When the going gets tough, by Steve Freer

3 Feb 11
As the public sector struggles to cut its spending, chief financial officers need to ensure budgets are realistic and to double-check every risk

As the public sector struggles to cut its spending, chief financial officers need to ensure budgets are realistic and to double-check every risk

Just about every public body in the land is currently immersed in discussions about reducing public spending. The pressure to agree budgets for 2011/12 and to set financial strategies for the succeeding two or three years is concentrating minds. The time for wringing hands is over; now clear thinking and hard decisions are needed.

Chief financial officers will inevitably be at the centre of this work. In terms of forming judgements and advising on the robustness of the budget, they will be focusing long and hard on questions of risk.

In good times, when budgets are characterised by stability and maintenance of well established services, risk might be no more than a background issue. However, when budgets imply widescale changes throughout organisations, as in the present climate, risk looms large and keeps CFOs awake at night.

Setting a balanced budget is a prerequisite but it is a far from an exact science. CFOs need to test the robustness of the budget and ensure that it passes muster. The critical question is: can it realistically be delivered?

In ideal circumstances, the CFO will be able to see that detailed plans have been developed to put the budget into effect. A service manager who is scheduled to reduce spending by, say, £1m should be able to demonstrate how that saving is to be tackled and secured. The project might involve multiple steps, many of them with tight deadlines. Other influential factors include: dependencies on other parties; requirements to consult internally and externally; and additional costs of designing new service models or terminating existing contracts.

CFOs should be able to stress-test these plans to ensure that all these factors have been considered and appropriately provided for.

In practice, these ideal conditions might not apply. There might not have been enough time for detailed plans to be prepared in every case. CFOs themselves might lack both the time and resources to review all the detail. In these circumstances, they must rely on intelligent sampling and judgement.

Optimism-bias is a critical issue to scan for. CFOs must bring a degree of professional scepticism to the table. They should consider and model what could go wrong. What will be the effect of a proportion of the budgeted changes slipping by say, three months? What are the risks of legal challenge and what would be the effect of such a challenge? What will be the impact if say, increased fees and charges lead to sizeable changes in patterns of customer behaviour? How will the organisation react to significant public opposition to cuts in services such as social care and libraries? Will it stay on track or will significant proposals be derailed?

Ideally, CFOs will be able to articulate how the organisation would respond if any or all of these risks come to pass. That might involve drawing on reserves or contingencies or activating reserve savings schemes. Again, these possibilities need to be properly tested.

CFOs should share their risk assessments and judgements with decision makers. Leadership teams need to be clear-sighted on these issues and reminded that budgets are a means rather than an end. The really hard work starts when the budget is approved and it is time to deliver.

Steve Freer is the chief executive of CIPFA

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