends beyond the current financial
year, for example, a rolling horizon of six to eight quarters, adding new periods as the current period
ends. Monthly or quarterly forecasts are prepared for the current year and quarterly forecasts for
the next financial year. The interpretation of forecasts is more effective when the organisation has
considered the phasing of the original budget for the current and next financial year.
forecasts is more
effective when the
organisation has
considered the phasing
of the original budget for
Similar to the internal budget process, an effective forecasting process is based on:
the current and next
using the same chart of accounts as budget and actuals reporting to help ensure consistency,
although typically a simplified forecasting model would be employed by summarising and
reducing the number of items comprising the forecast;
financial year.
the direct capture of forecasting inputs from operational managers who are closer to operational
activities. In this way, operational managers own and are accountable for their forecasts;
an integrated calendar which sequences budgeting, reporting and forecasting activities in a
logical fashion; and
rigorous governance processes and control over data to ensure reliability.
20 Under a journalbased approach, each budget change is prepared using a separate journal document. This provides an
audit trail showing the full impact of each adjustment on the budgeted income statement, balance sheet and cash flow
statement.
52
IMPORTANT UPDATE
While the analysis of comparative results for the same period in previous years assists in the
identification of trends that may affect current and forecast budget performance, a driverbased
approach to forecasting is more likely to result in a forecast that reflects the current underlying
nature of the organisation and the external environment.
A driverbased approach
For a forecast to be meaningful, its cycle time must be short enough that the results will be useful to
management for developing contingency plans, taking corrective action and advising stakeholders.
For example, if an organisation develops forecasts on a monthly cycle, but requires two weeks to
develop each forecast, the results are unlikely to be useful.
current underlying
Unlike the budget, which is usually developed well in advance of the period to which it relates and
requires rigorous layers of preparation, review and approval, the forecast is primarily a communication
tool to support rapid and flexible decision making. However, while fast reaction underpins useful
forecasting, it remains important to also focus on making reasonably accurate predictions.
It is possible to complete a forecasting process within three to five days of actuals data being
available. To achieve this, it is vital that organisations:
understand that forecasting is a means of enabling them to manage the gap between budget
estimates and actual results, rather than treating forecasting as another target-setting process;
to forecasting is more
likely to result in a
forecast that reflects the
nature of the
organisation and the
external environment.
While fast reaction

underpins useful
forecasting, it remains
important to also focus
on making reasonably
accurate predictions.
keep modelling calculations and relationships relatively simpleso that managers understand
the model and do not get a false sense of precision;
restrict their focus to those activities or budget elements that are material and most open to
change (for example, discretionary costs or headcounts);
forecast account aggregates or summaries. The forecast should be consistent with, but to a
lesser level of detail to, the original budget or the general ledger. For example, the number of
forecast line items is restricted to key line items so that more time can be spent on analysis;
update the forecast on a periodic or ongoing basis, by exception, rather than through a complete
bottom-up update; and
provide concise commentary focused on insights and trends.
Forecasting inherently contains a degree of uncertainty. As such, the use of range forecasts
(expected forecast as well as upper and lower limits), scenario planning and sensitivity analysis can
assist the organisation to understand the range of potential outcomes.21
Table 8 illustrates some of the key differences between budgeting and forecasting practices.
Arguably the most important element of the forecasting process is that senior management promote
a culture of honest forecasting; where forecasting reflects a best estimate of the future. Do not
dwell on the quality of the original estimates when analysing forecasts, rather focus instead on what
action needs to be taken.
21 Scenario planning involves an investigation into the implications of several options. Sensitivity analysis involves an
investigation into how projected performance varies along with changes in key assumptions for each option.
53
IMPORTANT UPDATE
Table 8: Differences between budgeting and forecasting

Practice
Comparison of budgeting and forecasting
Objective
The objective of internal budget processes is to establish limits, set

budget performance targets and allocate resources.
Whereas
The objective of forecasting is to manage gaps between budget
estimates and actual results, reallocate resources and revise expected
outcomes.
Considerations
Key questions addressed in internal budget processes include: what are

our priorities? What are our targets? What are our sources of income?
How best do we allocate resources?
Whereas
Key questions addressed in forecasting include: where are we now and
why? What does this mean? What are we going to do about it? What
will this achieve?
Horizon
The internal budget is prepared on an annualised basis (with monthly

phasing) with forward year projection.
Whereas
The forecast is prepared on a rolling basis.
Level of detail
The internal budget is financial statement based (summarised for each

level of management).
Whereas
The forecasting process focuses on key (summary) measures that drive
the organisation.
Frequency and
nature of update
Revisions of the internal budget are limited to formal updates and

approved changes and are undertaken through a formal process.
Whereas
The forecast is reviewed on a regular basis and is updated as necessary.
Construction
timeframe
Preparation of internal budgets spans one or more months and is

generally completed in advance of the performance year.
Whereas
Preparation of forecasts should be updated within three to five days of
month-end results being available. The forecast is updated throughout
the performance year.

A continuous improvement culture will help ensure that the internal budget process is efficient
and effective and remains relevant to the organisations needs and priorities. Measuring budget
accuracy and timeliness on an ongoing basis and periodically conducting more formal reviews are
two ways to identify areas for improvement.
54
IMPORTANT UPDATE

Monitoring the accuracy and timeliness of budget estimates over time, rather than monitoring the
achievement of results for a fixed period, enables the identification of areas for improvement. In
this respect, it is important that organisations measure accuracy and timeliness on a rolling basis
rather than simply year-to-year, thereby creating less incentive for managers to manipulate results
or spend up at yearend.
Monitoring the accuracy
Managers are more likely to take responsibility for achieving accuracy and timeliness targets where
the indicators have been agreed with them in advance and are limited to those budget elements
(costs) over which they have control.
for improvement.
and timeliness of
budget estimates over
time enables the
identification of areas
Under a rolling approach, budget (and forecast) accuracy is monitored periodically within the year
and again once final actual results are known. For example:
the monthly and year-to-date actual results are compared to the monthly and year-to-date budget
phasing for key budget measures (for example, net cost of services). Variances are typically
shown in absolute and percentage terms; and
once the final actual results for the full year are known, results are compared to the budgeted full
year results for each of the preceding budget updates with a view to assessing whether actualto-budget variances are improving in percentage terms with each update.
Measuring an individuals budgeting performance (that is, their performance in developing accurate
budgets) involves an assessment of the accuracy of budgeting and forecasting over the period
compared to actual results. In general, budget accuracy should improve as the timing of each
update gets closer to the known result. This is illustrated in the following example.22
Better Practice Tip: Measure budget accuracy over time

The Department of Finance and Deregulation reports annually on the accuracy of budget
estimates for the Australian Government General Government Sector.23 This includes key
performance targets for each iteration of the budget cycle as follows:
one per cent difference between first forward year estimated expenses and final outcome
(this budget is finalised 14 months before the commencement of the actual year);
0.3 per cent difference between revised estimated expenses at Mid-Year Economic and
Fiscal Outlook and final outcome (this budget is finalised around six months into the
actual year); and
0.25 per cent difference between revised estimated expenses at budget time and
final outcome (this budget is finalised approximately two months before the end of the
budgetyear).
In addition to having target accuracy indicators for each budget update, a key element of
this approach is the expectation that budget accuracy improves over time.
0.5 per cent difference between budget estimated expenses and final outcome (this
budget is finalised two months before the commencement of the actual year);
22 While taken from the external budgeting environment, the example can be similarly applied to an organisations internal
budget, particularly when there is a close alignment of internal and external budgeting updates as detailed in Part Two
of the guide.
23 Refer to Department of Finance and Administration (2007), 2006-2007 Annual Report, Chapter 4, Table 1, which
includes performance information for the outcome of Sustainable Government Finances.
55
IMPORTANT UPDATE

Undertaking periodic formal reviews (at least annually) helps identify opportunities to improve the
efficiency and effectiveness of budget-setting processes and associated timeframes. Conducting
such reviews will also help ensure that budget processes continue to meet the requirements of the
government and management.
It is important that stakeholders outside of the finance area are involved in formal reviews of
the budget function. This helps ensure that stakeholder priorities are identified and enhances
stakeholder support for the budget setting process. Ideally, reviews will involve representatives
from both senior management and line management. There is also merit in consulting external
stakeholders to assess satisfaction given the close link between internal and external budget.
Better Practice Tip: Review key planning and budgeting assumptions

To improve the accuracy of internal budgeting, and therefore reduce the average magnitude
of variances between budget estimates and actual results, it is essential that budget reviews
consider the appropriateness of key planning and budgeting assumptions. This will enable
organisations to better understand key budget drivers and increase the robustness of future
assumptions and therefore internal budgets.
It is useful to compile
internal metrics on the
accuracy and timeliness
of budget estimates to
benchmark performance.
To assist in the review of budget development processes, it is also useful to compile internal metrics
on the accuracy and timeliness of budget estimates to benchmark performance over time and,
where possible, to similar organisations. Table 9 provides a listing of possible benchmarks.
A better practice is to capture benchmarking information on an ongoing basis as part of internal
budget processesfor example, inclusion of benchmarking questions in budget submission
templates (such as the time taken to complete internal budgets).
Table 9: Benchmarking the internal budget function
56
Benchmark metric
Description
Cost of preparing the budget as a

percentage of total departmental costs
(Cost of budgeting, comprising full time

equivalent staff (FTEs), direct costs and
overheads) / (Total departmental expenses)
Staff involved in budget preparation as

a percentage of total staff
(Budget FTE) / (Total FTE)
Days to develop and approve budget
Elapsed time, measured from the start of

budget processes until budget approval
User satisfaction with budget process
Conduct qualitative surveys of users involved in

internal budget processes
Level of detail in the budget template
Number of line items and level of detail for each

lineitem
Budget accuracy over time
Measure and compare the accuracy of budget

processes over an appropriate timeframe
(distinguishing between the impact of
exogenous and endogenous variances)
IMPORTANT UPDATE
Part 5
Appendices and Glossary of terms
Contents
A Illustrative template guidelines for internal budget processes
58
B Budget summaryillustrative structure
60
C Internal budget processesbetter practice checklist
64
Glossary of terms
70
Appendices
57
IMPORTANT UPDATE
A Illustrative guidelines for

internal budget processes
The following template provides a list of potential contents for a set of internal budget guidelines.
The extent that each organisation adopts these contents, including the emphasis given to each
component, depends on their individual circumstances.
Section
Potential component
Foreword
Statement from the Chief Executive

Statement from the Chief Financial Officer
Introduction
Purpose
Background
Scope
Organisational overview, outputs and programs
Linkage to organisational planning framework
Linkage to external budget processes
Summary of changes since last budget update
Strategy
Organisational goals and objectives

Fiscal priorities and constraints
Budget position (surplus / deficit)
Sources of income
Key budget performance indicators and measures
Output and program management
Process
Governance framework
Budgeting approach
Budget systems
Budget hierarchy
Reporting framework
Roles and
responsibilities
Chief Executive
Budget committee
Chief Financial Officer
Budget coordinators
Budget preparers
Timeline
Planning, budgeting and financial reporting cycle

Key budget deadlines
Calendar of budget processes and responsibilities
58
IMPORTANT UPDATE
Section
Potential component
Financial policies
Budgeted revenue
Revenue recognition, measurement and disclosure policies
Revenue classifications
Revenue allocation
Treatment of one-off revenues
Key assumptions
Indexation and productivity arrangements
Budgeted expenditure
Expenditure recognition, measurement and disclosure policies
Expenditure classifications
Costing principles
Costing methodology
Cost drivers
Cash and accrual impacts
Key assumptions and standard costs
Indexation and productivity arrangements
Capital budget
Linkage to asset management plan
Distinguishing between operating expenses and capital assets
Asset categories
Project costing
Budget rules
Framework for budget decisions

Approval arrangements
Group and organisational budget responsibilities
Budget data entry processes
New or additional funding submissions
Revenue retention and carryover arrangements
Treatment of budget savings and underspends
Internal transfers
Capital investmentbusiness case arrangements
Minor capital requests
Unforseen and urgent circumstances
Use of contingency reserves
Appendices
Appendix ABudget Checklist

Appendix BBudget Templates
Appendix CFrequently Asked Questions
Appendix DGlossary of Terms
Appendices
Appendix EContacts
59
IMPORTANT UPDATE
B Budget summaryillustrative
structure
Chief Executive Message:
Key Priorities:
Key Budget Initiatives:
Priority one
Initiative one
Priority two
Initiative two
Priority three
Initiative three
Key Budget Results
Actual
Budget
Projection
20X1
$m
20X2
$m
20X3
$m
20X4
$m
20X5
$m
479.5
487.3
505.5
497.3
487.4
(478.3)
(483.3)
(507.5)
(497.3)
(487.4)
1.2
4.0
(2.0)
0.0
0.0
45.0
49.0
47.0
47.0
47.0
(458.3)
(453.3)
(495.5)
(507.3)
(469.4)
(18.0)
(26.0)
(4.0)
(16.0)
(12.0)
Administered expenses
(1,122.0)
(1,155.7)
(1,190.3)
(1,226.0)
(1,262.8)
Administered payments
(1,099.6)
Income
Expenses
Operating Result
Net Assets
Net operating payments
Net capital payments
(1,178.8)
(1,166.5)
(1,250.6)
(1,237.6)
Apr
May
Jun
Analysis of departmental expenses by month

50
$m
40
30
20
10
0
Jul
Aug
Sep
Employees
60
Oct
Suppliers
Nov
Dec
Jan
Depreciation
Feb
Mar
IMPORTANT UPDATE
Departmental expenses by output

Output discussion
Output 4
($55.7m)

Output 1
($138.9m)
Output 4 ($55.7m)
Output 3 ($202.8m)
Output 2 ($85.9m)
Output 1 ($138.9m)
Output 3
($202.8m)
Output 2
($85.9m)
Program expenses
Transfer payment a 347
Subsidy program b 231
143
Departmental Budget
50
Grant program e 116

80
Subsidy program f 173

0
60
Grant program c 231

Grant program d 58
Program discussion
90
60
100
200
300
400
500
$m
Administered Programs
Departmental Budget
Appendices
61
IMPORTANT UPDATE
Staffing levels
Group A
Group B
Group C
Group D
20X2 Budget
565
534
260
220
20X1 Estimated Actual
568
545
250
Corporate
Group
94
181
Total
1,673
80
1,624
Staffing discussion

Capital Budget
Actual
20X1
$m
Budget
20X2
$m
Projection
Total
20X3
$m
20X4
$m
20X5
$m
$m
Capital Projects
Project A
4.0
4.0
Project B
3.0
3.0
Project C
2.0
2.0
4.0
Project D
3.0
4.0
3.0
10.0
0.5
0.3
0.6
0.6
0.8
2.8
4.5
6.3
4.6
5.6
2.8
23.8
Equity injection
2.0
3.0
2.0
7.0
Depreciation reserve
2.0
2.5
2.5
3.0
2.5
12.5
Other
0.5
0.8
2.1
0.6
0.3
4.3
4.5
6.3
4.6
5.6
2.8
23.8
Minor purchases
Total capital purchases
Sources of funds
Total sources of funds
Key capital projects

62
IMPORTANT UPDATE
Budget analysis by groupGroup A

Description
(include a summary of the main budgeting outcomes for the group)
20X2 budget priorities

(include the main budget priorities to be delivered over the year)
Key budget changes

(include main changes in budget from previous years, such as new policy proposals or machinery
of government changes)
Key performance indicators

(include key budget performance indicators, such as accuracy of budgets and phasings or delivery
of outputs and programs)
Departmental expenses budget summary

180
165
161
20X1
20X2
150
$m
120
90
60
30
0
Average Staffing Levels

600
568
565
20X1
20X2
500
ASL
400
300
200
100
50 0
40
Outputs
30
Output 3
($40.4m)
20
Output 2 ($40.4m)
10
0
Output 1 ($120.1m)
Jul
Aug
Sep
Oct
Nov
Suppliers
Employees
Dec
Jan
Feb
Mar
Apr
May
Jun
Depreciation
Output 1
($120.1m)
Programs administered
Grant program e 58
18
143
50 100 150 200 250 300 350 400
Departmental Budget
Appendices
Grant program c 231
$m
Departmental Budget
63
IMPORTANT UPDATE
C Internal budget processes

better practice checklist
The following table provides a checklist of the internal budget practices covered in the guide.
Organisations should assess the extent that individual practices in this checklist are relevant,
appropriate and cost-effective in light of their circumstances. By way of example, a rating of
Absent for any one practice may be appropriate if the organisation has compensating practices in
place, or it is not cost-effective to adopt the practice.
Established Developing
Absent
Part 2Embedding the internal budget into organisational planning and management
Integrate the internal budget into organisational planning (Part 2.1)
1
Internal budgets closely align to strategic

planning processes.
Internal budgets are developed and approved

at the same time as organisational plans.
Internal budgets support each level of

planning and performance management.
Planning and budgeting processes source

information from the same data sets.
Align internal budgeting with organisational roles and responsibilities (Part 2.2)
64
Budget allocations are clearly assigned to

accountable officers or positions.
Officers are only held accountable for budget

allocations where they have the responsibility
and authority to take action.
Ownership of budget source data and key

budget assumptions is clearly assigned within
the organisation.
Allocated budgets show the full net cost of

services and distinguish between those items
that the responsible manager has direct
control over from those where control is
indirect.
The organisation has adopted a reliable

costing approach to attribute indirect costs to
outputs and programs.
10
Operational managers are consulted in the

establishment of cost attribution rules and
identification of key cost drivers.
11
All elements of the budget, including balance

sheet items, are allocated to operational
managers so that they can view the full
financial impact of their decisions.
IMPORTANT UPDATE
12
Absent
For any budget elements that have not been

allocated to operational managers, a formal
risk assessment has been undertaken to
identify compensating controls and help
ensure that each unallocated budget element
is managed.
Integrate operational and capital budgets (Part 2.3)

13
The organisation has prepared a longterm

assessment of its capital priorities and
associated funding requirements (a capital
budget).
14
The timeframe covered by the capital budget

encompasses the expected useful life of
current and planned asset purchases.
15
The capital budget links to, and flows from,

the organisations asset management plan.
16
The organisation uses the asset register to

assess useful lives and replacement values to
estimate capital replacement costs each year.
17
Capital and operating budgets are integrated

so that managers can assess the whole of
life cost of capital investment decisions.
18
The organisation requires all new major capital

investment and capital replacement proposals
to be supported by an appropriate business
case.
Align internal and external budgets (Part 2.4)

19
Consistency is maintained between the

internal and external budgets throughout the
external budget cycle.
Harmonise budgeting and reporting (Part 2.5)

20
Consistent policies and formats are adopted

for reporting budget and actual information.
21
Budget accounting policies are consistent

with external reporting requirements and
standards.
Engage stakeholders in internal budget processes (Part 2.6)

Planning and coordination of internal budget
processes includes representation from
23
The Chief Financial Officer reports directly to

the Chief Executive on the development and
management of the organisations internal
budget.
Appendices
22
65
IMPORTANT UPDATE
24
Managers understand and agree to their

role in the internal budget process and their
responsibilities have been clearly articulated in
their performance agreements.
25
Managers with budget responsibilities have

been provided with training or guidance on
the:
organisations internal budget processes,
including its budget policies and guidelines;
operation of the organisations budget
system; and
Australian Governments budgeting and
financial management framework.
26
Operational managers are able to submit

budgets on the basis of operational drivers.
27
Managers with budget responsibility have

access to appropriate systems and tools to
assist in developing their budget.
28
The organisation provides opportunities for

managers with budget responsibilities to
interact and share knowledge on budgeting
practices.
29
There is sufficient visibility of that part of the

organisations internal budget attributed to
whole of government activity.
Part 3Developing and implementing a comprehensive internal budget

Effective planning and coordination (Part 3.1)
30
The organisations internal budget policy

articulates budget priorities and constraints
and communicates the organisations
framework for budget development and
decision-making.
31
The internal budget is prepared on a multiyear basis consistent with the organisations
strategic and capital planning processes.
32
The organisation has a timetable that:

identifies information required for internal
budget processes;
describes deliverables in detail;
incorporates key checkpoints; and
identifies key deadlines and milestones.
33
66
The organisation clearly articulates

responsibility for budget coordination and
preparation.
Absent
IMPORTANT UPDATE
34
The organisation has appropriate contingency

arrangements if key budget staff or systems
are unavailable.
35
The organisation has issued guidelines and

instructions that contain:
Absent
budget policies;
priorities and assumptions on which the
budget is based;
roles and responsibilities;
timeframes and deadlines; and
protocols for budget development.
Effective budget construction (Part 3.2)
36
The organisation uses a combination of topdown direction and bottom-up participation

to develop the internal budget.
37
The organisation has considered

incorporating concepts of zerobased and
performancebased budgeting into their
budgeting approach.
38
The organisation uses fully integrated

budgeting and reporting software, which
incorporates sufficient controls and
functionality to meet the needs of users.
Forexample:
the system is subject to appropriate
governance and review;
changes to budget systems and tools are
centrally governed, including changes to
assumptions and calculations;
adequate segregation of duties exists
between budget input and budget approval;
operational areas are able to enter data
directly into the system;
budget data is regularly backed-up;
interfaces to other financial systems are
reconciled on a regular basis;
the system supports tracking of
adjustments; and
the system provides managers with access
to ad-hoc reporting tools and the ability to
drill-down through the budget data.
39
Appendices
The internal budget system and supporting

tools have been evaluated in the last three
years to assess if they remain appropriate for
the efficient and effective development of the
internal budget.
67
IMPORTANT UPDATE
Effective oversight, review and communication (Part 3.3)
40
The organisation has established a budget

committee to oversight internal budget
processes.
41
The Chief Financial Officer has sufficient

authority to ensure that budget guidelines and
policies are being complied with throughout
the organisation at all levels.
42
Operational areas are required to consult with

the Chief Financial Officer on all significant
budgeting issues, including new budget
initiatives.
43
Quality assurance checks are undertaken

before budgets are submitted to the budget
committee or senior management for
deliberation.
44
Managers are consulted on changes to

budget submissions before the conclusion of
the internal budget process.
45
Approved budgets are communicated to

managers as soon as practicable after the
conclusion of the internal budget process.
46
The organisation prepares a summary of

the approved internal budget for relevant
stakeholders.
Part 4Monitoring and evaluating budgeting performance

Monitor and report against internal budgets (Part 4.1)
68
47
The organisation monitors and reports budget

estimates against actual results on a regular
basis.
48
Internal financial reports are prepared for

each level of accountability and summarised
appropriately for each level of management.
49
Managers are provided with details of actual

results against budget within three days of the
close of each period.
50
Financial information is presented with

operational (nonfinancial) information to
obtain a balanced view of performance.
51
Monthly phasings are prepared to apportion

the total approved budget in accordance
with foreseeable patterns of expenditure (or
revenue), including seasonal factors.
Absent
IMPORTANT UPDATE
52
Managers with budget responsibility analyse

and explain budget variances on a regular
basis.
53
The organisation has a range of internal

guidance to help ensure a consistent
approach to analysing and explaining budget
variances.
Absent
Revising the internal budget (Part 4.2)

54
The organisation plans whole of organisation

updates to its internal budget to coincide with
the external budget cycle.
55
Transfers between internal budget allocations

are:
adequately justified;
appropriately documented; and
authorised by senior management.
56
Changes to the budget are reported to those

affected within the organisation.
57
The organisation maintains accurate

documentation of budget adjustments.
Forecasting to manage gaps between budget estimates and actual results (Part 4.3)
58
The organisation prepares forecasts on a

regular basis to identify and respond to gaps
between budget estimates and actual results.
59
The organisation prepares forecasts on a

rolling basis that extend beyond the current
financial year.
60
The forecasting process is completed

within three to five days of actual data being
available.
61
Senior management promote a culture of

honest forecasting; that is the forecast reflects
a best estimate.
Review and improve internal budget processes (Part 4.4)

The organisation regularly reviews the
timeliness and accuracy of internal budget
processes.
63
Managers are consulted on the establishment

of budgeting timeliness and accuracy
indicators.
64
Performance of internal budget processes is

benchmarked over time and against similar
organisations.
Appendices
62
69
IMPORTANT UPDATE
Glossary of terms
70
Activitybased budgeting
An approach to budgeting that focuses on factors that drive costs and

justifies expenditure on the basis of activities.
Bottom-up budget
A budget which is developed from the bottom up where budget

holders develop bids for resources and all bids are considered before
decisions are made about the final budget.
Budget
A budget is the financial plan of an organisations operations and a tool

to control the allocation and management of resources.
Capital budget
A budget of expenditure on capital items including noncurrent assets,

investments, and internally developed assets such as software. The
capital budget also includes expected sales or disposals of assets.
Chief Executive
The person who holds the highest office in the organisation and has
ultimate responsibility for the organisations performance.
Chief Financial Officer
The person with overall responsibility for financial planning and

financial management activities in the organisation. This includes roles
in strategic planning, development of accounting policies, budget
development (internal and external), management reporting, financial
statement preparation and managing the Financial Management
Information System.
Controllable cost
A cost that can be influenced by its budget holder.
Forecast
An estimate of the actual financial outcome for the balance of the

current accounting period or a forthcoming period based on actual
performance to date and other information available to the budget
manager.
Incremental or
traditionalbudgeting
An approach to budgeting where the previous years budget or

actual results provide a base line for the current year. This base line
is adjusted for known changes in activity level, inflation or percentage
based efficiency targets.
Internal budget
The internal budget shows an organisations expected financial

performance, financial position and cash flows disaggregated by
area of responsibility. Developing an internal budget involves making
decisions on the allocation, use and administration of resources to
achieve the organisations objectives.
Operating budget
A budget of the revenues and expenses expected in the forthcoming

accounting period.
Operational managers
Managers whose main responsibilities are delivering the programs and

outputs of the organisation. They are also referred to as line managers
or program or output managers.
Outcomes
The results, impacts or consequences of actions taken by the

Government and Australian Government organisations on the
Australian and international community.
IMPORTANT UPDATE
Outputbased budgeting
An approach to developing a budget that is driven by the outputs

required to be delivered by an organisation. The budget is established
by understanding the relationship between the outputs and the
resources required to deliver the outputs.
Outputs
The goods and services produced by organisations on behalf of

government.
Performancebased
budgeting
An approach to developing a budget that is based on an assessment

of what the organisation is trying to achieve. The activities required to
achieve the outcome are then identified and costed (generally using
activitybased budgeting).
Top-down budget
A budget that is imposed by the executive of the organisation with

limited opportunity for the budget holder to participate in the budget
setting process. In some organisations it is based on predefined rules,
agreed formulas or based on planned activity levels.
Variance analysis
The evaluation of performance by analysing differences between

planned, budgeted or standard outcomes and actual expenses or
revenues.
Zerobased budgeting
A method of budgeting that requires each cost element to be specifically

justified, as though activities to which the budget relates were being
undertaken for the first time. Without approval the budget is zero.
Appendices
71
IMPORTANT UPDATE
72
IMPORTANT UPDATE
ISBN No. 0 642 81021 4

Commonwealth of Australia 2008
COPYRIGHT INFORMATION
This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may
be reproduced by any process without prior written permission from the Commonwealth.
Requests and inquiries concerning reproduction and rights should be addressed to the
Commonwealth Copyright Administration, Attorney-Generals Department, Robert Garran Offices,
National Circuit, Barton ACT 2600 http://www.ag.gov.au/cca
Questions or comments on the Guide may be referred to the ANAO at the address below.
The Publications Manager
Australian National Audit Office
GPO Box 707
Canberra ACT 2601
Email: webmaster@anao.gov.au
Website: http://www.anao.gov.au
IMPORTANT UPDATE
Developing and Managing

Internal Budgets
top-down
embed
variation
phasing allocation
forecasting
bottom-up
Z00 33335
Better Practice Guide June 2008
www.anao.gov.au
Better Practice Guide
June 2008

The Financial Management and Accountability Act 1997 and the
Commonwealth Authorities and Companies Act 1997 were replaced
by the Public Governance, Performance and Accountability Act 2013
(PGPA Act) and supporting rules on 1 July 2014. The PGPA Act
provides a common legislative framework for the governance,
performance and accountability of all Commonwealth entities.
The ANAO proposes to update this Guide in 2015-2016 to
incorporate the PGPA Act and changes to the budget process
operating rules.
Further information on the PGPA Act is available at:
www.pmra.finance.gov.au
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IMPORTANT UPDATE

Developing and Managing Internal Budgets

Developing and Managing

Better Practice Guide June 2008

Better Practice Guide

ISBN No. 0 642 81021 4

1. Overview of internal budgetprocesses

1.3. Definition of internal budgeting and other common terminology

1.5. Internal budget processes

1.6. Characteristics of effective internal budgetprocesses

2. Embedding internal budget processes into organisational

2.2.1. Ensure clear accountability for all budget allocations

2.2.2. Align organisational structures to outcome, output and

2.2.3. Present full cost of service delivery

2.2.4. Show full financial impacts of budget decisions

2.3. Integrate operational and capital budgets

2.4. Align internal and external budgets

2.5. Harmonise budgeting and reporting

2.6. Engage stakeholders in internal budget processes

2.6.1. Obtain organisational support for the internal budget

2.6.2. Supporting operational managers in internal budget processes

2.6.3. Internal budget processes for whole of government initiatives

3. Developing and implementing a comprehensive internal budget

3.1.1. Set budget policies

3.1.2. Establish budget timetables and milestones

3.1.3. Allocate responsibility for budget development

3.1.4. Document budget processes and disseminate guidelines

3.2. Effective budget construction

3.2.1. Budget top-down, bottom-up or both

3.2.2. Determining the budget approach

3.2.3. Automate internal budget processes

3.3. Effective oversight, review and communication

Developing and Managing Internal Budgets Better Practice Guide

4. Monitoring and evaluating budgeting performance

4.1.1. Report budget performance

4.1.2. Assist managers assess budget performance

4.1.3. Phase the budget to provide meaningful comparisons

4.1.4. Analyse and explain budget variances

4.2. Revising the internal budget

4.2.1. Frequency of budget updates

4.2.2. Revising internal budget allocations

4.2.3. Understanding and tracking changes in internal budgets

4.4. Review and improve internal budget processes

4.4.1. Measure internal budget accuracy and timeliness

4.4.2. Identify opportunities for improvement

Appendices and Glossary of terms

A Illustrative template guidelines for internal budget processes

B Budget summaryillustrative structure

C Internal budget processesbetter practice checklist

Developing and Managing Internal Budgets Better Practice Guide

1.3. Definition of internal budgeting and other common terminology

1.5. Internal budget processes

1.6. Characteristics of effective internal budgetprocesses

Developing and Managing Internal Budgets Better Practice Guide

1.3. Definition of internal budgeting and other

Distribution or disaggregation of an organisations budget to its various work

Difference between a budget projection and an actual result. Budget

Allocation of costs to a particular group, output or program based on

A cost that can be directly attributed to an activity or the delivery of an output,

A cost that cannot be directly attributed to an activity or the delivery of an

1.5. Internal budget processes

Figure 1: Integrated internal budget processes

Embedding internal budget processes into organisational planning

Align with external

A Illustrative template guidelines for internal budget processes

B Budget summaryillustrative structure

C Internal budget processesbetter practice checklist