Solution Manual for Principles of Corporate Finance 14th Edition by Richard B...
Financial Management Manual for ULBs of M.P.- English
1. Financial Management Manual
For
Madhya Pradesh Urban Local Bodies
Madhya Pradesh
Urban Administration and Development
"Project Utthan"
Madhya Pradesh Urban Services for the Poor
2. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh
Preface
As the urban population is growing at a fast pace and larger share of GDP comes from urban areas,
Urban Governance and Development has become the focus of increased attention in the last decade by
central and state governments and other stakeholders across India. Consequently, Urban Local Bodies,
being at the fulcrum of urban management, have received more attention in terms of legal powers and
autonomy, financial resources, technical assistance and capacity building inputs to assist urban reform
processes under various government schemes including JNNURM.
Madhya Pradesh Government is at the forefront of the process of improving urban governance and
achieving urban development by pursuing a wide variety of innovative urban reforms facilitated by the
Madhya Pradesh Urban Services for the Poor (MPUSP) programme. The MPUSP programme, which is
an outcome of a partnership between the GoMP and the Department for International Development
(DFID) of the United Kingdom, is a major initiative of the GoMP towards implementing municipal reforms
and strengthening of Urban Local Bodies (ULBs) in MP.
A core area of focus for MPUSP funded reforms has been to improve the financial management of ULBs
which often faced difficulties in implementing prudent and optimal financial management practices in the
areas such as: budgeting, costing, expenditure management, receivables management, cash
management and other areas of financial management.
This Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh was conceived by
the Urban Administration and Development Department (UADD) , Government of Madhya Pradesh
(GoMP) as a direct response to these issues. The Manual is probably the first initiative of its kind in India
and will not only serve the ULBs of Madhya Pradesh but it will also be useful to all ULBs across the
country.
The manual beside defining financial management and explaining how it can be applied to ULBs, has
covered theoretical and practical aspects of financial management tools/techniques such as: financial
analysis, operating budget, capital budget, cash, receivables, payables and debt management, assets
management, financial information system, internal control etc.
It is expected that the ULBs of the MP will adopt and implement these good financial management
practices which will improve their financial performance and overall financial status. It is envisaged that
the manual will may be revised in the light of emerging learning and lessons to ensure that it is a useful
living document. Finally it is hoped that it will pave way to make ULBs financially efficient and
sustainable.
Commissioner
Urban Administration and Development
Bhopal
Dt. 08/11/2011
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3. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh
Contents
1 INTRODUCTION ................................................................................................................................. 10
1.1 Purpose of this manual .................................................................................................................. 10
1.2 Target group of users ..................................................................................................................... 10
1.3 How to use this manual .................................................................................................................. 10
1.4 Structure of this manual ................................................................................................................. 10
2 INTRODUCTION TO FINANCIAL MANAGEMENT ........................................................................... 12
2.1 Defining financial management...................................................................................................... 12
2.2 Need for financial management in ULBs ....................................................................................... 12
2.3 Financial management process ..................................................................................................... 13
3 BUDGETING PRACTICES ................................................................................................................. 15
3.1 Concepts ........................................................................................................................................ 15
3.2 Good practices of budgeting .......................................................................................................... 28
3.3 Policies recommended for adoption............................................................................................... 31
3.4 Procedures ..................................................................................................................................... 34
3.5 Case study: Budgetary reforms at Vadodara Municipal Corporation ............................................ 46
4 CAPITAL IMPROVEMENT PROGRAM AND CAPITAL BUDGETING ............................................. 52
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4.1 Concepts ........................................................................................................................................ 52
4.2 Good practices of CIP .................................................................................................................... 53
4.3 Policies recommended for adoption .............................................................................................. 53
4.4 Procedures ..................................................................................................................................... 54
4.5 Case study: CIP of Pune Municipal Corporation (PMC) ................................................................ 68
5 CASH MANAGEMENT........................................................................................................................ 74
5.1 Concepts ........................................................................................................................................ 74
5.2 Good practices of cash management ............................................................................................ 75
5.3 Policies ........................................................................................................................................... 76
5.4 Procedures ..................................................................................................................................... 78
6 RECEIVABLE AND PAYABLE MANAGEMENT ............................................................................... 89
6.1 Concepts ........................................................................................................................................ 89
6.2 Good practices of receivables and payable management ............................................................. 89
6.3 Policies ........................................................................................................................................... 90
6.4 Procedures ..................................................................................................................................... 91
7 DEBT MANAGEMENT ........................................................................................................................ 97
7.1 Concepts ........................................................................................................................................ 97
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7.2 Good practices of debt management ............................................................................................. 98
7.3 Policies ........................................................................................................................................... 98
7.4 Procedures ................................................................................................................................... 100
7.5 Case Study: Debt management strategy of Vadodara Municiapal Corporation .......................... 106
8 ASSET MANAGEMENT .................................................................................................................... 107
8.1 Concepts ...................................................................................................................................... 107
8.2 Good practices of asset management ......................................................................................... 109
8.3 Policies ......................................................................................................................................... 109
8.4 Procedures ................................................................................................................................... 110
9 EXPENDITURE MANAGEMENT ...................................................................................................... 115
10 COSTING PRACTICES ..................................................................................................................... 118
10.1 Concepts ...................................................................................................................................... 118
10.2 Policies ......................................................................................................................................... 122
10.3 Procedures ................................................................................................................................... 123
11 INTERNAL CONTROLS.................................................................................................................... 132
11.1 Concepts ...................................................................................................................................... 132
11.2 Good practices of internal controls .............................................................................................. 135
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11.3 Policies ......................................................................................................................................... 135
11.4 Procedures ................................................................................................................................... 136
12 FINANCIAL MANAGEMENT INFORMATION SYSTEMS ............................................................... 145
12.1 Concepts ...................................................................................................................................... 145
12.2 Policies ......................................................................................................................................... 147
12.3 Procedures ................................................................................................................................... 148
13 FINANCIAL ANALYSIS .................................................................................................................... 151
13.1 Concepts ...................................................................................................................................... 151
13.2 Good practices of financial analysis ............................................................................................. 166
13.3 Policies ......................................................................................................................................... 166
13.4 Procedures ................................................................................................................................... 167
14 PROCUREMENT ............................................................................................................................... 170
ANNEXURE 1: FORMATS FOR BUDGETING........................................................................................ 171
ANNEXURE 2: FORMAT FOR ASSET MANAGEMENT ........................................................................ 179
ANNEXURE 3: FORMATS FOR FMIS ..................................................................................................... 180
ANNEXURE 4: TOR CHECK LIST .......................................................................................................... 190
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List of Tables
Table 1: Structure of the Financial Management Manual ........................................................................... 11
Table 2: Example of line-item budget for a ULB ......................................................................................... 17
Table 3: Advantages and disadvantages of line-item budgeting ................................................................ 18
Table 4: Advantages and disadvantages of programme budgeting ........................................................... 21
Table 5: Example of zero-base budgeting .................................................................................................. 22
Table 6: Advantages and disadvantages of zero-base budgeting .............................................................. 23
Table 7: Sample performance measures .................................................................................................... 24
Table 8: Advantages and disadvantages of performance budgeting ......................................................... 25
Table 9: Forms prescribed in MPMAM for budget layout ........................................................................... 33
Table 10: Sample format for listing and linking proposed capital investment works to budget allocations 36
Table 11: Format of CIP prepared by PMC ................................................................................................ 72
Table 12: Sources of information for Cash Flow forecast ........................................................................... 81
Table 13: Format for gathering data for trend analysis ............................................................................... 84
Table 14: Illustration on judicious use of investments ................................................................................ 87
Table 15: Decision matrix for choosing among long-term financing alternatives ..................................... 105
Table 16: Illustration on cost savings through outsourcing ....................................................................... 121
Table 17: Illustration showing apportionment of indirect expenses .......................................................... 126
Table 18: Physical parameters for costing ................................................................................................ 126
Table 19: A typical cost sheet of Water Works Department ..................................................................... 127
Table 20 : Format for calculating budget requirements for electricity charges for streetlight service....... 171
Table 21: Format for calculating budget requirement for O&M of streetlight service ............................... 172
Table 22: Format for calculating budget requirement for fuel expenses for vehicles & other machinery . 174
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Table 23 : Format for calculating budget requirement for purchase of tyres for vehicles ......................... 175
Table 24: BIDS for listing spill over works and for estimating their budget liability ................................... 178
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LIST OF FIGURES
Figure 1: Financial management process ................................................................................................... 14
Figure 2: Sample budget calendar .............................................................................................................. 35
Figure 3: Decision making process for O& M expenditure ......................................................................... 40
Figure 4: Identification of capital works and formulation of capital budget ................................................. 44
Figure 5: Summary of budget preparation process ................................................................................... 45
Figure 6: Capital investment decision making process ............................................................................... 54
Figure 7: Procedure followed by PMC for preparing CIP ............................................................................ 68
Figure 8: Linkages of cash budget .............................................................................................................. 86
Figure 9: Relationship between AMP and Budget .................................................................................... 114
Table 10: Function and functionary codes for Cost Object - Water Supply .............................................. 124
Figure 11: Internal control system ............................................................................................................. 133
Figure 12: Format for collecting information on ULB assets ..................................................................... 179
Figure 13: Format for monthly financial position ....................................................................................... 180
Figure 14: Format for statement showing actual receipts against budgeted receipts .............................. 181
Figure 15: Format for statement showing actual expenditure against budgeted expenditure .................. 182
Figure 16: Format for statement showing investments in bank fixed deposits ......................................... 183
Figure 17: Format for statement on returned/ dishonoured cheques ....................................................... 184
Figure 18: Format for summarised status report on returned/ dishonoured cheques .............................. 185
Figure 19: Format for unadjusted advances status report ........................................................................ 186
Figure 20: Format for outstanding loans/ liability statement ..................................................................... 187
Figure 21: Format for projected monthly cash flow statement .................................................................. 188
Figure 22: Format for status report on examination of accounts .............................................................. 189
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1 INTRODUCTION
1.1 Purpose of this manual
The primary purpose of this manual is to explain the concepts and define the policies and procedures
about good practices of financial management for ULBs of M.P. A secondary purpose of the manual is to
develop the capacity of Urban Administration Development Department (UADD) and the ULBs to adopt
and implement these policies and procedures.
1.2 Target group of users
This manual is intended for all municipal employees involved in financial management of a ULB.
Particularly, these may include:
1. Senior decision makers including senior administrative officers such as the Commissioners/ Chief
Officers, department heads, elected representatives, as well as the Mayor-in-Council (MIC).
2. Accounts officers, municipal engineers and administrative officers who are the key people involved in
many of the processes related to financial management of a ULB.
3. UADD of GoMP who would be involved primarily in monitoring, supervision and facilitating financial
management process in ULBs.
1.3 How to use this manual
This manual does not give detailed instructions on the course of action to be taken in every situation
arising due to financial management. Instead, it outlines the basic policies, principles, procedures and
good practices observed in Indian or non-indian ULBs based on which decisions should be made.
The manual is intended to act as a guide which will facilitate the municipal employees to successfully
understand and implement the best practices on financial management.
1.4 Structure of this manual
The manual is structured into two parts.
• Managing financial framework – Budget (formulation, implementation & evaluation) is the most
important tool for managing financial framework and all other systems are aligned to it. It is most
effectively managed by having a system of short-term and long-term financial management. Short-
term financial management mainly includes cash management, receivables and payables
management and short-term debt management, whereas, long-term financial management consists
of formation of capital investment plan and long-term debt management.
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• Performance enablers - Apart from this there are certain systems that act as performance enablers
for managing the finance framework. These include Asset Management, Costing, Procurement,
Internal Control and Financial Management Information Systems.
The chapters of this manual have been framed keeping in the mind the above mentioned structure. The
following table provides the sequence of chapters in the manual.
Table 1: Structure of the Financial Management Manual
Number Name Category
Chapter 3 Budgeting
Chapter 4 Capital Improvement Plan/Capital Budgeting
Chapter 5 Cash Management Managing Financial Framework
Chapter 6 Receivables and Payables Management
Chapter 7 Debt Management
Chapter 8 Asset Management
Chapter 9 Expenditure Management
Chapter 10 Costing
Chapter 11 Internal Control Performance Enablers
Chapter 12 Financial Management Information Systems
Chapter 13 Financial Analysis
Chapter 14 Procurement
Apart from the above, a set of Annexures are appended to this manual, which provide formats for some of
the areas of financial management. These include:
• Annexure 1: Formats for budgeting
• Annexure 2: Formats for asset management
• Annexure 3: Formats for FMIS
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2 INTRODUCTION TO FINANCIAL MANAGEMENT
Finance has a unique and important place in personal, public, institutional and social walks of life. In order
to be successful in these walks of life, all of us need to augment and utilise financial resources efficiently
and in a sustainable way to ensure future flow of resources. Therefore, all decision-makers need to know
how to manage finances of their institutions/ organisations.
Financial management attempts at optimising output from the given input of funds. In a country like India
where resources are scarce and there is enormous demand for funds, proper financial management is of
utmost importance.
2.1 Defining financial management
Financial management in simple terms means the entire gamut of managerial efforts devoted to the
management of finance (both its sources and uses) of an enterprise (organisation/ institution/ public body
etc.). It is the management of the finances of a business/ organisation in order to achieve its financial
objectives. Taking a business as the most common structure, the key objectives of financial management
would be to:
• Create wealth for the business,
• Generate cash, and
• Provide a return on investment keeping in mind the risks that the business is taking and the resources
invested.
It can be observed that traditionally, the basic objectives of Financial Management were the maintenance
of liquid assets and maximisation of the profitability of the organisation. But now it has undergone a
change. Today, the ultimate objective of financial management is maximisation of wealth.
The objective of wealth maximisation holds good for public bodies’ financial management also. Public
bodies or any governmental form of organisation exists not for ‘profit maximisation’ but for ’wealth
maximisation.' In order to improve the overall standard of living of people or society, the government
needs to maximise wealth and then to ensure equal distribution of the wealth generated. Thus, public
bodies are expected to attain the objective of wealth maximisation through judicious allocation and
utilisation of resources. In order to achieve this objective, public bodies must run their finance function as
per modern financial management methods, as the discipline of financial management strives for ’wealth
maximisation'.
2.2 Need for financial management in ULBs
In the past two decades, India has witnessed a phase of rapid urbanization. This has resulted in most
urban settlements facing shortfalls in provision of urban services such as, housing, water supply,
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sewerage and urban transportation systems. In addition to the growth in demand for urban services, poor
functioning of municipal bodies has made the problem even more acute.
In order to meet these and other growing challenges, the Government of India (GoI) introduced special
purpose schemes such as the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) that intend
to enable municipal bodies to meet these challenges by providing a fresh impetus to urban reforms. As
the infusion of funds from these schemes is expected to increase municipal budgets, it is important that
ULBs have sound financial management systems and procedures in place to ensure that these public
funds are used efficiently and transparently.
Hence ULBs require sound financial management systems to ensure that funds are effectively managed
and efficiently utilised.
2.3 Financial management process
The whole financial management process can be viewed from three angles:
• Creating financial framework
• Managing financial framework
• Performance enablers
The creation of financial framework basically deals with three aspects namely financial policies, financial
analysis and financial planning. These three aspects form the core of financial framework for any ULB.
After the creation of financial framework, the second most important aspect is managing this framework.
Budget (formulation, implementation and evaluation) is the most important tool for managing financial
framework and all other systems are aligned to it. Short-term financial management mainly includes cash
management, receivables and payables management and short term debt management. Long-term
financial management consists of formation of capital investment plan and long-term debt management.
Apart from this there are certain systems which act as performance enablers for managing the finance
framework. These include Asset Management, Costing, Procurement, Internal Control and Financial
Management Information Systems.
The following figure depicts the financial management process.
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Figure 1: Financial management process
Enabling Performance
Creating Financial Managing Financial Framework
Framework
Short term financial
management
BUDGETING
Financial Management
Financial Management
Information System
Financial Policies •Cash Management
Internal Control
•Receivables and
payables management Operating Budget
Financial Analysis •Short term debt
management
Long term financial
+
management
Financial Planning •Capital Improvement
Plan Capital Budget
•Long term debt
management
Asset Management Costing Procurement
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3 BUDGETING PRACTICES
This section of the manual discusses various concepts, principles, techniques associated with budgeting,
and provides the policies related to budgeting, the budget preparation process followed by the budget
review mechanism.
3.1 Concepts
Budgeting is a statutory activity for all urban local bodies (ULBs) in India. It acts as a powerful tool to
allocate limited resources among competing priorities. It is a local government’s plan to allocate its
financial resources for a specified period including all planned revenues and expenses.
A ULB budget typically includes:
• Planned activities, projects, and services;
• Estimates of the resources or revenues available; and
• Estimates of public expenditure necessary to finance planned activities.
3.1.1 Definitions
Operating/ revenue budget: It is a plan for the on-going day-to-day operational expenditures of the ULB
and the proposed means of financing for a specific period (usually one year).
Capital budget: It is a plan of proposed capital improvements and the means of financing them, usually
based on the first year of a multi-year capital improvement programme and typically enacted as part
of the complete annual budget, which includes both operating and capital outlays.
Extraordinary budget: It is a part of the capital budget, but contains receipts and payments which do not
amount to income and expenditure for the ULBs. For example, deposit receipts and payments, advances
given and adjusted, etc.
Poor budget: It is a budget which is sensitive to the needs of poor people or which tries to correct its bias
in resource allocation for the alleviation of poverty by stipulating a certain percentage of resources for the
poor. For example, in normal practice, a budget fails to show sensitivity towards the needs of the urban
poor in resource allocation and special needs of the poor get neglected.
Gender-based budget: It is a budget which is sensitive towards gender or which tries to correct gender
bias in resource allocation by stipulating a certain percentage of resources for one gender. For example,
in normal practice, a budget fails to show sensitivity towards the needs of women in resource allocation
and special needs of women get neglected.
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Participatory Budgeting: It refers to the adoption of alternative practices for local budget management
aimed at encouraging people’s participation in the allocation of municipal public resources. Such
practices are believed to promote greater efficiency in the allocation of resources by forcing planning and
transparency into decisions on expenditure. Increasingly, municipal bodies all over the world have
introduced such practices and there is increasing global recognition for the significance of such an
approach.
3.1.2 Objectives of a budget
A budget is prepared with the objectives of controlling, managing and planning the financial resources of
an organisation. Each of these objectives are discussed in detail below.
1. Control
As a control document, a budget defines the legal and policy constraints within which the managers of a
ULB can operate. These constraints include determing:
• Permissible expenditure by each ULB;
• Purposes for which expenditure can legally be made (such as salaries, maintenance, and loan
charges); and
• Collection of tax resources and non-tax resources (i.e., revenue functions).
Control is a significant objective governing the preparation of budgets in ULBs, although its achievement
is drastically impaired by a number of systemic weaknesses. To achieve the objectives of control, the
budget needs to be supported by effective accounting and auditing systems.
2. Management
As a management document, a budget sets targets that ensure the achievement of an efficient and
effective delivery of urban services. To enable the budget to be a fully effective management tool, there
must be a clear relationship between budgetary inputs (such as personnel and equipment) and expected
outputs, defined in ULB performance measures (such as the number of square metres of road to be
repaired, etc.). Such a relationship enables departmental heads to use the budget as a device to manage
their staff.
3. Planning
The preparation of a budget provides a major planning opportunity for a ULB, which wants to address its
growth and development needs through judicious use of its limited financial and personnel resources.
Each year, the budget defines the anticipated revenues of a ULB and outlines the blueprint for its
expenditure.
3.1.3 Constituents of an ideal budget
A ULB's budget should cater to the interests of various users such as politicians, administrators, ULB
managers, employees, representative groups such as NGOs/ CBOs, analysts and the public at large. A
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budget should meet the requirements of these varied user groups and yet should not become unyielding,
bulky or ambiguous.
An ideal budget document should be:
• A policy document: As an operating plan for a local government, the budget document should
propose, identify and clarify policies. These are generally adopted by the governing body during the
year and are referred to or summarised in the budget message.
• A financial plan: The budget process is the primary mechanism for promoting solvency, efficiency
and rational collective choices regarding the distribution and use of the assets and resources of a
ULB.
• An operations guide: The budget provides a framework for operations of a ULB. It must go beyond
purely financial dimensions to deal with the functions of different parts of the organisation and the
number and levels of employees.
• A communication device: A budget is a focal point for residents, taxpayers and constituents, and,
therefore, should be made plain and simple. Therefore, sufficient efforts should be made to use
simplistic narratives, charts or graphs to convey the meaning and impact of the budget to people who
are not familiar with government finances.
• Scrupulous: A budget should be able to stand up to scrutiny by competing interest groups.
• Holistic: A budget should be holistic in approach and should not neglect some areas or over or
under-emphasise others.
3.1.4 Budgeting techniques
A number of budgeting techniques have evolved overtime in order to achieve diverse objectives. These
techniques have met varying degrees of success in different countries. Whereas, some of these
budgeting techniques are more advanced, each budgeting technique offers distinct advantages and has,
at the same time, certain limitations. It is for an organisation to select one or more budgeting techniques
that are appropriate to its activities and budget classification.
3.1.4.1 Line-item budgeting
This method of budgeting is also referred to as incremental budgeting. Under this approach, budgets are
justified on the basis of proposed expenditures by line-item, or object class. The base budget is usually
not justified, but only the additions (or increments) are questioned. It is noteworthy that ULBs in MP
currently develop their budgets on a line-item basis.
A simplified example of line-item budget is presented in the table below.
Table 2: Example of line-item budget for a ULB
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Budget Request
Line-item Base Budget (INR) Increments (INR)
(INR)
Salaries 50,000 + 6,000 56,000
Travel 25,000 + 14,000 39,000
Equipment 40,000 - 10,000 30,000
TOTAL 1,15,000 + 10,000 1,25,000
The base budget is equivalent to either:
• The current year’s budget, including adjustments; or
• The current year’s actual expenditures, usually estimated to the end of the fiscal year; or
• The last year’s actual expenditures.
The base budget is different from the current service budget, which is the anticipated cost of continuing a
programme at the present levels, without policy changes or enactment of new laws. Mathematically, the
current services budget (CSB) can be expressed as follows:
CSB = Base Budget + Unavoidable Cost Increases
Increases in unavoidable or fixed costs such as employee costs or dearness allowances may mean that it
will cost more to deliver the same level of services currently being provided. It is important for the budget
office to provide directions to the line departments to enable them to estimate fixed cost increases.
No matter which budget development approach a government uses, its budget is usually translated into a
line-item budget for the purpose of budget execution and control, with allocations to object classes.
Advantages and disadvantages
The primary advantage of the line-item approach is that it is easy. Whereas, the primary disadvantage of
using the line-item approach is that it does not provide essential information.
Table 3: Advantages and disadvantages of line-item budgeting
Advantages Disadvantages
1. It is an efficient way of enhancing the 1. It is only concerned with inputs and not
allocation and control of funds since it mirrors outputs. Thus, it is difficult for decision-makers
the accounting system. to find out the results of their allocation
decisions and what the public gets for its
money in terms of services and outputs.
2. There is no need for extensive Management 2. It is difficult to develop a current services
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Advantages Disadvantages
Information System (MIS) since information budget, as the present level of services is not
pertaining to service levels, unit costs and known. Decision-makers do not know what
programme output is not required to develop they get for their additional resources
the budget. allocated to a programme: same level of
service; higher level of service; or, less
service.
3. Incremental budgeting is consistent with the 3. It does not provide any information to
fact that many programmes are stable and do decision-makers about alternative ways of
not change dramatically from year to year. accomplishing an objective and reveals little
about a ULB’s priorities.
4. It is developed by using the estimates of direct
costs only and, therefore, indirect costs are
completely ignored.
5. It is characterised by budget control
techniques, which do not provide sufficient
flexibility to programme managers to achieve
results.
6. Line-item budgeting is usually accompanied
by ‘across-the-board’ approach to allocation
decisions. Budget additions or deductions are
distributed among all departments on a
percentage basis, thus, failing to take into
account the changing needs and priorities of
the departments.
3.1.4.2 Programme budgeting
Programme budgeting focuses on the decision-making process; particularly on problems of data and
analysis. Its first effort is to introduce a rational ordering of inputs and outputs, in which the initial
emphasis is laid on the identifiable outputs, that is, major objectives of the governmental process. It then
attempts to order the inputs, that is, governmental activities created by manpower, material, real estate,
etc., so that comparisons among wide ranges of alternatives are feasible and meaningful.
Programme budgeting attempts to measure programme effectiveness and programme results in a
quantifiable manner. It starts with clear, quantifiable and measurable programme objectives for all
activities. Programme budgeting can be defined at two levels:
1. The way in which the budget is organised (by programme); and
2. The way it is justified (on the basis of programme results).
This method of budgeting provides a method for organizing activities into programmes (activities or
services with a common goal), identifying alternatives for achieving each goal, determining the costs and
benefits for each alternative, and selecting the right alternative to maximize benefits. Since total cost and
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performance levels are what matter — not the cost of each line item — budgetary allocations can be
provided “lump sum” by programme rather than in traditional department line items. Programme
budgeting is often accompanied by various kinds of performance measures.
On the basis of the above explanation, the following characteristics of programme budgets emerge:
• It discloses the full cost of a programme regardless of the number of organisational units involved in
performing the function.
• It attempts to measure the actual outcomes or programme results of a service or programme.
• It uses ‘programme elements’ as the basic budgetary classification scheme instead of departments.
• It provides for consideration of alternate service delivery options.
Programme budgeting is feasible only if measures are quantifiable and specific. Measures utilising terms
such as ‘improve,’ ‘strengthen’, and ‘coordinate’ are impossible to quantify and are too general. Because
of these deficiencies, they do not provide a means of holding agencies or managers accountable for
results. Consider these three possible programme measures for a maternal and child health programme:
3. Measure A: Improves health of infants
4. Measure B: Improves health of infants by 20 percent
5. Measure C: Decreases infant mortality by 10 percent in 3 years
Measure A is not useful because it is not quantifiable, and is, therefore, not measurable. Measure B is
quantifiable but it is not specific as to what is meant by the phrase ‘improves health of infants.’ How would
an improvement in the health of infants be measured; Measure C is the best because it is both
quantifiable and specific. Therefore, in Measure C, it is possible to conclude whether the programme
achieves the desired outcome or fails to achieve it.
Sample programme measures
The following programme measurements may be used:
1. Public Works
a. Increase in the useful life of the infrastructure; and
b. Decrease in the average downtime of the government’s equipment.
2. Health Services
a. Decrease in infant mortality rates;
b. Decrease in the percentage of children classified as malnourished;
c. Decrease in dental diseases; and
d. Increase in the average lifespan of population.
3. Public Safety
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a. Number of structures saved from fire;
b. Decrease in crime rates; and
c. Decrease in traffic-related fatalities.
4. Audit
a. Rupees saved as a result of audits; and
b. Number of audit findings successfully addressed.
5. Tax and Revenue
a. Number of tax returns accurately processed; and
b. Additional revenue from tax compliance programmes.
Advantages and disadvantages
Table 4: Advantages and disadvantages of programme budgeting
Advantages Disadvantages
2. It leads to a rational allocation of resources 1. It is inherently difficult to quantify programme
and is particularly useful in making decisions results or programme effectiveness. Even if
about alternative ways of accomplishing an output and/or programme results can be
objective. measured, it may not be possible to know
whether a result was achieved due to the
programme or because of another factor.
3. It provides information on the total resources 2. Programme budgeting may ignore the need to
allocated to programmes (information not control expenditures by assigning
available in other budgetary techniques). responsibilities to departments.
3. The costs of trying to measure programme
effectiveness may outweigh the advantages
and usefulness of the information.
4. Information about resources allocated to the
programmes could only be obtained by
reorganising government departments in line
with the programme areas, which is time-
consuming and not always feasible.
5. In order to effectively implement programme
budgeting, budgetary personnel must be
specially trained and must have the time to
conduct programme audits, which is a costly
affair and municipal bodies may not be able to
afford it.
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3.1.4.3 Zero-based budget (ZBB)
Peter A. Pyhrr at Texas Instruments pioneered the concept of Zero-Base Budgeting (ZBB) in 1969 as a
tool for planning budgeting and controls. In this system of budgeting, organisations do not take budget
allocation in past years for an activity as granted while preparing their budgets and start from zero
allocation. Budget-making under this technique starts from zero instead of treating the current budget as
the base or the starting point. In this system, existing programmes and activities are reviewed and
examined in as much detail as in the case of newly proposed ones.
Definition
In the words of Peter Pyhrr, ZBB is “an operating, planning and budgeting process, which requires each
manager to justify his entire budget requisites in detail from scratch (hence zero basis). Each manager
states why he should spend any money at all. This approach requires that all activities be identified as
decision packages, which would be evaluated by systematic analysis ranked in order of importance.”
ZBB is a formalised system for deciding whether a programme should be operated at a minimum,
reduced, current or increased level. Priority rankings are assigned to all decision packages from the
highest to the lowest; packages are ranked either in or out of the budget. Decision packages must be
discrete, that is, they must be stand-alone and not rely on the other parts of the budget.
Illustrative example
Assuming that the base budget for the Public Works (Roads Maintenance Division) is INR 24 lakhs, an
example of a budget request prepared using the ZBB format is shown below.
Table 5: Example of zero-base budgeting
S.N. Decision Package Cost (INR) Total Budget
(INR)
1. Only Maintenance 24,00,000
2. Resurface 5 kilometres of road + 3,00,000 27,00,000
3. Resurface 5 more kilometres + 2,50,000 29,50,000
4. Reconstruct bridge on Beach Road + 1,75,000 31,25,000
Decision-makers can choose any, all, or none of the decision packages. If only decision package two is
chosen, then a total of five kilometres of road will be resurfaced. If decision packages two and three are
chosen, a total of 10 kilometres of road will be resurfaced. If all the decision packages are chosen, 10
kilometres of road will be resurfaced and the bridge will be reconstructed.
Advantages and Disadvantages
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Table 6: Advantages and disadvantages of zero-base budgeting
Advantages Disadvantages
1. It enables decision-makers to make rational 1. ZBB requires agencies to justify every element
allocation decisions across programme and of their budget every year. A good idea in
organisational lines (for example, is it more theory, but in practice, this proves to be too
important to resurface five more kilometres of cumbersome, time-consuming and involves
road or build three more classrooms?). huge paperwork and is easy for managers to
manipulate. In most places, ZBB has died of its
own weight.
2. It has the advantage of being more realistic 2. It is unrealistic and a waste of resources to
than either performance budgeting or justify the existence of programmes every year;
programme budgeting on its own. few programmes are eventually terminated as
a result of the ZBB process.
3. ZBB provides a systematic way to consider 3. The process is susceptible to games:
various alternatives to accomplish an departments may put essential services in
objective. lower-ranked decision packages, knowing that
decision-makers will put them into the budget.
4. ZBB offers a systematic mechanism for 4. Decision units may not coincide with the
deciding on the proper level of a programme. classification system used by the accounting
For example, the Public Works budget might system, making it necessary to carry out
have three decision packages for resurfacing complex crosswalks between ZBB and the
a road. accounting/ appropriation structure.
3.1.4.4 Target-based budgeting
In this type of budget, each department is given a maximum amount or target for budget request for
accomplishing minimum levels of service. Targets are based on revenue estimates for the coming fiscal
year and adjusted for any changes in priorities communicated by governing body members. The more
complex part of target-based budgeting involves estimating each department’s current services budget.
Generally, the current services budget is the department’s current year appropriation plus or minus some
adjustments (i.e., one-time purchases, etc.). Once established, the target is typically set at some
percentage of the current services budget — for example, 95 per cent for lower priorities in the current
year or 105 per cent for higher priorities. Although target-based budgeting includes some elements of
ZBB, it greatly reduces conflict and the use of subjective judgment since departments know up front their
probable level of funding for the next year.
3.1.4.5 Performance budgeting
In India, the first step towards the introduction of performance budgeting was taken by the Estimates
Committee of the first Lok Sabha, as early as in the year 1954. The Administrative Reforms Commission
also recommended a phased introduction of performance budgeting in government bodies. Since then,
the Government has been making efforts to introduce performance budgeting in more and more of its
operations.
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Performance budgets relate the input of resources to the output of goods or services in a quantifiable
format. Under this approach, budgets are based on measures of work and cost necessary to carry out a
certain level of activity. Budgets are based on unit costs and service expectations. At the end of the year,
a performance analysis is conducted to compare actual work performed with budget estimates.
Performance budgets provide information with regard to the efficiency and productivity of public services.
Efficiency is a measure of the cost to provide a unit of service, while productivity is the measure of the
inputs required to produce a unit of service against a cost standard.
In order to make performance budgeting work, the following three conditions are necessary:
• It must be possible to develop and measure the units of service for governmental activities;
• The accounting system must provide information about costs; and
• Management Information Systems (MIS) must provide information about the level of service provided
by each activity.
Performance measures
At the heart of performance budgets are performance measures. Performance measures reflect output,
i.e., how much service is provided. It is important to understand the distinction between performance
measures and performance standards. While considering performance measures, the key question is:
what is being counted. While considering performance standards, the key question is: how much or how
many should be produced or served per rupee or per employee.
Illustration
Examples of performance measures and corresponding performance standards for various functions of
ULBs are shown in the table below.
Table 7: Sample performance measures
Performance Measures Performance Standards
Public Works
Kilometres of road resurfaced INR 1,00,000 per kilometre
MW of electricity delivered INR 0.09 per kW
Health Services
Number of outpatients treated INR 20.0 per patient per day
Number of Inpatients treated INR 100.0 per patient per day
Public Safety
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Performance Measures Performance Standards
Number of food samples taken 10 samples per food inspector per day
Number of fires fought 10 fires per fireman
Environmental Protection Agency
Number of water quality inspections INR 65.0 per inspection
Number of land use permits reviewed INR 500 per permit reviewed
Tax Revenue
Number of tax returns processed INR 175 per return processed
Number of tax audits conducted INR 2, 500 per tax audit
Finance and Accounting
Number of cheques drawn INR 4.5 per cheque
Number of vouchers processed 500 documents per vouchers staff per year
Advantages and Disadvantages
Table 8: Advantages and disadvantages of performance budgeting
Advantages Disadvantages
1. Facilitates rational allocation decisions in 1. It is difficult to develop performance measures
accordance with the desired level of service. for all government services, especially for
For example, if it costs INR 25 lakhs to re- government functions which do not provide
surface one km of road, and decision-makers services directly to the public such as financial,
want 5 km of road to be re-surfaced, INR 125 legislative and general administrative functions.
lakhs must be budgeted in the public works
function for road re-surfacing.
2. Makes it possible to hold government officials 2. Developing and maintaining a system of
and organisations accountable for their collecting performance data may be costly and
performance. time-consuming; in some cases, it is not worth
the expense.
3. Fosters a cost consciousness among 3. Performance budgets are generally
programme managers, especially if incompatible with existing accounting systems,
organisations are organised into cost centres which do not measure cost of service ex ante.
and as many services as possible are treated Cost information is usually available only ex
as direct costs. post (after the costs are incurred), and is not
always reliable.
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Advantages Disadvantages
4. Programme output does not equal programme
effectiveness. Measurement of service levels
and work output do not always reveal
information about programme effectiveness or
programme results.
3.1.4.6 Outcome Budgeting
Outcome budget is a pre-expenditure instrument, which helps in realizing the performance through clearly
defined outputs/ outcomes, as compared to the current system built around post–expenditure scrutiny.
Outcome budgeting is about clearly articulating outcomes of each and every capital work and linking such
expected outcomes of development works or expenditure to the financial outlays in budget before
undertaking it for implementation. It is a logical extension of performance budgeting and gets facilitated if
there exists performance budgeting in a ULB. Performance budgeting links physical targets to financial
outlay but may or may not provide information about outcomes planned or expected on completion of the
work or expenditure. Typical examples of outcomes are given below:
• Construction of Elevated Storage Reservoir (2ML) for water supply, will serve a population of 12,000
@ 170 LPCD with a daily supply 4 hours. The numbers of new connections can be quantifiable
depending on the pipe network size.
• Laying of sewerage pipe of diameter 150mm of length covering a particular area, will provide proper
sanitation facilities for sewer connection for households in that particular area. The number of new
sewer connections is quantifiable.
• Construction/ completion of a school building is the output, whereas increase in the literacy rate is the
final outcome where an increase in enrolment would be an intermediate outcome.
• Provision of public tap – it can quantifiable with the number of households that could use the service
3.1.4.7 Gender Budgeting
A gender-responsive budget is a budget that acknowledges the gender patterns in society and allocates
money to implement policies and programmes that will change these patterns in a way that moves
towards a more gender equal society. Gender budget initiatives are exercises that aim to move the
country in the direction of a gender-responsive budget.
Gender budget initiatives are known by a range of different names. They have, for example, also been
referred to as ‘women’s budgets’, ‘gender-sensitive budgets’, and ‘applied gender budget analysis’.
Gender Budgeting is based on the modern idea that budgeting is not simply an accounting or
bookkeeping exercise. Instead, budgeting is a key part of the planning and implementation process.
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Gender budgeting is not the only tool that can and must be used if equality and empowerment are to be
realised. Gender Budgeting is, however, an essential tool because, unless sufficient money is allocated to
implement all the other tools and strategies, they will not be effective.
The Five Step Framework for Gender Budgeting
Step 1: An analysis of the situation for women and men and girls and boys (and the different sub-
groups) in a given sector.
Step 2: An assessment of the extent to which the sector's policy addresses the gender issues and
gaps described in the first step. This step should include an assessment of the relevant legislation,
policies, programmes and schemes. It includes an analysis of both the written policy as well as the
implicit policy reflected in government activities. It should examine the extent to which the above meet
the socio-economic and other rights of women.
Step 3: An assessment of the adequacy of budget allocations to implement the gender sensitive
policies and programmes identified in step 2 above.
Step 4: Monitoring whether the money was spent as planned, what was delivered and to whom. This
involves checking both financial performance and the physical deliverables (disaggregated by sex)
Step 5: An assessment of the impact of the policy / programme / scheme and the extent to which the
situation described in step 1 has been changed, in the direction of greater gender equality
Source: UNIFEM-UNFPA Gender Responsive Budgeting and Women's Reproductive Rights:
Resource Pack
Example of Gender Budgeting -
Gender Budgeting is not about simply dividing government money 50-50 between men and boys on the
one hand and women and girls on the other. A simple 50-50 division may look equal, but it is often not
equitable, or fair, because the needs of women and men and girls and boys may be different. Instead,
Gender Budgeting looks at every part of the government budget to assess how it will address the different
needs of women and men, girls and boys and different groups of women and men, girls and boys. For
example, in the area of health, male and female people will have similar needs in respect to influenza and
malaria. But women will have greater needs than men in terms of reproductive health.
A municipal body to begin with can adopt a policy of reserving 10 to 15 % of its development budget for
welfare of women and illustrative items under this budget could be
• Construction of adequate and appropriate toilet block for Girls in all municipal schools;
• Construction of adequate and appropriate toilet block for women throughout the city;
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• Construction and running Health care centres for women in each area;
• Construction and operations of hostels for working women;
• Construction and operations of shelter homes for destitute wormen, etc
3.1.4.8 Multi-year planning budgets
Multi-year planning budgeting refers to a process designed to ensure that the long-range consequences
of budget decisions are identified and reflected in budget totals. In practice, this usually means that multi-
year planning estimates for revenue and expenditures are shown for each programme beyond the budget
year.
For some governments, the annual budget is the vehicle for the implementation of multi-year (usually five-
year) strategic plans. In this sense, long-range budgeting means integration of planning and budgeting
processes. Decisions about public investments and programme expansion are made as a part of the
multi-year planning process, and not as a part of the annual budgetary process.
3.1.4.9 Participative budgeting
In India, there is growing awareness about the need to introduce such processes, particularly among civil
society organizations. JNNURM scheme has mandated for State Governments to put in place ‘Citizens
Participation Law’ to facilitate citizens’ participation in urban governance. In light of this, adoption of
participative budgeting by the ULBs has become important.
From a socio-political viewpoint, the process of participatory budgeting is an embodiment of the ideals of
decentralized urban governance, namely transparency, accountability and the participation of the public
at large in identifying their needs and determining how these can be fulfilled. From a managerial or
technical point of view, ‘participatory budgeting’ provides the link between financial planning and the
planning for infrastructure and services in the cities.
3.2 Good practices of budgeting
3.2.1 Preparing a budget
1. Budgeting should be a continuous process: Budgeting is a 365-day activity. As soon as a budget
st
comes into force on 1 April of a particular year and actual figures become available in the month of
May, a ULB should start the process of budget preparation for the next year. As part of this process, a
ULB should forecast major revenue and expenditure items for next year’s budget.
2. Budget forecast should be based on stated assumptions and methodology: The forecast along
with its underlying assumptions and methodology should be clearly stated and made available to
participants in the budget process. These assumptions and methodologies should also be provided
as references in the final budget document.
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3. ULB should analyse the variances between previous forecast and actual amounts: The
variance analysis should identify the factors that influence revenue collections, expenditure levels,
and forecast assumptions. This will help improve future forecasting.
4. Use of Budget Information Data Sheets (BIDS) for budget preparation: A ULB should use BIDS
to collect information for preparing its budget. Using BIDS facilitates efficiency and cost audit as
actual figures can be compared in a disaggregated manner to find out precisely the cost of overrun or
cost inefficiency. Formats for collecting data in the form of BIDS are provided in Annexure 1. These
are sample formats and ULBs are encouraged to develop BIDS for each important receipt and
payment item on these lines.
5. Use of Assets Management Plan (AMP) for budget preparation : Like BIDS a ULB should use
AMP to assess funds needed for maintenance of the assets on scientific and preventive basis and
then use financial figures coming out of AMP to formulate it annual maintenance budget. AMP is in a
generic way one type of Budget Information Data Sheet.
6. The budget document should clearly define the basis of accounting used for budgetary purposes.
3.2.2 Capital budgeting
1. Capital budget should be prepared as part of annual bugeting process: A ULB should prepare
and adopt a formal capital budget as part of its annual budgeting process.
2. Capital budget should be drawn from the multi-year capital improvement plan: The capital
budget should flow from the multi-year capital improvement plan. Presentation of capital budget
should include a summary of the multi-year capital improvement plan.
3.2.3 Budgeting techniques
1. Line-item budgeting should be used for preparation of revenue budget with the conservative
incremental approach.
2. Performance, participatory and outcome budgeting techniques are recommended for the formulation
and administration of the capital budget.
3. Budgeting for poor, gender budgeting, functional budgeting, budgeting on geographical basis
(zone/area-wise budgeting) etc budget techniques should be used for segregation and presentation
of budget in multi-dimentional manner.
3.2.4 Implementing/ administering/ controlling the budget
Having prepared and adopted the budget the next important aspect of budgeting is administering the
budget. Administering the budget is linked with several short term and long-term financial management
aspects. It is linked with cash and working capital management, bills receivables and payables
management, inventory management for short-term financial management and long-term debt
management, assets management and implementation and revision of Capital Investment Plan, etc., for
long-term financial management. Following good practices have been observed for improving budget
implementation.
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1. Budget should be contingent on resource mobilization: In government parlance, budget is a legal
authorization. As a result, once budget allocations are approved, the departments are free to utilise
their allocations fully, even if the receipts are not realised as per targets. The expenditure mechanism
assumes independent existence. Thus, by not making its expenditure contingent to actual receipts,
ULBs enhance their budgetary deficit. In fact, a local body can control negative aspects of deficit
financing by judiciously linking and making its expenditure contingent to resource mobilization.
Instead, ULBs should make their budget expenditure contingent on their actual receipts and accounts
or the finance officer should issue every month (in the light of actual receipts) a benchmark for
undertaking expenditure by the departments. For instance, a year opening circular may allow
departments to spend 10% of the budget in the month of April and cumulatively 20% in the April to
June quarter. After that, the Finance Officer of ULBs could issue monthly and quarterly expenditure
benchmarks at the beginning of every month on the basis of actual receipts in the past months. In
summary, departments should not get automatic clearance to spend budget allocations once they are
passed and they should be required to seek permission to use full or part of it in the light of actual
receipts.
2. Departments to obtain prior financial approval before spending budget approved: It would not
be sufficient to make budget contingent on revenue realised. Its implementation requires a system of
financial approval before starting procurement process (before administrative approval to the
expenditure) by a competent authority, and then, after completion of procurement process, but,
before issuing work order or purchase order. This system is a logical extension of making budget
contingent on revenue realised. Under this budgetary control system Head of the Department must
obtain financial approval to expenditure from Accounts/ Finance department of the ULB before
starting procurement process and then before issuing work or purchase order for all the capital
expenditure and certain operation and maintenance expenditure (as specified by the Commissioner
of the ULB). Accounts/ Finance Department should maintain budget control register and uni-number
system for giving number to approved expenditure files.
3. Budget should be bifurcated into monthly cash and working capital budgets: In order to make
expenditure contingent upon revenue realised and to implement system of prior financial approval to
expenditure, annual budget of the ULB should be broken down into monthly cash and working capital
budgets. At present, budget preparation is viewed as an annual activity. Financial managers need to
change this mindset. A budget can be for one week or even for a day. For a detailed discussion on
adopting cash and working capital budget see Chapter 5 of this manual.
4. Budget administration to include management of inventory, assets, receivables and payables:
The budget administration should include management of inventory, assets, receivables and
payables. These sub-systems, except receivable management, constitute expenditure system. Like
expenditure provided in the budget should be contingent on the revenue realised, the operation of
these expenditure sub-systems should also be contingent on the revenue realised and should not
work on a stand-alone basis. The Accounts Department of the ULB should decide through a system
of prior financial approval to expenditure on when and how much inventory should be purchased or
how much operation and maintenance expenditure should be undertaken or the extent of project
works expenditure that should be undertaken in the light of revenue realised and availability of funds.
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3.2.5 Monitoring and evaluating the budget
If the above-mentioned good practices are followed rigorously, the need for a formal review mechanism is
reduced. However, the following good practices should be followed for monitoring and evaluating a
budget.
1. Budget should be prepared using a budget coding structure: A ULB budget should be prepared
using a budget coding structure as prescribed by the government. Adherence to budget coding
structure would ensure that all the items are properly recorded and classified. This in turn captures all
types of financial information within a ULB. If the discipline of classifying receipts and payments is not
adhered to, then the entire database can get distorted and the quality of decision-making, based on
the data, becomes poor.
2. Budget Variance Report (BVR) to be used as a crucial budgetary control tool: ULBs should also
prepare a Budget Variance Report that could be used as an important budgetary control tool. BVR
analyses the positive and negative variances of actual vis-à-vis budgeted receipts and expenditure
items. In other words, a BVR provides information on fast-moving and slow-moving receipts and
expenditure items. Positive variance should be analysed for reasons. For instance, a ULB has
collected more property tax than the budgeted amount in a particular ward. The reasons for the same
should be analysed and replicated. Negative variance should be analysed for reasons and cost
control measures should be identified. For instance, the increase in maintenance expenses or finance
charges would indicate lack of planning or implementation follow-up.
3. Performance benchmarks (standards), indicators and measurement system: For monitoring and
evaluating budget the ULB should have pre-defined set of performance benchmarks (standards) to
compare actual performance against budgeted performance, performance indicators to measure
performance and institutional structure to run performance measurement system. Revised budget
and next year’s budget should get improved in the light of learning from budgetary monitoring and
evaluation exercise. Budget performance analysis report should be submitted quarterly to Mayor or
Chairman in Council for information and discussion and should be released as a public document.
3.3 Policies recommended for adoption
3.3.1 Frequency and timing
Each Municipal Corporation in MP shall prepare and adopt an annual budget of income and expenditure
of the ULB before the last day of February in the preceding accounting year for the next accounting year
in the manner and form as prescribed in Madhya Pradesh Municipal Accounts Manual, July 2007. In this
regard, the Commissioner shall prepare estimates of income and expenditure and present before the
th
Mayor-in-Council, on or before the 30 day of November in the preceding accounting year for
consideration, modification, and approval, as appropriate.
3.3.2 Basis of preparation
1. Each Municipal Corporation in MP shall integrate performance measures and productivity indicators
with its annual budget. In this regard, Municipal Corporations shall adopt the systems of performance
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budgeting and outcome budgeting for preparing, and approving estimates of all types of capital
expenditure except loan repayment in the manner and form as prescribed in MPMAM.
2. Each Municipal Corporation in MP shall adopt system of participating budgeting for preparing,
estimates of operating and capital expenditure except salary, debt charges, loan repayment and any
other statutory expenses in the manner and form as prescribed in MPMAM.
3. Each Municipal Corporation in MP shall adopt the systems of Gender Sensitive and Pro-Poor
Budgeting. For this purpose, a Municipal Corporation shall segregate relevant budget items and
allocations into two separate main budget heads, viz., (1) ‘Providing Services to Women, Children,
and Senior Citizens’ (for gender sensitive budget) and (2) ‘Providing Basic Service to Urban Poor’ (for
pro-poor budget).
3.3.3 Conservatism in revenue estimation
In order to maintain a stable level of services, each Municipal Corporation in MP shall use a conservative,
objective, and analytical approach when preparing revenue estimates. The process shall include analysis
of probable economic changes and their impacts on revenues, historical collection rates, and trends in
revenues. This approach should reduce the likelihood of actual revenues falling short of budget estimates
during the year and should avoid mid-year service reductions.
3.3.4 Fiscal control
1. Each Municipal Corporation in MP shall ensure fiscal stability and the effective and efficient delivery
of services, through the identification of necessary services, establishment of appropriate service
levels, and careful administration of the expenditure of available resources.
2. Each Municipal Corporation in MP shall adopt and maintain a balanced budget. For this purpose,
expenditure deferrals into the following fiscal year, short-term loans, or use of one-time revenue
sources shall be avoided to balance the budget.
3. Each Municipal Corporation in MP shall operate on a current funding basis. Expenditures shall be
budgeted and controlled so as not to exceed current revenues plus the planned use of fund balance
accumulated through prior year savings.
4. Each Municipal Corporation in MP shall project future operating costs associated with new capital
investments and will include them in the operating budget forecasts.
5. Debt or bond financing shall not be permitted to be used by any Municipal Corporation in MP to
finance current operating expenditures.
3.3.5 Presentation and formats
3.3.5.1 Budget coding structure
Each Municipal Corporation in MP shall prepare its annual budget using the six-digit coding structure as
prescribed in the Madhya Pradesh Municipal Accounting Manual (MPMAM). The prescribed coding
structure shall have three levels of codification – first level representing function group, second level
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representing function description and the third level representing cost centre. Each level shall have a two-
digit code. The codification structure is described below.
1. First level represents the obligatory and discretionary functions of the ULBs under the Madhya
Pradesh Municipal Corporation Act, 1956 and the Madhya Pradesh Municipalities Act, 1961. This is
known as the “Function Group". Functions shall represent the various functions or services carried
out by the local body. Account Heads shall represent the nature of the income or expenditure.
2. Second level represents the particular type of service under a function, known as "Function
Description".
3. Third level represents a particular ”Cost Centre” code, which provides the service.
Refer to Annexure 4 of the MPMAM for detailed formats as prescribed in MPMAM on coding structure.
3.3.5.2 Budget categories
The budget of a Municipal Corporation in MP shall be divided in three distinct categories – Revenue
(operating) budget comprising operating income and expenditure; Capital budget comprising capital
income and expenditure including loan repayment and Extra-ordinary budget comprising receipts and
payments on account of deposits from people and advance given and recovered. These three broad
budget types shall then be sub-classified under functions performed by the ULB followed by the sub-
functions or different departments of the ULB.
3.3.5.3 Budget layout
Budget layout refers to the budget forms that will be used for final preparation and presentation of the
budget. Each Municipal Corporation in MP shall follow the method of bottom-up budgeting as prescribed
in the MPMAM. Also, Municipal Corporations shall use the forms prescribed in the MPMAM for presenting
budget information. The table below provides the names and references of these forms as prescribed in
the MPMAM. It is noteworthy that the forms prescribed here relate to the final presentation of the budget
and not initial data collection by various departments.
Table 9: Forms prescribed in MPMAM for budget layout
Name of the form Description
BUD 1 Summary Budget Estimates
BUD 2 Abridged Major Account Head Wise Budget
BUD 3 Revenue Income Budget Estimates
BUD 4 Revenue Expenditure Budget Estimates
BUD 5 Capital Receipts Budget Estimates
BUD 6 Capital Expenditure Budget Estimates
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Name of the form Description
BUD 7 Detailed Revenue Expenditure (Department-Wise) Budget Estimates
BUD 8 Detailed Capital Expenditure (Department-Wise) Budget Estimates
3.3.5.4 Ease of presentation and transparency
While presenting the budget, each Municipal Corporation in MP shall ensure that budget information is
presented in a way that facilitates policy analysis and promotes transparency and accountability.
3.3.6 Closing balance of budget
The budget shall be so prepared as to provide for a closing balance, which each Municipal Corporation in
MP shall maintain at its credit at the end of the year and the amount of which shall be not less than the
limit prescribed in the [MP Municipal Finance and Accounts Rules].
3.3.7 Review and revision
1. The Commissioner of each Municipal Corporation in MP shall perform a mid-year budget review and
analysis based on actual information for the [first six months] of the accounting year (April to
September) and prepare revised estimates of income and expenditure of the Municipal Corporation
for the current year. The analysis of the mid-year budget review shall be submitted to the Council for
approval.
2. Each Municipal Corporation in MP shall be permitted to revise its budgets only [once] during a
particular accounting year.
3. Each Municipal Corporation in MP shall prepare a Budget Variance Report (BVR), as prescribed in
the MPMAM. The BVR shall be prepared by each Municipal Corporation on a [quarterly] basis. A
copy of the BVR shall be submitted to the Urban Administration and Development Department.
3.3.8 Other policies
Each Municipal Corporation in MP shall project revenues and expenditures for the next [three] years and
shall update the projections annually.
3.4 Procedures
This section provides a detailed step-by-step discussion related to the budget process.
3.4.1 Step 1- Development of budget policies and tools
The Commissioner of the ULB is responsible for developing various budget tools, the set of rules and
principles as well as the forms and guidelines to regulate the budget preparation and implementation
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process. These documents must be circulated within each department of the ULB before starting the
budget preparation process. These documents must include:
• Policies — Principles or financial policies are needed to guide budget preparation. Department
managers should be encouraged to use this information to reassess the benefits of current service
activities as well as justify requirements for any new and/ or expanded services. These policies may
be formed keeping in mind the expected financial situation in the upcoming financial year.
• Budget Calendar — A calendar or detailed time/ event schedule that identifies due dates for budget-
related activities; steps to be taken during budget preparation; the person or group responsible for
each step; and the date on which each step must be completed. The following figure shows a sample
budget calendar.
Figure 2: Sample budget calendar
Identification of works for next year budget in consultative manner
Identification of works for next year budget in consultative manner
Preparation of draft budget by various department heads
Preparation of draft budget by various department heads
April to
April to
September
September
Finalization and Submission of budget by Commissioner to Mayor-in-council
Finalization and Submission of budget by Commissioner to Mayor-in-council
October to
October to
November
November
Final adoption of budget estimates and approval by mayor-in-council
Final adoption of budget estimates and approval by mayor-in-council
December-March
December-March
Implementation of Budget by getting administrative approval to each work, tendering,
Implementation of Budget by getting administrative approval to each work, tendering,
contracting and implementing them
contracting and implementing them
Implementation
Implementation
year around
year around
Whereas, the Madhya Pradesh Municipal Corporation Act, 1956 and the Madhya Pradesh and
Chattisgarh Municipalities Act, 1961 provide the dates for submission, approval and adoption of budget of
a ULB, a Budget Calendar should not be confined to these end result dates. Budgeting is a 365-day
st
activity. As soon as a budget comes into force on 1 April and actual figures become available in the
month of May, the repective ULB should start the process of budget preparation for the next year.
The period between May and September should be used for the identification of major O&M works and
capital works for the next year through consultative process and then preparing design and estimates of
the probable projects. Therefore, by the time primary budget preparation process starts in November, the
ULB would be ready with the list of projects for the next year’s budget.
Similarly, during the period October to December, the ULB should take stock of projects undertaken in the
current year to identify the projects that can be completed before end of current year in March and the
projects that can spill over to next year’s budget. Also, during this period, a revised budget should be
formulated and presented separately. Therefore, when the budget is put together in January, the ULB
clearly knows its revised revenue and expenditure, the expenditure that would spill over to next year and
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36. Manual on Good Practices of Financial Management for ULBs of Madhya Pradesh
the works that need to be taken up in the next year’s budget. A similar analysis and implementation
activity should be carried out for the revenue side of the budget.
3.4.2 Step 2 - Application of budgetary techniques
Section 3.1.4 of this manual explains different techniques that could be used by a ULB to prepare a
budget. Each budgeting technique has its distinct advantages and constraints, but no budgeting
technique should be viewed as superior to other budgeting techniques. Each technique has its own
application, depending upon the objectives of preparing a budget as pursued by the ULB. Given below is
an illustrative application of different budgetary techniques.
• Revenue Budget: The “Line-item Budgeting” technique should be used for the preparation of the
revenue budget, with the conservative incremental approach. “Line-item Budgeting” is preferred over
other budgeting technique for the preparation of revenue budget because it contains numerous
routine and statutory expenditure items, which can be calculated precisely and objectively. Also, in
case of these items, control is more important than performance measurement. Moreover, this
technique is simple and user-friendly. In order to overcome the limitations of Line-item Budgeting and
excessive use of incremental approach, the system of subsidiary budgeting has been designed,
which involves the preparation of Budget Information Data Sheets (BIDS). Whereas, participatory
budgeting technique is not applicable for preparation of the revenue budget, but gender budgeting or
budgeting for poor concepts can be applied to segregate budget items of revenue budget on the lines
of gender and poor budgets.
• Capital Budget: Performance measurement is one of the most important aspects regarding
development or capital works. Therefore, performance and outcome budgeting techniques are
suggested for the formulation and administration of the capital budget. Performance budgeting
requires linking of physical targets to budgetary (financial) allocations made in the capital budget.
Accordingly, municipal bodies will have to prepare a schedule of capital works linked to each budget
item (allocation) of capital budget.
Outcome budgeting requires determining outcome/ results expected out of each capital works
undertaken by a ULB. Therefore, besides linking physical targets to financial allocations, ULB should
detail out the outcomes expected out of each of such works and financial allocation. The format for
preparing schedule regarding capital works detailing physical aspect and outcomes is provided
below.
Table 10: Sample format for listing and linking proposed capital investment works to
budget allocations
Budget code D55201 Budgete
d
Amount
Particulars Expected Budget Item - Erection of Streetlight on Central Divider
Outcome
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