This is a complete guide for forecasting, budgeting and setting the precept at your Parish, Town or Community Council in England and Wales.
This is relevant to Clerks, Responsible Financial Officer (RFO), and any other Council staff or Councillors who wish to know about budgeting and forecasting.
💰 So firstly, what is Budgeting?
Put simply, a budget is a financial plan for a specific period of time, often a year. For local councils the aim is to result in the calculation of the precept, but it also provides financial accountability for local authorities and represents the spending plan for the future of the community.
That’s a pretty big task, hey?
No wonder budgeting can be a daunting process for many Clerks or RFOs! Often it’s helpful to think of budgeting in simple terms and how it applies to you as an individual. Budgeting can simply be seen as considering what you need and want to spend (e.g. the electricity bill, a beach holiday) and how it matches up against your income.
✅ Before we look at the practicalities, let’s consider in more detail why budgeting is so important for Local Councils.
The most important element of budgeting for Local Councils is the calculation of the precept, but this is not the only goal. Budgeting should be seen as a continuous process to assist in monitoring the financial position of the council and provide the basis for sound financial decision-making. A good budget will flag up any potential issues with cashflow or overspends, allowing you to take corrective action like drawing down from your reserves.
It also allows the council to plan for future projects - not just the initial project costs but also the timescales and the ongoing costs going forward.
It is key that all members of the council understand the budget. Some are likely to be more involved than others, but all should understand the budget and decisions involved to result in those figures as well as the importance of a good budget that is regularly monitored.
🗓️ Now, let’s lay down the timetable.
The specific dates will vary from council to council and a clear timetable should be set, but generally the following time frame applies:
🤔 So, what are the different budgeting approaches
As seen above incremental budgeting is fairly straightforward, whereas zero-based budgeting could be seen as quite an extreme option. However, it may be needed when the current budget is not fit for purpose, due to:
- Items being missed when the current budget was set
- Budget amounts being apportioned incorrectly
- A budget that is generally lacking in detail
If the current budget is varying vastly to the actual spend, this is a key indicator that the budget may require an overhaul.
📈 When it comes to creating the draft budget, forecasting can play a vital role.
Forecasting is the process of predicting future income and expenditure to:
- Create an expected end of year position to assist in budgeting.
- Assist in monitoring the current position - managing expected under or overspends against the budget
A forecast can be created from any point - starting at the half year point works well. Once you have your April - September actuals, you can forecast for the remaining six months to result in the expected end of year position.
In the same way it is true for budgeting, forecasting some lines of the budget will be much easier than others. For example, a monthly phone bill is very easy to forecast, but variable lines such as maintenance will need to be your best guess. Consider:
- What has been spent so far
- Planned expenditure
- The state of the item/building being maintained
Be mindful not to be too optimistic or pessimistic when forecasting. You want to result in the likely end of year position. So if your predictions mean that you expect to end up well overspent, then this should be what the forecast shows.
Once you have created your forecast, it can be analysed against the current budget to decide which budget lines may need increasing (or decreasing). Also take into account any changes in the new year, e.g. taking on new services or increases in supplier costs. You may also need to use data from previous years, especially if the current year is non-typical. This of course would have been a consideration when setting the 2021/22 budget due to the impact of Covid in 2020/21.
📝 Now that we have an idea of what the forecasting entails, let’s take a look at the budget process.
Once you have the current budget along with a forecasted end of year position and any other relevant data, you can make a start on the budget process itself.
You will need to consider the following which we will look at in turn:
- Contingencies & Reserves
Now, remember what we’ve discussed - some lines of the budget will be harder to budget for than others. When considering this, also be mindful of the level of detail and materiality of these lines. Take stationery for example - amounts purchased may fluctuate, but the overall total is a small percentage of the total budget. The budget lines that are larger and harder to predict will be the ones that you need to attribute greater time and effort to.
🌟Tip: Keep your workings of how the budget was arrived at. This can be a great help if questions arise or if you want to refer to the decisions made at a later date.
So, let’s take a look at income first.
Some councils may have very little income besides the precept, just bank interest and other sundry donations. In this case, the precept will likely match the total expenditure budget (unless there is a surplus to be offset).
Other councils may have additional income sources besides the precept, e.g. venue hires, allotments, and it would be necessary to budget for expected income from these sources. More uncertain income will need to be estimated using either prior year data or calculations of the expected use e.g hires.
Now, let’s hone in on expenditure and the different types of costs.
Fixed costs (or indirect costs/overheads) are those that are unlikely to change and are fairly easy to budget for, often these make up a large proportion of the budget. Some of these costs will be known, such as the insurance renewal or subscription costs, and others can have a percentage or incremental amount applied, e.g. phone costs.
Reactive (or variable) costs are harder to predict but generally take up a smaller proportion of the budget, e.g. maintenance. These may require more analysis and will often be based on assumptions and estimates. Some budget lines may have a relationship with other lines in the budget and this should be taken into account when working on these. E.g. if a council is expecting higher income due to increased hirers, associated budget lines may also need increasing, e.g. cleaning, electricity.
Under or overspends are not uncommon, and if unforeseen circumstances do occur then it is important that the council holds sufficient funds to cover this.
This is where contingencies and reserves come into play.
A contingency is an amount held for unexpected or unplanned expenditure. Contingencies should NOT be built into each budget line or section as doing this will mask the real position of the budget against the actuals. It will make future budgeting much easier if one-off, unexpected amounts are not coded to regular budget lines.
When working on your budget you also need to be mindful of the council’s general reserve. Typically this is equal to between 3 and 12 months expenditure (depending on the size of the council) to cover unexpected expenditure or to ease cash flow problems. It is important to ensure the general reserve is maintained at an appropriate level - too low may mean the council could run out of money prior to year end and too high may mean the precept being taken is too great.
Once you have worked on the elements of the budget, this will enable you to calculate the precept amount required.
➕ Calculating the Precept
In simple terms, the precept required will be the expenditure budget less any other expected income or prior year surplus. For example, an expenditure budget of £100,000 with an income budget of £20,000 would mean a precept requirement of £80,000.
Once you have made this calculation, you can check the calculation per the Band D properties in your parish or area. Your billing authority will provide the equivalent number of Band D properties that you would divide the precept across. This will then allow you to compare it to the previous year to review the change.
You will of course always need to check and review the proposed budget, but this will be particularly important if the precept calculation shows that the amount per Band D property has changed significantly (either up or down). Has something been missed or been double counted? It may be that some of the calculations are too optimistic or pessimistic, or that some projects need to be deferred.
After reviewing the figures it may be that the precept does need to increase or decrease significantly - this could be true if you had previously ended up with a large budget surplus or deficit.
Once the budget and therefore the precept has been agreed, it can be submitted to your local billing authority in readiness for the new financial year.
But you should not stop here. Ensure that budgeting reports are prepared and submitted to the council and committees throughout the financial year, ideally, at least quarterly.
👀 Monitoring the Budget
Monitoring the budget on a regular basis gives the council a good overview of their financial position and also aids decision-making. It also helps with budget setting for the next financial year. If the council has a good understanding of the budget and regularly reviews it, they are more likely to have an accurate budget as well as awareness and understanding of the things that are likely to impact it.
Monitoring the budget is made easier by a good cashbook. Having a cashbook that is well aligned to the budget means it is easy to review the actuals against the budget and use this information for forecasting.
It is also a good idea to keep notes regarding the budget. Not only during the budget setting process to act as an aide memoire of decisions made in case budget amounts are later.
Other Resources and How it Works on Scribe
A link to our free forecasting sheet is here.
You can watch the recording of "Budgeting and Forecasting in Uncertain Times" for Town & Parish Councils here.
Forecasting & Budgeting on Scribe:
Questions & Answers
Q. Do I include VAT in the budget?
A. No - budgets should be set as net figures as the VAT will be reclaimed. When posting transactions in the cashbook it is important to split out the VAT so that only the true cost (i.e. the net amount as the VAT will be reclaimed) shows against the budget line.
Q. Does the budget need to remain fixed throughout the year?
A. There is nothing to say that budgets cannot be moved between budget headings. If you have a particular budget line with underspend this can be moved to a budget line with overspend, so long as the total annual budget remains the same.
Q. Has the government increased homeworking allowance?
A. The current allowance starts at £26 a month as a flat rate and this doesn't need receipt justification. However, greater amounts can be paid as per the guidance here https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim01476
Q. What percentage increase should we use for inflation?
A. It is very tricky to predict. Perhaps try a “worst case scenario” percentage and a “middle ground” percentage and see where both of these bring you, and whether it is a feasible option for your council.
Q. What percentage increase should we use for staff costs?
A. The current offer, with effect from 1 April 2022, is an increase of £1,925 on all NJC pay points 1 and above, so it would be advisable to add 7-10% this year and also take into consideration payments to HMRC and Pensions which could then take the amount closer to 10%. *The definite increase will be clearer towards the end of October.
Q. The council have previously tried to keep the precept increase at 2% and now we need to raise our precept significantly to cover increased costs but councillors are reluctant to do so. How should I deal with this?
A. Ultimately the answer is to raise the precept, as this will only cause problems further down the line. It is therefore important that this is communicated to your residents to let them know why the increase is happening and the extra services they are going to get. You can also break this down monthly or weekly to show them how much extra this will be.