Questionnaire findings
Question B1 assessed the budget approach taken using a Likert scale of 1 (bottom-up) to 10 (top- down).
Table 5.3 Budgeting approach
mean 5.55 (standard deviation 1.97)
Bottom-up Top-down Scale 1 2 3 4 5 6 7 8 9 10 Total Respondents 1 4 7 10 24 13 12 7 2 4 84 Percentage 1% 5% 8% 12% 29% 15% 14% 8% 2% 5% 100% Cumulative 1% 6% 14% 26% 55% 70% 85% 93% 95% 100% Combination
As explained by PricewaterhouseCoopers (2012b), the typical methodology adopted by most organisations is a combination of top-down setting out the financial constraints and bottom-up for developing the detailed plans and budgets. Most institutions (70%) were clustered around the 4-7 points on the scale, with a mean of 5.55, indicating a combination of both top-down and bottom- up. The results are consistent with studies of other organisations where a majority used a combination approach, thereby incorporating a collaborative capability in to their processes (Jutras & Hatch, 2009; Develin & Partners, 2009). Those using a top-down approach in the Develin study tended to be smaller organisations. Similarly, the 13 universities using a top-down approach (at scale points 8-10) were on average smaller than the total population, with an average income of £136m in 2013-14 compared with the population mean of £204m. Nine were post-1992 institutions and four pre-1992 (see chart 5.1).
110
Chart 5.1
Chart 5.1 demonstrates that a top-down approach would seem more prevalent in institutions with a smaller than average income. It may be that either greater control is exerted over those institutions with lower income or their size simply makes it more efficient to use a top-down approach rather than involve subordinates.
Responses to Question B2 demonstrated that the majority sub-divided their budget into monthly control periods (77%). 16% of institutions chose not to break the budget down by period and instead concentrated on re-forecasting the budget to the year end and explained the change from the original budget. Thus, emphasis was placed on reporting against both future and past variances. The profiling of budgets is discussed further in the interview findings below.
The average time taken to prepare the annual budget was 15 weeks, with a further 5 weeks spent waiting for approval (Question B3). Develin and Partners (2009) found the average preparation time in many types of organisation was 3.7 months. Similarly, CFO Research Services (2011) found it took 2-4 months and PwC (2015) 95 days. Universities appear to take longer to complete the budget compared with other types of organisation and perhaps start the process too early. The reason for this may be due to an extended phase for challenging initial budgets submitted by academic and service areas followed by a long period waiting for the final budget to be approved through various committee structures.
111
Responses to Question B4 demonstrated a range of practices in terms of updating the budget once implemented. 34% (31 institutions) said that the budget was fixed and not updated, 31% (28 institutions) revised the budget on an ad-hoc basis and 33% (30 institutions) indicated that revisions occurred at the next formalised budgetary review. A clear association between the accuracy of budgeting (scale points 5 and 6) and the approach taken to updating the budget is not evident from the table below.
Table 5.4 Approaches to updating the budget
Cautious Optimistic
1 2 3 4 5 6 7 8 9 10 Total % Mean
Once accepted, budgets are fixed 0 0 8 8 5 3 3 3 1 0 31 34% 4.9
The budget is revised on an ad-hoc basis 0 1 7 10 2 1 2 5 0 0 28 31% 4.8
Revisions occur at next formalised review 0 2 6 8 5 3 4 2 0 0 30 33% 4.7
Rolling budgets are in place 0 0 0 0 0 0 1 0 0 0 1 1% 7.0
Total 0 3 21 26 12 7 10 10 1 0 90 100% 4.8
% 0% 3% 23% 29% 13% 8% 11% 11% 1% 0% 100%
Accurate
Institutions commonly appear at the more cautious end of the budgeting accuracy scale (points 3 and 4) irrespective of the approach, indicating that updating the budget as the year progresses does not result in an increased perception of accuracy compared with those who fix their budget.
The link between the budget and an institution’s strategy is important (Davies & Jackson, 2016). Question B5 sought to identify the strength of this relationship.
Table 5.5 Budgets and strategy
Reponses to each statement
Scale mean strongly agree moderately agree somewhat agree somewhat disagree moderately disagree strongly disagree Respondents Scale 1 2 3 4 5 6
The budget process is explicitly linked to strategic
objectives/targets within your institution 2.3 24 33 16 4 3 3 83 Setting the budget causes us to talk about and reflect
upon our strategy 2.6 12 35 21 7 6 2 83
Feedback from the budgeting process can result in a
change in our strategy/tactics 3.2 6 20 25 17 11 3 82 Managers are expected to identify tactical initiatives
to improve performance 2.3 18 31 24 6 2 1 82
The annual budgeting process was connected with achieving strategic objectives in most institutions, with 73 respondents agreeing. Whilst this is consistent with a previous study by RSM Robson Rhodes (2003) which concluded that budget preparation in universities was directly linked to strategic plans, other studies found weaknesses in the link between strategy formulation,
112
budgetary control and performance evaluation due to a lack of accountability (Broad & Goddard, 2010). Means of 2.3 (indicating only moderate or somewhat agree) for the link between budget and strategy and the need for managers to identify initiatives to improve performance suggests that there are weaknesses in strategic processes. The comments of interviewees in the next section suggest that institutions concentrate too much on detailed operational issues at the expense of strategic matters.
64 respondents agreed that setting the budget caused the institution to talk about and reflect upon its strategy. However, the budget process did not necessarily result in a change in strategy, with only 51 respondents indicating that it did (just 6 strongly agreeing), even though 73 respondents stated that managers were expected to identify tactical initiatives to improve performance. The inability to achieve the budget in any one year does not necessarily invalidate the strategy being pursued, but longer-term failure and a lack of accountability can cause difficulties.
There was evidence that institutions suffered from budget gaming behaviours and reduced budgetary accuracy. Question B6 sought to understand the extent of common gaming behaviours, as detailed below.
Table 5.6 Budget gaming behaviours
Mean Never Occasionally Frequently
Scale 1 2 3
Spending available resources at the end of the budget period so as
not to lose it 1.2 6 58 20
Deferring necessary expenditures to assist in meeting budget targets 1.0 16 54 14
Incurring expenditures in the current period so as to make it easier to
attain the budget in the next period 0.9 21 52 11
Negotiating easier targets than one actually thinks can be
accomplished to make the budget easier to attain 1.0 16 49 19
Loading expenditure budgets on to certain headings/lines to hide
contingencies 0.8 27 43 12
Although frequency tends not to be high there are at least occasional instances of gaming at the majority of institutions and perhaps gaming is inevitable. The results are consistent with evidence of gaming behaviours within companies (Libby & Murray Lindsey, 2010). However, most respondents claimed that gaming behaviours did not cause them undue concern (Question B7).
113
Table 5.7 Impairment of long-run performance by gaming behaviours
mean 4.58 (standard deviation 2.06)
Not at all To a very high extent
Scale 1 2 3 4 5 6 7 8 9 10 Total
Respondents 1 8 21 16 9 13 8 3 2 2 83
Percentage 1% 10% 25% 19% 11% 16% 10% 4% 2% 2% 100%
Cumulative 1% 11% 36% 55% 66% 82% 92% 95% 98% 100%
Over half indicated that on a Likert scale of 1 (no influence) to 10 (very high influence) they fell within the range of 1-4, suggesting that the behaviours had little effect on the long-run performance of the institution. Of course, accountants may simply have a different attitude towards dysfunctional behaviour compared with non-financial managers who tend to see the budget as more important (Lyne, 1990). Academic managers may perceive a benefit from budget gaming and their views may be quite different from central finance staff. Nevertheless respondents did not view gaming as being sufficiently disruptive to warrant concern.
Some of these budget gaming behaviours may be the result of not allowing unspent balances to be carried forward at the end of the financial year. The majority, 63% of institutions prevented it, with another 28% only permitting a limited element of carry forward (Question B8). Of the 32 who did allow the practice, most (21 institutions) indicated that it had little impact on their ability to forecast accurately (Question B9). Given this view, it might have been expected that many of these 21 institutions would perceive their budgeting to be accurate if carried forward budgets could be managed without adversely affecting accuracy. However, this was not confirmed by the perception of the budgeting accuracy achieved, with only eight of these institutions achieving budget accuracy at scale points 5 and 6. Therefore, allowing the practice appeared not to significantly improve perceived accuracy.
114
Table 5.8 Budgeting methods
Frequently Sometimes Never Proposed Total
Previous year plus inflation 51 27 4 2 84
Activity Based Budgeting 12 41 18 6 77
Zero-Based Budgeting 13 32 27 9 81
Priority Based Budgeting 11 33 29 4 77
Incremental Budgeting 28 32 15 3 78
Rolling Budgeting 5 16 42 12 75
Other 1 1 0 0 2
By far the most popular methods were ‘previous year plus inflation’ and ‘incremental budgeting’, which were used frequently or sometimes by 93% and 77% of respondents. This is consistent with previous findings by Cropper and Drury (1996) and Lyne and Alhatabat (2015) which showed that incremental budgeting remained dominant, and is considered further in sections 7.6.2 and 8.6.
Although there was a surprisingly high occasional usage of ABB, PBB and ZBB, this was probably to satisfy specific purposes such as one-off budget exercises in particular areas of activity if actually used at all. There was some evidence from the interview stage that respondents lack familiarity and understanding of more complex methods.
Institutions might have been expected to introduce more complex methods and to tighten budgetary controls in such a changeable environment but, the effectiveness of tight budgetary control is dependent upon the extent to which economic turbulence results in changes to an organisation’s financial position: “Tight budget control reduces budget deviation only for organisations experiencing significant budget turbulence” (Johansson & Siverbo, 2014, p.279). Those taking a more ‘sophisticated’ approach may not increase the accuracy of their budgeting if significant changes in the external environment do not affect the short-term budgets.
Key points
A top-down and bottom-up budget approach was used by 44% of institutions, resulting in an extended period of preparation. Despite claims of increasing financialisation in a competitive market, there is little evidence of a tightening of budgetary control.
The budget was usually updated in-year to reflect changed circumstances. The practice adopted can have a significant effect on how variances are reported to stakeholders.
115
Budget gaming behaviours exist but appear to cause few problems and the carrying forward of unspent budget is rarely used to address this issue.
Simple and incremental methods of budgeting are favoured despite changes in the environment.
Interview findings
Those concentrating on a bottom-up approach to budgeting experienced difficulties, as explained by one interviewee: “Faculties and services take budgeting too seriously. There is not enough focus on strategy. The numbers can end up being ‘precisely wrong’. They are much too detailed. A lot of time is spent on the detail - it has become a sausage machine with numbers churned out that lack meaning” (OU19).
For many, the approach involved central management informing academic and administrative areas of the resources available. These areas then used the resources to set budget priorities. Iterative practices were common, with academic and administrative areas drafting an initial budget and the centre consolidating these prior to assessing them for affordability. However, this process requires the co-operation and trust of both central management and academic areas to work effectively (Berry et al., 2004).
At each stage interviewees indicated that a certain level of cautiousness was being built in to the final budgets. Furthermore, adopting a detailed approach caused difficulties. One interviewee explained that “the accuracy of the budget wasn’t improved by undertaking a detailed analysis. The budget quickly became out of date and was unrealistic by the time it came in to use” (NU3). Another commented that the institution’s current thinking was to move away from detailed operational plans, which do not necessarily assist in achieving accuracy, and to produce higher level strategic plans instead. The interviewee explained that: “In the past the process was too detailed. It wasn’t possible to see the wood from [sic] the trees” (OU20). The greater use of technology and a change to less detailed budget setting processes were considered to have improved the accuracy achieved (OU17).
116
Some interviewees claimed that there were areas of their university which were very stable and therefore easy to budget and forecast, and that it was rare for overspending to occur. In these instances accuracy was considered to be the norm.
Budget reporting practices were being reviewed by institutions. Some with quarterly reports were looking to move to monthly in order for faculties to become more self-sufficient and to highlight variances at an earlier stage (e.g. OU4, NU13). Conversely, other institutions indicated that reporting too frequently did not assist in determining if budgets and re-forecasts were accurate due to ‘timing differences’ (e.g. NU2, OU6, OU18).
Reported variances can signal either a change in expected performance or inaccuracy in the original prediction either overall or in terms of timing/profiling. Many found it challenging to determine which applied when undertaking variance analysis, and differing issues arise for income and expenditure. One explained: “It’s difficult to know when to flag up problems that we can see arising. There was a problem last year with a shortfall in tuition fee income which could have been flagged earlier. The previous FD’s advice was ‘never to make a budget call in January’ as things might change as the year progresses further” (OU10).
A number of interviewees commented that it was not sensible to look at variances from budget in isolation as, for example, an under-spend may signal that targets were not being achieved elsewhere. One explained that: “Faculties tend to be self-regulating. If an adverse variance is achieved in one area the faculty tries to compensate with favourable variances elsewhere”. The budget was not seen as the “be all and end all” and it was noted that other factors came in to play both in terms of the achieving the budget and other non-financial priorities. Variance from budget might indicate inaccuracy but only gave part of the story and was not important if the overall faculty contribution rate was achieved: “However, services are cost centres and therefore expected to remain within budget by setting and achieving priorities” (NU5).
The phasing of income for reporting purposes caused problems. Some took a simple approach and profiled most income over 12 or 10 months where fee income was excluded from July and August. One interviewee commented that: “Our bankers prompted us to re-look at our phasing of income as they couldn’t understand what our management accounts were telling them on how the
117
university was progressing during the year” (OU10). The time spent trying to achieve meaningful variance analysis prompted another interviewee to suggest that they needed to move away from apportioning the budget over the year and instead concentrate on regularly preparing a revised forecast (NU7).
Furthermore, an interviewee explained the difficulties that arise from only reporting against an original budget: “Finance and budget holders are held responsible against these original budgets, not against a re-forecast budget once student numbers are known. Sometimes variances have to be repeatedly explained and justified during the year which is quite de-motivating” (OU14). Another emphasised that: “The original budget becomes less important as the year progresses and revised forecasts take on greater importance” (NU5). Although the majority of institutions undertook re- forecasting the timing of the process varied and there were differences in terms of whether the budget was updated.
However, there were suggestions that preparing multiple iterations of the budget was not sensible: “It’s micro-managing and can mean that the institution misses the bigger picture. It’s hugely bureaucratic to keep adjusting the budget” (NU1). This interviewee referred to a previous role and explained that in industry variance analysis is key and the budget is fixed without being adjusted as the year progressed. “It’s important to know why the original budget didn’t work. If we keep adjusting then we lose the plot”. This comment was made in the context of not undertaking a regular update of all budgets but adjusting where a significant ‘error’ had occurred, such as student number projections.
Others preferred to avoid reporting against a potentially inaccurate start of year budget at all. One interviewee explained that the budget in place at the beginning of August was only considered to be a ‘draft’. During the first quarter (August to October) a ‘final’ budget was created and agreed. This incorporated high level adjustments to take account of any significant changes in areas such as tuition fee income and related expenditure. For the remainder of the year actuals were reported against this final budget: “It stops the practice of continually reporting on bad news throughout the year” (OU13). Where income dropped, budget holders were expected to make savings.
118
Budget gaming behaviours were common, particularly in respect of “over-egging the costs” and hiding contingencies (NU14). Whilst some interviewees said that it caused them problems in that they could not be certain if expenditure would come through as predicted resulting in a loss of confidence in the figures, others claimed to have an understanding of where and when favourable variances would arise even if they were less certain of the amounts involved.
However, as also indicated in questionnaire responses (Table 5.7 above), many were unconcerned about the consequences of gaming behaviours and appeared content to tolerate the possible effects on budgeting accuracy as other benefits were gained, such as a greater engagement in the process rather than disinterest (OU6, NU11, NU7). It was explained that: “It hasn’t been easy to get academic areas to take a more robust approach to managing their finances”. This person noted that the institution was “collegiate” so “academics have more power than perhaps at more teaching intensive institutions or those with a more conforming community where academics might be persuaded more easily of the need for changes in financial management” (OU11). Another interviewee alluded to the potentially biased views of finance staff in terms of their perception of the budgetary process: “We’re bound to say that units don’t take the budget process sufficiently seriously, we work in Finance!” (OU20).
The general response from interviewees was that carry forward was not allowed, with typical responses being “some areas were building up large reserves because they had been over- resourced” (OU21) and “people are used to this and it has caused few problems” (NU21). The central finance department appeared able to exert power over whether the practice was permitted and generally took the view that it created potential problems for an institution, thus arguing against the practice.
Where it was allowed, one interviewee explained that controls were placed over such expenditure and that schools were discouraged from creating large reserves. The interviewee commented that: “Reserve expenditure has created some difficulties in terms of adding ‘unbudgeted’ expenditure and therefore suppressing the current year’s surplus” (NU3). The controlled release of carried forward budget was emphasised by others to reduce adverse movements on institutional surpluses and cash flow management (OU8, OU9).
119
The consequences of not allowing unspent balances to be carried forward can be seen in the comments from interviewees: “One area purchased a stock of three years’ worth of photocopying paper rather than lose the money, but the paper was damaged in storage – it was a waste” (OU10), “There is some evidence of wasteful expenditure towards the end of the year such as buying laptops, but it is still relatively small in the overall scheme of things” (NU16), “The budget drove strange behaviours towards the year end with budget holders trying to spend up or they wouldn’t spend on important initiatives because they hadn’t been budgeted for” (NU3) and expenditure from reserves “would unexpectedly affect the bottom line” of the university (OU7).
When considering the differing budget methods used, although an incremental approach was