Value-Based Management in Government

CHAPTER THIRTEENDriver-Based Budgeting and Rolling Financial Forecasts

THERE IS NOW A better approach to forecasting the location and level of resources and budgeted expenditures. Sometimes called activity-based budgeting (ABB), this approach recognizes that the need for resources originates with a demand-pull triggered by customers, citizens, or any end users of the organization's services and capabilities. In contrast, traditional budgeting tends to extrapolate the level of resource spending for each spending line item for all of the cost centers (e.g., departments) from the spending levels of past periods, and then adds a small percentage increase to allow for monetary inflation. In the traditional approach to budgeting, the budget process starts with the current level of expenses. A problem with budgeting this way is that the past is not a reliable indicator of the future. It is insensitive to changes in demand volume to the organization and any or all of its cost centers.

Increasingly, today's more knowledgeable managers correctly believe that the budget should flow backward in the reverse direction from the outputs to the resources. Activity-based budgeting (ABB) flows backward. ABB assists in logically determining what levels of resources – the types and numbers of employees and spending for supplier or contractors – are required to meet the future demands placed on the organization.

In the 1980s, financial planners – particularly in the US federal government – actually ...