Delivering a ‘Performance Culture’: Resource Accounting and Budgeting
By addressing the four relationship questions identified in chapter3, the business should be in a position to chart its progress towards its mission and assess the extent to which it is achieving value-for-money (conceived as ‘best value’). Each question has to be asked regularly and always answered in a way that is open, systematic and clear. This involves establishing robust management information systems and tools that are appropriate to the task of monitoring and assessment (refer level C in fig.4).
The range of assessment tools used in business planning is illustrated in fig.4 (level D). You will notice that, in line with our conceptual model, the tools are grouped under the four VFM relationship concerns (the four Es). You will also notice that the three line arrows (level D) all point inwards towards the issues that relate to effectiveness. This emphasises the priority that the model gives to the establishment of a ‘performance culture’.
Business planning is a complex subject and whole books have been written about how to go about it. We are here simply concerned to provide a conceptual overview of the topic and so we will conclude this chapter by outlining the nature and scope of the tools and procedures that need to be employed in managing the process.
Monitoring and measuring efficiency: resource accounting and budgeting
In the early part of the twenty-first century, as part of its ‘modernising programme’, the government introduced reforms to its own accounting procedures that put them more in line with those operating in the private sector. At the heart of these reforms was a shift in emphasis away from ‘cash accounting’ to ‘resource accounting’. The reforms were intended to make departmental spending more ‘business-like’ by taking account of the real resource implications that follow from financial decisions. This approach has now been extended to local government and all organisations or agencies that received financial support from the Exchequer.
The idea of resource accounting and budgeting (RAB) is that the accounting records should be kept in such a way that the information they contain helps organisations make decisions about how best to allocate scarce resources between competing ends. That is, resource accounting seeks to present information in a way that will enable managers to make optimal decisions about the use of the valuable and limited resources under their control. Optimal decision-making requires clarity about the objectives of the decision-makers. It cannot be understood simply by reference to the records of cash flows that have been made in a given accounting period: it needs to consider the real results of spending and investment decisions. In particular, it requires managers and auditors to be able to assess the actual outcomes of their decisions against the planned-for outcomes. Resource accounting seeks to provide information that will help the organisation to judge the extent that its investment of funds has been effective. In this context the notion of ‘effectiveness’ has a particular meaning (see above chapter 2).
In a commercial setting ‘profitability’ is largely used as the measure of successful resource budgeting. Housing agencies, however, are usually more concerned with managerial effectiveness than with crude commercial profitability. In assessing the extent to which it is optimising the use of its resources, an organisation needs to match inputs and outputs with accomplishment by comparing what was plan for with what actually happened.
As well as embracing the matching principle, the effective measure of commercial or social profit and loss also requires accounts to be kept in accordance with the accruals concept. This states that to acquire a true profit and loss picture for a specific period (e.g. a financial year), revenues and costs should be recognised as they are earned or incurred, rather than as they are received or paid out (as occurs in the cash-flow approach). For example, if it costs £50,000 a year to rent a building then there is an expense of £50,000 to be recognised each year regardless of how or when the rent is paid. If, for example, it is paid biannually in advance, the accruals principle states that it would be inappropriate to charge £100,000 as an expense for year one. An accrued charge is an expense that has been incurred as at a particular date but not yet invoiced or paid. An accrued revenue is an income that has been earned but not yet recorded.
The accruals principle requires the impact of investing in a capital asset to be discounted over the asset’s useful life. Accruals accounting has the effect of reducing the recorded cost in the first year of investment and enables a longer-term rational view of the investment’s financial viability to be taken.
Resource accounting and budgeting provides the monitoring framework within which the business pursues the efficient use of its tangible assets. Since 1997, the Government has sought to introduce the principles of RAB into central and local government. Resource accounting requires the public sector (and by inference social agencies such housing associations) to manage their existing assets in an open and business-like fashion. Resource budgeting requires agencies to carry out an option appraisal of any major proposed development project and to be clear about why this particular project was chosen over others that were considered (see fig.3 level D, column 1).
Resource accounting is sometimes referred to as ‘management accounting’ because it seeks to record the financial consequences (costs and revenues) of managing existing assets.
Resource budgeting is sometimes referred to as ‘investment accounting’ and can be thought of as the option appraisal procedure that underlies a development decision. That is, it seeks to calculate the financial consequences of creating new assets (or renewing old ones). The argument is that to ensure we get value-for-money from a development, a full cost benefit appraisal (CBA) of the proposal has to be made (and compared with alternative uses for the money capital) before a decision to go ahead is finalised. Resource budgeting seeks to identify what economists refer to as the opportunity cost of the money capital committed to the project. We will say something more about the CBA technique in the next section when we discuss the issue of intermediate term financial planning.
Monitoring and measuring effectiveness
In recent years, agencies that receive public funding have been required to produce performance indicators (PIs) and, based on these, periodic league tables have been published by the regulators. Most successful private firms also devise targets and monitor performance. PIs can provide an information base to underpin performance review and quality management. Together with VFM audits, competition and benchmarking they can be used to provide a basis for achieving the regulator’s view of ‘value-for-money’.
Many argue that, in the past, performance figures, particularly when presented as a league table, have failed to take proper account of local circumstances and have therefore been difficult to interpret. For these reasons, their publication often carries ‘health warnings’ from practitioners, academic commentators, and even from the monitoring agencies themselves. However, despite these reservations, it is clear that the drive to achieve ‘best value’ requires formal mechanisms of comparison between authorities and agencies. It is of course important that in comparing one organisation’s performance with others, we compare like with like. Furthermore, to be systematic, coherent and open, all the measurement and monitoring techniques need to be underpinned by a common accounting framework.
The establishment of a fair and effective system of performance review may require the creation of a tiered approach to measurement in which universal measures (key or ‘headline’ indicators) could be ‘unpacked’ to reveal performance and quality measures that are intended to take into account all local factors that affect a business’s performance in a particular area.
Despite their unpopularity amongst many practitioners, published performance measures are now a permanent feature of the management landscape. For private businesses they set a coherent framework for assessing achievement and allow shareholders to see beneath the surface of published reports and financial statements. For social businesses they provide a mechanism for delivering an organization’s commitment to be accountable to service users, tax-payers, community interests, and the Government.
We will turn our attention from ‘efficiency’ and ‘effectiveness’ to the issues of ‘fairness’ and ‘feedback’.