FINANCIAL MANAGEMENT: BUDGETING AND ACCOUNTING Training Slides for Lower Local Governments

FINANCIAL MANAGEMENT: BUDGETING AND ACCOUNTING

Training Slides for Lower Local Governments

Financial Management:Budgeting and Accounting

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Budgeting and Accounting: Course Objectives

At the end of the course, participants should be able to:• Understand and explain the purpose of local government budgets, key

components, steps in their preparation and the basic data requirement;• Identify elements of a BFP and budget call;• Describe and explain OOB, RTS, DTS, IFMS budgeting and prioritisation and

costing processes under the FDS;• List the criteria for successful budgets;• Make realistic revenue forecasts and compile LG budgets in time;• Lead budget discussions and present a balanced budget for approval and

publication;• Explain the need for LG accountability;• Produce up-dated books of accounts and reports within the guidelines of the

FDS and IFMS;• Interpret financial reports effectively and manage financial records better


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Module 1: Session 1:Framework for LG Budgets

What is a Budget?A Local Government Budget is a detailed annual plan of how a local government intends to spend its financial resources in line with its objectives, needs and priorities.

What is Budgeting?This is the process of allocating a Local Government’s scarce resources between its needs and priorities. This process goes hand in hand with the planning process.

Why Budget?• To allocate scarce resources• Budgets are legal requirements• To identify and disclose source of funds


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Module 1:Session 1: Reasons for Preparing Budgets and Legal Background

Why Budget (continued.) • To cost projects for implementation• As a basis for financial requisition• To give an overview of past financial

and output performance• To control implementation of projects• It is a requirement of good governance

as well as a political tool• It is an information/communication tool

for both central government and donorsKey players and stakeholders include:• LG Budget Committee; • MOFPED;• Line Ministries; • Uganda Local Government

Associations

The Local Government Act, 1997• Section 78 (1): Local Governments shall

have the right and obligation to formulate, approve and execute their budgets and plans provided the budgets are balanced.

The Local Governments Financial and Accounting Regulations, 1998• Make up the principal financial management

framework for local governmentsThe Poverty Eradication Action Plan• Is the overall national planning framework

for development.• Central Government ensures that national

priorities are reflected in LG Budgets through allocation and transfer of conditional grants to LGs

,


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Module 1:Session 2: The Structure of LG Budgets

Overall Structure• All Local Governments will operate a

uniform recurrent and development budget structure with a new chart of accounts that has been harmonised with that of central government.

Link between Revenue and Expenditure• The recurrent and development budgets

provide the link between local government revenue and expenditure budgets

Output Oriented Budgeting and ROM• Sectors set output targets and priorities

for the financial year.the analysis of direct output from a sector program will show how much outputs have contributed towards the set outcomes/objectives

Performance Indicators and Budgets

• The Budget Structure contains an hierarchy of performance indicators: outcomes, outputs, processes and inputs

• Under the ROM, the relationships should be translated into clear line of responsibilities within the local government

• These relationships are classified in terms of :

– Economy: fewer inputs used to carry out a specific activity

– Efficiency: activities required to get an output

– Effectiveness: extent to which an output leads towards achievement of outcomes


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Module 1: Session 3: FDS and its Implications

What is the Fiscal Decentralisation Strategy (FDS)• This is a strategy approved by Cabinet whose aim is to increase

local government autonomy and flexibility in implementing national sector policies.

• FDS brings the fiscal activities of government in line with existing legislation such as the LGA, 1997 that requires line Ministries to implement national policies via Local Governments

Why FDS?Current conditional grants undermine autonomous LGs and are inconsistent with the laws of Uganda.

In addition to increasing autonomy and flexibility, the FDS also seeks to streamline and transfer modalities to enhance efficiency and effectiveness of LG programs. The overall aim is to achieve PEAP goals in a transparent and accountable framework.


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Module 1:Session 4: The LG Budgeting Process

A Successful Budgeting Process: Pre-requisites• Consultative and participatory approach to ensure

ownership of both the process and the approved budget• A systematic prioritisation based on informed choices• Realistic and achievable outputs, activities and

expenditure allocations.• Council should avoid monopolised and biased

prioritisation• Sufficient time for dialogue among stakeholders• Relevant background materials for the budget must be

availed to Councillors in time• There should be clear linkages between plans and

budgets• Provide possible scenarios and consequences of

different choices as a basis for political discussion and decision- making


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Module 1:Session 4: Steps in the Budgeting Process

Stage 1: Preparing for the Budgeting Process. This includes determining the timing, the activities to be undertaken, the responsibility centre and agreed outputs.

Stage 2: Preparing the LGBFPs Stage 3: Finalization and approval of the annual

workplan and budgetTools in Budgeting:• The District Development Plan (DDP) that

constitutes the overall integrated planning framework for the LG.

• The LG Budget Framework – articulates the 3 year Budget Strategy of the LG

• The Annual Workplan – showing the expected annual performance and financial plan for the coming financial year


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Module 1:Session 4: LG Budget Call

The Budget Call is prepared by the budget desk which is a subset of the Local Government Technical Planning Committee and consists of the officers responsible for planning and facilitating the process. It includes:• The timing of events in the planning and budgeting

process;• The inputs required from other stakeholders by the budget

desk;• Any other information required by stakeholders to enable

them prepare their inputs.Functions of the Budget Call:Informs departments and lower LGs; communication with stakeholders; provides indicative sector ceilings; provides minimum sector grant recurrent grant allocations to departments; indicates areas for flexibility, cuts and cost savings


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Module 1:Session 4: Preparing Annual Work Plans

HoDs

HoDs provide inputs to the Annual Work plan, which in turn forms part of the Budget Framework Paper. Standard Formats are used to ensure uniform presentation.

3 Principles pursued in the Budget Formats:1. They link outcomes, outputs and activities to budget

allocations;2. They take into consideration the principles of

OOB:inputs lead to activities, activities lead to outputs (results), and outputs lead to outcomes (achievement of objectives)

3. They identify the responsible officers at each level in order to make it clear who is responsible for achieving results at each level.


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Module 1:Session 4: Compiling the Budget Estimates

• The Budget Desk when aggregating budget estimates from HoDs will apply the new chart of accounts prepared for the Integrated Financial Management System (IFMS), and the new budget structure for districts/municipalities.(refer to Mod.2)

• It is the responsibility of the Budget Desk to prepare the revenue budget after consultations with other stakeholders

• The Recurrent and Development Transfer Budgets are the link between the Local Government Budget and Expenditure Budget. They illustrate how specific revenue resources are allocated to sectors in line with their conditions


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Module 1:Session 4: Finalising and Approval of Budgets

The last stage in budget preparation is the finalization of theWork plan and budget estimates, its presentation to, and approval by the Council. The steps include:1. Review of LG Budget Framework Paper and Draft

Budget2. Review of LGDP allocations and MTEF, BFP

submitted to Cabinet for approval3. Review of budget framework paper and draft budgets

after receiving the final budget ceiling4. Review of final draft annual work plan and budget

estimates 5. Finalising work plans and budget estimates6. Reading and approval of budget estimates by Council

before 15th June


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Module 1:Session 5: Budget Implementation

• Budget implementation refers to the constant comparison of actual activities and achievements against set targets and timing within the Annual Work plan.

• Remedial action is taken on a timely basis to ensure the achievement of policy objectives

• Pre-requisites and controls include:– Clear identification of responsibilities– Timely, and reliable feed back to decision – makers– Delegation of authority to sectors or departments to

avoid unnecessary delays in implementation• Budget reporting is necessary for:

- Provision of feedback information for decision making- Giving accountability to citizens, political leadership

and Central Government


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Module 1:Session 5: Budget Reporting

What do we report on?• Outputs• Activities and Progress• InputsTypes of (monthly) Report• Internal reports within the LG: to

provide information to managers• External reports to Council and

Central Government

Reports submitted to the Executive, Council and Central Government by the 20th day of the month:• A descriptive progress report• Key department output performance

• Financial Statement• Bank reconciliation statements

supported by copies of bank statements

Corrective action may include:• Cautioning those responsible for

unsatisfactory performance• Reducing planned service levels• Postponing start of capital

investment projects• Freezing staff variances• Approving only such expenditures

considered urgent and necessary• Staff retrenchment


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Module 1:Session 5: Cash Flow Management

Cash flow management refers to the systems, procedures and management decisions by which managers ensure that: The LG has sufficient cash to meet approved expenditures Payments are made according to the plan( cash budget) Serious decline in cash balances is avoidedLack of adequate cash flow management may lead to:• Bottlenecks and administrative inefficiency• Creation of domestic arrears• Dissatisfaction among employees, the public, contractors and

suppliers• Under- utilization of tangible (fixed) AssetsSteps:1. Analyze the cash flow pattern and formulate an annual cash flow

budget2. Conduct routine activities like collecting planned revenues and

making payments according to the cash flow budget3. Update the quarterly and monthly cash flow projections in light of

emerging situations


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Module 1:Session 5: Cash Flow Implementation

Implementation procedures:

• Collect all projected incomes promptly

• Monitor revenue arrears and take action to recover outstanding amounts

• Manage payments within projected amounts, work plan and agreed policy on payment periods

• Avoid over-commitments

• Review monthly cash flow budgets in light of new information

Corrective actions in case of cash flow

problems

• Review the funding of non- essential services

• Suspend recruitment

• Suspend non-urgent capital projects and acquisitions

• Freeze construction projects

• Review budget to remove or postpone some items


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Module 2: Session 1: Accounting Information Systems

Financial Accounting is the process of producing financial reports about the financial activities of an entity (the LG) and presenting them to users.

The term accountable refers to the requirement to give a report or explanation of one’s actions in order for such action to be evaluated.

Accountability is used to denote the explanations given by those who are accountable. It is always supported by documentary evidence

An information system is defined as ‘ a system in which defined data is collected, processed, analyzed and communicated to help those responsible for the use of resources in decision- making’. It encompasses data capture, processing, communication and storage.


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Module 2:Session 2: Basis of Accounting

Two main basis of Accounting in LGs1. Cash Accounting2. Modified Accrual Accounting The difference lies in the timing of financial transactions and how they are recognized in the books of accounts• Cash Accounting: Revenue is

recognized and recorded only when it is paid. Revenues not received at the end of an accounting period are not recorded within the accounts of the period. The same applies to expenses.

• Modified Accrual Accounting: Revenue is recognized and recorded during the period in which it is earned,.

whether money has actually been received or not- it is recognized within the period to which it relates. Similarly for expenses

Under the Commitment Basis of Accounting (with either cash or accrual accounting) expenses are recorded as soon as commitment to incur them has been entered into

Bookkeeping is the systematic recording of all monetary and or money-worth transactions pertaining to a named organization, project, or activity as and when the transactions take place.


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Module 2:Session 2: Journals and Cashbooks

An account is a record in a ledger form summarizing all the transactions that have taken place to a particular event, or activity, or asset to which the ledger account relates. Examples are personal accounts. Real or property accounts and nominal accounts

The double entry principle in bookkeeping is that every transaction that results in a transfer of money or monies worth involves the giving of a benefit: and the receiving of that benefit

A Journal is a book where transaction entries to be recorded are first prescribed for certifying and naming of the ledger accounts. The General Journal is for recording transactions of a general nature, and specialized transactions are recorded in special Journals, e.g. Cash receipts Journal and Cash Payment Journal

A Cashbook is part of the principal book; the ledger. It comprises both cash and bank accounts taken out of the ledger and maintained separately for the sake of greater care and attention


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Module 2:Session 4: Banking and Bank Reconciliation

Preparing a bank reconciliation means determining those items which make up the difference between the balance appearing on the bank statement, and the balance shown by the council’s cashbook (bank column) as at the same date- usually end of the monthPossible causes of differences:• Cash deposited with the bank late in

the day may be posted to the statement the following working day

• Uncleared effects (cheques drawn on other banks) may not be credited until the proceeds are realized

• Unpaid cheques (those returned dishonoured by the drawee bank) are debited to the customer’s account well before he/she is advised

• Errors of casting especially in the cashbook and, at times, to the bank statement

• Bank charges especially on up-country cheques are levied before the customer is notified

• Standing orders may be effected at times when the customer concerned has not taken notice of it

• Direct payments to the ban account by the debtor who had earlier been advised to pay


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Module 2:Session 5: Classifications and Coding of Financial Items and Transactions

Classification is the process of grouping together items of a similar nature Coding is one of the ways in which classification is applied. Codes aid(electronic) processing of information; are shorter than name descriptions; makes possible quick identification of items.Properties of a Good Coding System• Uniqueness• Exhaustiveness• Distinctiveness• Unambiguousness• Uniformity• Brevity• Expansion

• Central Control• Layouts• Chart of Accounts The coding structure is geared towards compliance with International Accounting Standards and Government Financial Statistics recommended for the public sector by the IMF

Classes of the 6 digit coding structure• Class 1: Revenue• Class 2: Expenses• Class 3: Assets• Class 4: Liabilities• Class 5: Reserves


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Module 2:Session 4: Commitment Accounting and Expenditure Control

A LG enters into financial commitments whenever it enters into an agreement which involves future financial payments

Key principles of Commitment Control under FDS• All LG recurrent and capital development

expenditure transactions are processed through the Commitment Control System (CCS)

• No contract agreement, LPO, or other commitments should be issued unless a proper commitment requisition has been approved

• All commitments must be entered into the vote book as soon as they occur

• Each commitment requisition should possess a Reference Number

• All commitments should be consistent with the annual budget and relate to activities in the work plan

• Commitments should not be approved unless there is sufficient balance available in the quarter’s commitment limit

• No payment should be made unless it is passed on a previously approved commitment

• The CFO should produce monthly/quarterly report on outstanding commitments, unpaid and overdue bills

• Accounting officers will be personally responsible for any over- commitment of the LGs, and should monitor commitments together with Vote Controllers


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Module 2:Session 4: Recording of Abstracts and Ledgers

Transactions are recorded on Abstracts immediately a receipt, or payment is made. At the end of the month, the total revenue or payments appearing under the different code items in the abstract are posted to the respective subsidiary ledgers.A summary of ledgers maintained by Higher Local Governments• Revenue Control Ledger Level I

(total Local Revenue and Total Central Government receipts ledgers)

• Revenue Control Ledger Level II

(a) Local Revenue Sources-( e.g graduated tax, property tax, etc)(b) Central Government Receipt

• Revenue Items Ledger Sheets (each item of revenue as presented in budget estimates)

• Expenditure Control Ledger level I(a) RT transfers to departments(b) DT transfers to departments© salaries ledger sheets

• Expenditure Control Ledger level II• Expenditure Items Ledger sheets of

(a) recurrent by section/unit(b) capital development expenditure


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Module 2:Session 6: Management of Financial Records

Why Financial records need proper management• Documents are very sensitive and may be deliberately

misused• Financial documents are susceptible to theft• They are used as reference materials and during audits• Some financial data may be confidential• Most financial decisions are based on immediate provision

of financial data• Storage of financial data, like any, has a cost• May be retained for several years in compliance with

regulation• Financial records may be destroyed because of

environmental; hazards like fire, water, vermin and temperature


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Module 2: Session 7: Presentation of Financial Information

Section 87: LGA, 1997 and Reg. 150: LGFAR, 1998- All LG Councils and Administrative Units shall produce financial statements. These are mandatory and intended to enforce accountability to the stakeholders.

Properties of Good Financial Statements:• Level of aggregation: too much/ too scanty details

avoided• Classification: affect the comparability of LG accounts• Structure: items are given correct prominence• Articulation: reflects the way different aspects of the same

transaction are shown in the different financial statementsLG fin statements include:Revenue Account; Balance Sheet: Trial Balance; Revenue and Expenditure Summary; Detailed Statements of Revenue and Expenditure and Notes to the Account


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Module 2:Session 8: Interim Reporting

Paragraph 5.31; Chapter 5, LGFAR requires the CFO to produce the following financial statements every month, and to forward them to the Executive Committee:

– A Trial Balance– A Revenue Account for the month– A Balance Sheet at the end of the

monthThe new reporting requirements introduced under the FDS:• Reports of service delivery unit on

revenues and expenditures to section heads

• Reports by section Heads to the HoD on section outputs and activities and financial report

• Reports on commitments and bills• The monthly Council Report• A consolidated financial statement

for all recurrent and development revenues and expenditures of the council

• Bank reconciliation statements and supporting copies of bank statements

• Descriptive Progress reports and Key Department output Performance Reports


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Module 2:Session 8:Interpretation of Financial Statements

Sources of Financial Information• The annual financial reports of the LG• Interim reports of the Local Council• Others, e.g Revenue Returns, Creditors and Debtors

Schedules, Project Progress Reports, etc• Government Statistics, e.g national standards of

financial performance on health and education

Methods of Analysis/Interpretation• Financial Ratio analysis (the main tool)• Trend Analysis (for the same LG over time) • Cross-sectional analysis (compare with other LGs,

national standards of financial performance)• Budget performance analysis


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Module 2:Session 9: Publication of Financial Information

Why Publish?

• To encourage community involvement

• Accountability to taxpayers

• To enhance transparency

• To promote community monitoring

• As a means of enhancing revenue collection

• To inform taxpayers, and others about LG activities

• To enable comparisons

• To help Councilors judge their performance

What to Publish?

• Budgets and Work plans

• Government grants e.g LGDP grants, conditional grants, equalization grants, etc

• Monthly, quarterly and annual accounts

• Tender Board minutes

• Financial decisions of the Council

• Internal and external audit reports

• Reports of investigations

• Reports of LGPAC

• List of approved suppliers and contractors

How to Publish?

• Notice Boards

• Local Press

• Local Radio Programmes

• Documents to NGOs, CBOs, LCs, Community Leaders, act

• Regular meetings with stakeholders