Guidance

Budget holder forecasting handbook

Updated 27 February 2023

Introduction

The purpose of this handbook is to set out why it’s important to provide accurate and timely forecasts, what good looks like, and what the benefits are. It sets out clear principles to follow, supporting budget holders to succeed at forecasting.

As a budget holder, you have formal, delegated responsibility to manage a budget. You are managing public funds and have a responsibility to your Accounting Officer, and they to Parliament, to execute your responsibilities with sound financial management. Forecasting is an essential part of that.

Accurate and timely forecasting enables you to make better decisions earlier. It helps you manage your budget, understand the direction you are heading in, and what you can do to affect that direction. It enables you, as budget holder, to achieve your policy/operational priorities, objectives, and outcomes.

Forecasting also has real-world impacts. Forecasting data is used in decision making within departments, and across government. The data submitted to the Treasury monthly plays a vital role in government and how decisions are made.

Effective forecasting

What is a forecast?

Forecasting should be an honest assessment, given the best information available, of the future financial position of an organisation and its activities. It serves as a prediction of future requirements based on data and assumptions about influencing factors. It is the expected spend against your allocated budget and agreed outcomes. It is a key output, used to inform you and your organisation.

Your finance team will help with the preparation of forecasts. This will often be in collaboration with wider teams, including professional analysts who can provide technical advice on forecasting methods and approaches.

Forecasts are rarely static. They evolve and change during the financial year so you should regularly revisit the data and information driving your forecast.

Why?

A forecast helps to plan for changes in priorities, aids decision-making, and helps with modelling impact on performance.

Accurate and timely forecasting supports important functions and processes, such as:

• aiding better decision-making earlier, and enabling current and future planning for the department
• informing your short- and medium-term planning, for instance if projects run over multiple years
• providing quality information that allows decision makers to take the most informed and effective decisions on spend and resource allocation
• helping staff at all levels (from teams working on delivery, to senior leaders reviewing the wider business area) understand what is expected to occur
• this in turn helps everyone understand and report on the uncertainties, risks, and opportunities ^{[footnote 1]}, teams are constantly thinking about future impacts
• building trust through reliability, for example if you say you need a certain amount of money, and your monthly forecast is generally accurate, your assessment is likely to be trusted

Budget holders

Defining a budget holder

A budget holder is an official who has been delegated responsibility for an allocated budget.

An organisation’s Accounting Officer delegates to the budget holder through a formal delegation letter. While budget holders can then sub-delegate certain responsibilities to individuals in their team (such as approving orders), the budget holder remains responsible to their Accounting Officer, who in turn is ultimately accountable to Parliament. This accountability framework is established in Managing Public Money.

Parliament
↓
HM Treasury
↓
Principal Accounting Officer
↓
Account Officer/Senior Budget Holder
↓
Budget Holder
↓
Authorised Individuals

The principle of delegation means that decisions can be made by those best placed to make them. Budget holders directly control teams, grants, and contracts on behalf of government. Due to your direct involvement and specialist knowledge of your business area, you are best placed to make day-to-day decisions on the management of your budget and to decide when a decision should be escalated.

You are supported in your role by finance specialists including a Finance Business Partner and Management Accountant. They will guide, support, and advise you on your budget but, as the responsible owner of the budget, you are responsible for the decisions made.

The four-question test

The demanding standards expected of all public servants are:

honesty, impartiality, openness, accountability, accuracy, fairness, integrity, transparency, objectivity, and reliability.

carried out

in the spirit of, as well as to the letter of, the law
in the public interest
to high ethical standards
achieving value for money

Budget holders are, via the Accounting Officer’s delegation of responsibilities, responsible for the ‘four-question test’ when it comes to their budgets. This test should be a core component of your decision-making process.

1. Regularity: can I spend money this way?

Is it compliant with:

• legislation
• relevant authorities
• agreed spending budgets
• Managing Public Money

2. Propriety: should I spend the money this way?

Does this represent:

• correctness of behaviour
• fitness
• Parliament’s expectations, intentions

3. Does this represent Value for Money (VfM)?

• Would alternative proposals, or doing nothing, deliver better value for the Exchequer as a whole?

4. Feasibility: is it likely this proposal will be delivered?

Is there any doubt that the proposal can be implemented:

• accurately, sustainably
• to the intended timetable
• within available resources

You can read more about the fiduciary duties of those handling public resources in chapter 2 of Managing Public Money.

Benefits

The benefits of effective and timely forecasting

What are the benefits for you, the budget holder?

Accurate and timely forecasting supports you because:

• it allows you to understand the true costs of delivering the outputs within your business area or programme
• it enables you to identify issues early, and so proactively put in place the necessary help/mitigations
• it gives confidence to your seniors and finance teams that you can deliver against a forecast and budget
• it enables decision making as early as possible and so means you can implement changes beneficial to your team/programme/department with agility
• timely and active analysis between your forecast and actual spending acts as an important indicator of performance and a course correction tool

What are the benefits to your department?

Your forecast supports your department in its central planning because:

• your forecast is part of the bigger picture and used to inform the department’s future short- and medium-term position
• ministers and senior leaders can make better choices on where to prioritise and distribute public money, they will also be better informed in unforeseen situations where urgent spending decisions are needed
• variances can be identified early and enable departments to manage and address these
• accurate forecasting supports your department’s regular financial performance assessments with the Treasury
• it unlocks the greatest value through facilitating and enabling progression or prioritisation through informed, evidence based information to support strategic decision making

What are the benefits to government?

Ultimately, accurate and timely forecasting means better value for taxpayers’ money. This is because forecasting data is used to:

• inform the OBR of expected spending on government policy; this is an essential input into the OBR’s forecast which is an important component for ensuring fiscal credibility
• the accuracy of this forecast also underpins government’s ability to meet fiscal plans laid out in the Charter for Budget Responsibility and events such as Spending Reviews and Budgets; this ultimately achieves fiscal consolidation (a policy aimed at reducing government deficits and debt accumulation)
  • borrowing more than we need to (or paying more to borrow what we need at short notice) significantly adds to the rising costs of debt servicing
  • moreover, higher debt costs roll forward to future years, reducing the available funding for departmental settlements
• plan cash and debt management operations by the UK Debt Management Office
• accurately inform how much money we will have in future months (and having confidence in those forecasts) meaning Treasury ministers can make decisions on funding allocation which optimise policy and delivery outcomes

Finally, accurate forecasting ensures better public trust in the way government handles public finances so we can deliver the outputs and services the government and public seek to achieve.

Treasury expectations for forecasting

The Treasury benchmarks departmental compliance with set expectations on forecasting. This is identified through an end-of-year benchmarking process of forecasts against outturn. There are also in-year reviews with Treasury spending teams. Examples of poor performance include (and are not limited to):

• being in the bottom quartile of departments in the benchmarking process, or otherwise not forecasting to within 1% of their eventual outturn in Period 6 (month 6 of the financial year)
• targeting a static end of year forecast total, without consideration of changes in policy, delivery, or wider influences from initial policy costings
• significant and unexplained fluctuations in forecasts or year-to-date spending

Departments that forecast poorly will be asked to set out a plan to the Treasury on how they intend to improve their forecasting. The Treasury will take their forecasting performance into account in future decisions around access to the Reserve and other budgetary flexibilities. Given the impact of departmental forecasting on the OBR’s forecasts, departments might also be asked to meet with the OBR to explain their forecasts and how they intend to improve these. The Treasury may also apply other penalties.

Forecasting

Budget holder behaviours

In this section we set out the behaviours budget holders should exhibit, and lead with, to achieve effective and timely forecasts.

Leading across boundaries	You bring together different insights to gain a more well-rounded view before making a forecast.
Sound judgement	You understand the output/delivery needs, what you then do with the information, know where changes are anticipated, and flag where remediation or reprioritisation is needed.
Seeks understanding	You understand the factors driving spending, recognise where these conflict, and can determine which one is more likely to be dominant.
Evidence led	You collect regularly updated data from reputable sources, enabling them to make better informed decisions.
Breaking it down	You make projections for each component of the forecast, before bringing a whole forecast together , this often yields better results.

Forecasting principles

Underpinning an effective forecasting process is sound understanding and judgement. A forecast is not just a number: there will be a range of possible outcomes which consider the risks, opportunities, assumptions, and volatility. A forecast is made within that range.

Throughout the process itself, you (and your teams) should communicate this range and what’s driving it. That will enable a better understanding for the organisation as to the possible outcomes, and so enable better decision making.

Business context

Assumptions	Forecasts are built around knowns and unknowns, it is inevitable that some assumptions will need to be made.
Volatility	Some areas of spend may be more volatile than others.
Risks and opportunities	Each assumption is exposed to risks and opportunities from inside and outside the business area.

The forecast reflects your best understanding and should sit at the intersection of all the factors you need to consider. The forecast will evolve over time as your information evolves.

Forecasting with your finance teams

Your Finance Business Partner and finance teams are your financial advisers. They enable effective financial management of your business area. They themselves will also often involve professional analysts on the more technical aspects of forecasting. They also act as a bridge to other areas of finance including strategic finance, financial and management accounting teams, and external stakeholders like the Treasury.

You will also work closely with your Management Accountant; they play an important role on providing intelligent analysis to tell the story of a financial position with impact. They also play an important role in ensuring your financial reporting recognises the business context.

It is your responsibility to flag opportunities and risks within your forecast to finance teams. They, with support from analysts who can advise on suitable modelling approaches, will be able to provide insight, analysis, advice, and challenge.

You remain responsible for the decisions made.

Forecasting activities

Your organisation will have its own specific processes for how the forecast is agreed and submitted; the way you, as the budget holder, agree your final forecast could involve the best practice activities set out below.

Behaviour	Activities
Leading across boundaries	Ensure there is join up with teams across the business, finance, commercial, HR, analysts, and that they are inputting into the forecasting process. Foster a culture of risk identification and mitigation so that teams are constantly encouraged to escalate issues up to you. Ensure your Finance Business Partner and Management Accountant are regularly engaged with the financial management of the budget, risks, and opportunities so they can help identify forecasting challenges early.
Breaking it down	Understand the data - you should have a developed understanding across each component area of the forecast before the final position is agreed. Ensure your teams submit timely, accurate, and informative reports where they relate to the forecast.
Evidence led	Ensure there is a robust reporting timetable which allows for sufficient scrutiny and challenge of the forecast, you should have accurate and up-to-date information. Ensure you are clear on the limitations of available information and transparent about the assumptions on which forecasts are based.
Seeks understanding	Understand the risks inherent to your programme which could materialise in financial risks. Understand and communicate with finance teams the volatility and sensitivity in forecasts. Define risk and variance tolerance with seniors and stakeholders. Define and record forecast assumptions, review and update them over the life of the policy/programme.
Sound judgement	Invite challenge from across your team including your finance leaders. Act as a challenge function for your team’s planning assumptions. Invite your business’ senior leadership team to report forecasting matters to you.

Common forecasting pitfalls

Forecasting can be a challenging process. Below we set out some of the common pitfalls, their effects, and how to mitigate them.

Pitfall	Effect	Mitigation
Preparing the forecast too slowly	Decisions are made with out-of-date information, meaning the forecast is inaccurate	Focusing on the efficiency and effectiveness of core processes, supported by quality people and technology
Optimism bias in the forecast	Forecasts are inaccurate, supporting delivery plans do not have realism impacted, business risks are deferred, and significant issues are hidden	Establishing an open and honest culture based around achieving accurate central forecasts, which can then be used as a course correction tool
Lack of evidence for assumptions and decisions	Unclear rationale for cost behaviours, inability to take appropriate action, lack of suitable information to drive the forecast	Providing clear explanations for assumptions made based on sound evidence of costings; consult analysts on appropriate methodologies
Poor quality data	Conflicting data from multiple sources causing inaccurate, untrusted, and unreliable forecasts	Consolidation of data sources and clear senior messaging to teams that they must agree a single version of the truth
Lack of ownership and accountability	No one takes responsibility for spending and for implementing mitigating actions	Accountability is clear and communicated alongside budget management responsibility sub-delegation
Inadequate skills in the team	Lack of understanding of purpose, prioritisation, or value when putting the forecast together; lack of understanding of policy area	Focused training and recruitment to enhance forecasting skills base; ensure those involved in forecasting understand the business area they work in
Not fully considering risk and volatility (both short- and long-term)	Misinformation causes decisions to be made without understanding of potential impacts and changes	Investigation and clear documentation into the risks, volatility and sensitivities of key cost behaviours presented alongside the forecast
Optimistic workforce planning assumptions	The forecast will be incorrect (it can take longer than expected to hire/recruit or there can be necessary additional approvals)	Ensure that finance and HR business planning teams work closely together to produce an aligned forecast for workforce planning
Poor communication of forecasts	Not all stakeholders are aware of latest insights and risks, leading to inconsistencies in understanding and ineffective decisions	Establish a clear list of customers/stakeholders to keep informed (including where there are interdependencies); regularly review distribution lists so that they are up to date

Forecasting myths

Here we challenge some of the common ‘myths’ when it comes to forecasting.

Myth
It’s always a good thing to underspend	Underspending means that you expect to spend less than your budget, which may mean that you are planning to deliver less than planned, or that costs are lower than expected. Early sight of forecast underspends is good because it enables early decision making (perhaps for your department, agency, or arm’s length body) to reallocate funding to critical or priority business areas. Underspending isn’t necessarily good because it may mean under-delivering for the public. Robust forecasting is crucial for your central finance teams to understand what the organisation has and needs.
I’ve got more money than I expected / my budget has increased; I can’t decide what to do with it	You should only spend money on what has been agreed and so continue to forecast what is needed to deliver your policy/programme aims. You should disclose an unexpected underspend.
I only need to focus on this year, even though my project takes several years (multiyear)	Decisions made now can affect costs and deliverability in future years. You should consider this when planning activity and when setting a realistic forecast for this year and for the lifetime of the project/its future running costs.
What I forecast this year will determine my budget next year; I shouldn’t reduce my forecast so the budget stays the same	Business planning is agreed at a central level and the process takes into consideration requirements and plans across the organisation, which may change from year to year (and is overall determined by the budgets set by the Treasury).
I should forecast optimistically, I want to deliver this quickly	As we show above, you should only forecast robustly, not the ‘ideal’ scenario but the scenario you deem realistic, as informed by up-to-date information.
It doesn’t matter if I update my forecasts, it’s the actual spend that matters	Forecasting enables you to manage your budget effectively and understand the direction you are headed, it is a crucial part of financial management and ensures your department can prioritise its resources. Waiting until actual spending emerges risks leaving it too late to make decisions that ensure public money is spent effectively. Additionally, failure to provide updated, monthly forecasts (including producing or sharing less accurate/incomplete information), and significant and unexplained fluctuations in the forecast will be identified by the Treasury as poor performance. It stops funding from reaching areas that may need it. Departments that forecast poorly will be asked to set out a plan to the Treasury on how they intend to improve their forecasting. The Treasury will take their forecasting performance into account in future decisions around access to the Reserve and other budgetary flexibilities; they may also be asked to meet with the OBR to explain their forecasts and how they intend to improve them. The Treasury may also apply other penalties.
Forecasting is my Finance Business Partner’s responsibility; they are responsible for finance	You are responsible for your overall forecast, your professional finance teams provide support. They will be able to provide insight, analysis, advice, and challenge you.
VAT is not an issue for my budget, it is always reclaimable	VAT rules for public bodies and government departments are complicated. While there will be a lot of circumstances when any VAT incurred will be reclaimable by the contracting body (primarily on qualifying service contracts) there will be a lot of instances where VAT is not reclaimable (supplies of goods and non-qualifying services). HMRC regularly issue tax penalties across the public sector in relation to tax errors, so it is crucial to get the VAT treatment correct. Tax Centre of Excellence colleagues can support you if your finance teams are unsure of the correct treatment.

Additional support and resources

Below are links to resources that provide further support and information.

Additionally, your department may have specific budget holder instructions (such as Licence to Operate training) or guidance documents providing an overview of budget holder responsibilities and your departmental processes.

Important texts

Resource	Overview	How it will help you
Managing Public Money (MPM)	This guidance sets out who is accountable and how to steward public funds.	As a public sector body, you must demonstrate to Parliament that you are spending taxpayers’ money efficiently and effectively. To ensure you meet these expectations, the overarching principles are set out in Managing Public Money.
Consolidated Budgeting Guidance	This sets out annual guidance for government departments on the budgeting framework that applies for expenditure control.	This provides you with guidance on improving forecasting, risks of inaccurate forecasting and consequences of poor forecasting (see Chapter 2 for an overview of the spending control framework and the importance of forecasting).
Government Finance Function Standard	The GFF Standard sets expectations for the effective management and use of public funds.	This provides direction and guidance for anyone with responsibility for finance, or financial management, whether or not they sit in a finance role. This document should be used in conjunction with Managing Public Money.

Guidance

Resource	Overview	How it will help you
Management Accounting handbook (OneFinance)	Guidance for Management Accountants (MA), who are key to ensuring both finance colleagues and the wider organisation can access the right data at the right time to inform decision making.	Management accounting is a core part of financial management, it provides a single version of the truth to help make informed decisions This will help you to understand the role of Management Accountants, who themselves provide the foundational information that links departments’ spending with your performance and delivery (see Chapter 13, this will help in understanding how MAs can provide support and intelligence in your role as a budget holder).
Finance Business Partner handbook (OneFinance)	This is aimed at a variety of stakeholders, departments or agencies implementing or refining their Finance Business Partnering model, budget holders and other customers.	Provides an insight in how to work with your Finance Business Partner; ensuring they are a strategic partner with the business acumen and insightful information to aid, challenge and influence decision-making whilst focusing on delivering positive financial outcomes and driving forward value-added opportunities. to help make informed decisions (see Chapter 7 for an outline of the role).
GFF Forecasting Principles (OneFinance)	Reporting and monitoring principles focused on the department’s strategic, financial, and operation components.	This provides principles that define and follow financial processes to ensure consistency of financial management across government – it is for finance teams but sets out key actions in three main areas, preparing forecasts, adjusting forecasts, and managing risks which will give you an understanding of what finance teams need from the forecasting process.
Government Analysis Function (GAF) Standard	The GAF Standard sets expectations for the planning and undertaking of analysis to support well-informed decision making.	This informs how to incorporate evaluation through the design, implementation, delivery, and review stages of policy making. It also explains how results can be interpreted and presented, and what should be considered in this process. This will support you in how to secure and use good evidence.
Cabinet Office controls guidance	The Cabinet Office spend controls help organisations to reduce unnecessary spend and encourage cross-government collaboration. There are approvals for certain kinds of spending, and these will add an additional review/clearance process to your programme spending.	You should consult the different spend control guidance documents to make sure you are aware of how long these could take, and so how this could impact your costings and budget profile.

Government Finance Academy training

Resource	Overview	How it will help you
GFA Forecasting training (Civil Service Learning)	Forecasting foundations which explores why accurate forecasting is important and how it helps you.	This is a free 50 min online training session that provides basic forecasting foundations. It demonstrates the ways to improve the accuracy of forecasting and how forecasts are used within wider government. You may want to share this with your teams who are involved in producing forecasts.

Contact us

For any queries, please contact [email protected]

1. A risk can be defined as the likelihood of the crystallisation of an overspend against forecast. An opportunity can be defined as the likelihood of the crystallisation of an underspend against forecast. See the Risks and Opportunities Guidance for more information. ↩