Navigating financial uncertainty and building resilience: Guiding principles

Effective strategic financial planning is significantly enhanced by considering different scenarios and sensitivity factors. This approach involves constructing a range of forecasts that highlight the possible fluctuations and sensitivities in a local authority's budget. This allows the authority to anticipate and prepare for potential shifts in the fiscal landscape.

It is advisable for key areas influencing the local authority's financial position to consider a range of diverse and flexible perspectives. Factors such as shifting demand levels, price fluctuations or changes in service provision should be included in these considerations, thereby offering insight into future cost trajectories. The ability to consider different scenarios provides local authorities with the capacity to prepare for and adapt to a variety of potential future scenarios.

For best practice refer to Financial Management Code (CIPFA)

Develop and employ a comprehensive set of financial models to consider and assess different financial planning scenarios, ensuring each key assumption made is appropriately captured. These models should be both adaptable and transparent, designed to consider critical scenarios and sensitivities within the context of the medium-term financial strategy.

Encourage engagement with service departments to ensure that the main assumptions and outcomes are not only understood but also unanimously agreed upon. Supplement this process with insightful dashboards, providing a concise overview of financial performance to inform and enhance decision-making.

For best practice refer to The Annual Budget Process (Must Know Guide, LGA).

Both internal and external data can be used by the finance function to inform the assumptions underpinning various financial modelling scenarios. Finance can play a key role in identifying available data sources both within the authority and externally, which help strengthen the robustness of financial planning assumptions. 

Using better data can strengthen the service’s understanding of the financial planning process. Data on service demand or provision can foster a common language with service managers, improving their engagement in the financial planning process. Moreover, inspecting non-financial data can help identify risk earlier, aiding in proactive decision-making.

Once the local authority knows the information is available and suitable, it can start using it to plan for different scenarios and use the information to support decision making. This data can then be used to construct a reliable model that provides a basis for future planning, leveraging data patterns to support risk identification, assumption driven financial planning and data driven decision making. 

Understanding and articulating budgetary trade-offs is crucial. This involves recognising and communicating the potential benefit and sacrifice implicit in each budget decision, and understanding the implications of alternative options.  

Outlined below are key steps the finance function can take to deliver against this action.

1. Develop a comprehensive understanding: The finance function should first focus on developing a comprehensive and strategic understanding of budgetary trade-offs. This involves understanding the short-term and long-term implications, benefits and sacrifices of various budget decisions. To gain this understanding, the finance function must engage with all stakeholders. 
2. Foster effective communication: Once a solid understanding is established, the next step is to foster effective communication of these trade-offs across all stakeholders. This would ensure a shared and realistic view of what can be achieved with the available resources.
3. Align ambitions with practicality: The role of the finance function will be to ensure members have the right information and advice to inform goal setting. They can then work to align the available budget with the local authority’s goals, using the information and insights gained above to prevent unsustainable financial decisions. 

It is important for local authorities to structure their budget monitoring and adopt a risk-based approach based on the scale of impact and potential volatility of each budgetary component; in essence, allocating more resources to monitor budgets more frequently that have a greater potential for variance and carry risk. By doing so, variations can be detected early and adjustments can be made promptly, enhancing the control over the local authority’s finances and ensuring stability in the implementation of financial plans. This targeted approach not only aids in effectively managing financial uncertainty and maintaining overall fiscal health of the local authority, but also helps ensure that finance resource is targeted towards areas that add the most value.

Further information on an approach to risk is provided in Section 5: Strategising risk.

Example of a risk-based budget monitoring approach:

Baselining the capacity and capability of the finance function is the initial starting point in determining workforce requirements, considering how existing resources compare against this and the actions that can be taken to move closer to the desired state.

The baseline should set out the following:

• The vision and the future to-be of the finance function (including skills required for the future, where and how these should be delivered and how the function deals with financial uncertainty in the future state).
• Set out the as-is across:

1. Spans, layers, and grading structures.
2. Ways of working, lines of reporting and culture.
3. Governance and controls.

• Assess the gap between the as-is and to-be.
• Develop an action plan of both quick wins and longer-term initiatives as well as the investment case for additional capability and capacity as required.

Outlined below are examples of finance functions of different maturities to help inform baselining exercises.

Local authorities should consider their employee offer, to ensure their offer and supporting terms and conditions are competitive, in both the immediate term (to enable the resourcing of current gaps) and to build a longer-term pipeline of talent. This will ensure stability in the finance function during periods of uncertainty, and might include:

• External and internal training programmes that include both technical and softer skills (e.g., stakeholder management, communication and presentation, and report writing).
• Secondment opportunities and pooled resources with local authorities / public sector bodies as well as the private sector.
• Apprenticeships and school leaver opportunities.
• Identifying and nurturing ambition.
• Developing a culture of recognition.
• Coaching and mentoring opportunities.
• Opportunities around hybrid and flexible working.

For best practice refer to Workforce planning(LGA), Workforce capacity (LGA) and Recruitment and retention best practice (LGA)

Establishing a transparent accountability structure for financial management, with associated training, is crucial for optimised functioning within local authorities. The structure should clearly define the roles and responsibilities of the finance function, as well as other services throughout the local authority – these should be aligned with and ideally should be in the constitution. 

For best practice refer to Financial Management Code (CIPFA)

Intelligent automation creates efficiencies and capacity so that the finance function can have greater focus on their strategic role and less on transactional tasks. 

Budget managers should be equipped with the tools to enable proactive ownership. This could include real-time tracking, reporting, and forecasting, enabling managers to have immediate access to financial data. Amidst financial uncertainty, this timely and accurate data empowers budget managers to make informed decisions, adapt budgets swiftly, and effectively manage resources, thereby promoting stability and resilience.

For best practice refer to Financial Management Code (CIPFA)

A reserve strategy plays a critical role in promoting financial resilience for local authorities. As a safety net, reserves can provide stability and capacity to handle unexpected financial risks, making their management a top priority. It is important to recognise that the strategy will not contribute to financial stability unless it has buy-in across the organisation and the local authority effectively implements the strategy. Moreover, the strategy must clearly outline risk management approaches, exploring the use of alternative methods of funding, and contingency planning to drive stability and resilience in the face of financial uncertainties.

This strategy should outline the procedures for using and replenishing reserves. Regular reporting to elected members on the level of reserves and planned usage ensures that they are informed about the local authority’s financial resilience, affording them an understanding of their local authority’s capacity to absorb shocks and contingencies.

Having a clear reserve strategy not only instils public confidence and enhances accountability but is also an essential part of a local authority’s financial management approach. It serves as a failsafe in case of unforeseen challenges, and as such, is a key component of financial resilience strategy, enabling local authorities to navigate the inevitable financial uncertainties that arise.

Developing supplementary balance sheet reporting can play a significant role in enhancing financial transparency and resilience for local authorities. These reports would highlight potential financial resilience concerns, such as areas of high risk or volatility, and help elected members and residents understand the local authority’s financial status more clearly. By identifying areas of concern early, there is more time to develop strategies to mitigate potential risks, increasing the local authority’s overall financial resilience.

Supplementary balance sheet reporting would present a more detailed view of assets, liabilities, and reserves, and could include explanatory notes and visual representations of data to ensure the information is easily accessible and understandable. For greater oversight, this exercise should be completed quarterly. This enhanced communication could facilitate greater engagement from senior leaders and elected members, encouraging a greater understanding of, and confidence in, the local authority’s financial management. Through this approach, the local authority can ensure its stakeholder community is well-informed, enhancing accountability and trust, and supporting the local authority’s navigation through financial uncertainty.

Minimum Revenue Provision (MRP) is the amount a local authority must charge its revenue budget each year, to set aside a provision for repaying external borrowing. Ensuring clarity on the impact of capital activity on the authority’s cash, MRP and capital financing requirements is vital in engendering balance sheet resilience. This should be supported by a suite of models that aligns the authority’s treasury management strategy to its capital activity. Forward looking modelling will support a clear view on the impact that capital activity (whether it be capital inflow or outflow) will have on liquidity and the servicing of liabilities. This should include appraising a range of scenarios that determine the impact of slippage or variances in cost and income assumptions, ensuring the authority has a clear view on risks it is exposed to and the degree to which it is required to mitigate them. Establishing such a grasp on an authority’s forward look activity helps to support informed decisions relating to capital financing and hedging, thereby allowing the authority to establish better resilience in the economic environment.

Local authorities should adopt a proactive approach to asset management, underpinned by comprehensive strategies and rigorous governance processes. This approach effectively addresses financial uncertainty in local government by ensuring fiscal responsibility, prioritising sustainable investments, and making provision for risks and unforeseen circumstances, thereby establishing a stable foundation for future economic growth and stability. Adopting clear investment criteria and requiring thorough business case development for all initiatives can ensure investments align with the local authority’s financial objectives and contribute towards broader societal, economic, and environmental goals. This strategic envisioning could encompass investments that support community development, stimulate local economies, and advance environmental sustainability.

Central to these strategies should be regular asset reviews to assess their ongoing value. Where assets are found to be underperforming, appropriate processes for capital disposals should be executed. Concurrently, consideration should be given to initiatives such as asset consolidation and the transition towards a 'net-zero' future. Consolidating assets might enhance efficiency and lower costs, thereby strengthening balance sheets. Similarly, investing in 'net-zero ready' assets such as energy-efficient buildings or renewable energy sources make local authorities more resilient to future energy costs and regulatory changes, while also attracting green investments.

In adopting such measures, local authorities build a sizable and diversified asset base that not only boosts balance sheet strength but also embodies their commitment to community benefit and environmental responsibility. Through such proactive governance of asset management, local authorities can navigate financial uncertainties while promoting long-term sustainability.

For good or ill, there is an expectation that, in a crisis, councils can dispose of surplus assets to finance revenue expenditure for a temporary period. Having clear asset management strategies and plans in place will provide an immediate read-out of the extent to which this is possible. 

Title: Asset Management Plan Framework and Policy

A. Corporate Landlord - this is the foundation required to support a wider estates transformation programme. It is the integration and effective governance of Property/Estates, FM and Capital Projects. It's widely regarded as best practice. 

B. Supply Analysis - This pillar is broken down into two sections, current and future supply analysis. Current is about understanding your current assets - cost, condition, efficiency, utilisation, values etc. Future is about identifying potential locations, assets, and spaces to meet future demand.

C. Demand Analysis - This pillar is about understanding future asset needs - space types, locations, attributes and how this may change over the medium to long term. It needs to be highly service area focussed, understand their current interactions with physical space, challenging the way the service is delivered and how it uses space, and looking at ways to collaborate, co-locate or otherwise increase flexibility of space. This needs to link closely with the digital strategy and tech road map.

D. Asset Planning - This is where Supply Analysis and Demand Analysis are integrated - putting the pieces of the puzzle together into Area Based Asset Plans/Local Asset Plans which show the types and volumes of space required in a location and the options to achieve it, eventually becoming the AMP.

E. Asset Strategy - This is the overarching strategy, policies and frameworks that set out what we are going to achieve, the priorities are and how decisions will be made, e.g. whether the Local Authority is looking to integrate service delivery through a hub strategy, more focused on services in the community/a spoke strategy, or a combination of hubs and spokes.

Creating a robust capital strategy starts with clear capital objectives that are aligned with the wider organisation’s objectives and are cognisant of relevant financial uncertainties. The development of the strategy requires the utilisation of models that give a clear understanding of all parts of service operations. This is to ensure that all aspects are included in a detailed financial forecast for the local authority. If not properly executed, the lack of a robust capital strategy could generate significant financial uncertainty for a local authority. This can potentially lead to inaccurate forecasting, which may jeopardise financial sustainability, impede crucial developmental projects, and undermine the ability to deliver essential services to the local community in the long run.

Developing robust capital strategies underpinned by detailed, scenario-supported forecasting will enable the local authority to effectively manage the four components outlined below. Throughout this process, it is vital to ensure good project and programme governance/management to ensure effective oversight. It is also important that elected members and other decision-makers are sighted on changing risks for major capital projects in real time and can take decisions accordingly. 

It is imperative to account for the rapid pace of change in the economic environment, conducting frequent and flexible assessments of the viability of capital investments in a dynamic and evolving financial landscape. This enables the finance function to adapt promptly and recalibrate strategic decisions based on real-time information. This approach serves as a reality check on the efficacy of current investment strategies and provides inputs to manoeuvre capital allocation rapidly. Agile assessments can significantly enhance the flexibility and resilience of the financial function and, by extension, the entire organisation in responding to external economic shocks or changes.

Ensuring member agreement of a well-defined and focused investment strategy and supporting financial framework is an integral element of ensuring that a local authority can effectively assess and manage investment and financial risks.  Failure to do so can hamper the authority’s investment ambitions, leading to exposure to financial risk and falling short on delivery of corporate objectives. 

An investment strategy should set clear financial and non-financial objectives for the use of capital.  It should be supported by a financial framework which includes appropriate hurdle rates (i.e. the minimum thresholds required) for various appraisal metrics and associated weighting criteria to support decision making.  The framework should support the authority to reduce financial uncertainty by testing potential investment viability and affordability, giving consideration to a range of funding and operational scenarios and risks that potential investments may be exposed to. 

Not all contributions can be measured through a financial lens, and this is especially important in times when financial performance is exposed to volatility. Non-financial aspects like social impact, community engagement, environmental sustainability and economic impact frequently create significant value within communities and services. Nevertheless, quantifying these factors can pose challenges. To overcome this, the finance function should work with services to devise a standard, fair, and uniform framework to quantify non-financial value.

To do so, an agreed, objective, and consistent framework should be developed to quantify non-financial value. This framework will help systematically identify, measure, and track non-financial contributions, enabling their recognition, consideration, and integration into the strategic decision-making processes. These will form part of the criteria for any investment decisions. 

The methodology should consider a range of factors, including social indicators, environmental measures, and the impact on community outcomes. This allows the local authority to appreciate the broader context of the total value generated by service operations, beyond just the fiscal performance.

The finance function has the critical role of providing a connection between economic development and financial planning. The finance function should utilise its understanding of financial strategies to translate the potential economic growth into the local authority’s finance planning. This ensures that the financial plan aligns with the local authority’s ambitions for development.

A crucial action for the finance function is to support the identification of place-based schemes that not only supports communities but also help reduce dependence on local authority services. 

The finance function can play a decisive role in drawing a link between investment in preventive services and a subsequent reduction in demand for interventions by statutory services. By systematically analysing cost data and service finance usage trends, the finance function can demonstrate how preventive measures lead to cost efficiencies and improved service outcomes, reducing the strain on more intensive statutory services.

Across the organisation, the finance function can contribute to the development of robust demand management strategies, tapping into their professional networks to discover best practices from other local authorities. The finance function would support services, and overview and scrutiny functions, to review services, identify opportunities for change in service provision and share these findings with commissioning leads for further consideration. This unique perspective assists in isolating areas where resources can be optimised, duplication can be minimised, and services can be realigned more efficiently. Additionally, the finance function can guide and support strategic decisions on how to shift and innovate service provision to garner cost savings, improve residents' experiences, and meet their needs more effectively. 

The finance function could aid the identification of these strategies by:

Key roles for finance to manage demand 

A core task of the finance function is to support the development of detailed saving plans and business cases. This involves assembling comprehensive financial data that demonstrate how changes in service provision can generate savings. The team then supports services to create business cases that justify these changes, in terms of their cost-effectiveness and their potential to improve service delivery. This is often supported by benchmarking data from neighbouring local authorities and across the wider region to compare cost and service indicators.

For best practice refer to Financial Management Code (CIPFA)

To build resilient supply chains, it is essential for the finance function to support services across the organisation to undertake comprehensive analysis to identify potential resilience issues. Thoroughly evaluating historic and current supplier data, financial trends and market shifts can then highlight areas of vulnerability within the supply chain that may pose a risk to service continuity or financial stability. The finance function will work alongside the procurement function to monitor the financial health of suppliers. Services should then periodically review supply chains to identify any vulnerabilities, adjusting strategies and plans accordingly. This information will support the production of resilience plans to enhance the service’s supply chain resilience against potential disruptions and financial risks. 

The finance function can significantly contribute to the development of market sustainability plans. Their analytical expertise can inform strategies that promote a sustainable and diversified supply base, reducing dependence on a limited number of suppliers. The team can also help services to shape fair and stable commissioning practices that encourage market growth and supplier diversification, thereby strengthening the overall sustainability of the supply chain.

Key steps for the development of market sustainability plans include:

1. Analysing market trends
   Services will examine current market trends to inform the development of a market sustainability plan, highlighting opportunities for encouraging diversification.​
2. Supporting the commission of practices
   The finance function acting as a critical friend to ensure services develop a robust and diverse supplier base to avoid single points of failure.​
3. Developing monitoring frameworks to assess supplier performance
   Regularly assess the performance and financial stability of suppliers to ensure they align with the sustainability plan alongside commissioning leads.​
4. Developing contingency planning
   Working with services to develop and cost risk mitigation strategies and emergency procedures should supplier-related issues materialise. ​

Further to Section 2.1 ‘Creating and maintaining an engaged and proactive finance function’, investments in workforce strategies are a key pillar of building long-term financial resilience within local authorities. This work starts with attracting, retaining and developing local talent, which reduces reliance on agency staff, a major avenue for cost savings. Creative employment packages that offer attractive benefits and clear career progression plans make direct local authority employment a preferable option. At the same time, nurturing existing talent through training and partnerships with local educational institutions ensures the skills of the workforce align with the local authority’s needs. This dual approach not only helps mould a favourable labour market, reducing the need for outside recruitment, but also ensures a stable, skilled workforce that sustains high-quality service delivery. This effectively makes the workforce a resilient component of the local authority’s supply chain, able to withstand external pressures and uncertainties.

Within the framework of developing efficient workforce strategies, the finance function works alongside the HR function to undertake analysis of the funding required to ensure budgets are allocated to support hiring, employee benefits, and training programmes. This can support the HR function to create competitive employment packages that effectively attract and retain talent.

Risk management is a day-to-day requirement for both finance and non-finance staff. To create a thorough method for managing risk, you need a deep understanding of how the local authority operates, the different services it provides, how it navigates the political landscape it exists in, and how it engages with the various parties it works within and who it works alongside. 

Key roles for the finance function include:

• Treating risk management as a continuous process, involving both finance and non-finance staff.
• Developing a comprehensive risk management framework that aligns with the local authority’s broader assurance framework. 
• Maintaining an up-to-date risk register for documenting, evaluating, and monitoring risks.
• Strategic reporting focused on actions to mitigate the financial consequences of risks crystallising
• Implementing regular feedback mechanisms of potential risks from residents, staff, and partners is indispensable for a comprehensive monitoring of potential risks from a wide array of perspectives.

The cornerstone of efficient management of financial risk is formulating an extensive risk assessment methodology. This approach should consider risk sources internally and externally to the local authority. Included among these risk factors might be fluctuations in the economy, changes in government policy, environmental considerations, and sector specific risks. Through systematic evaluation of these varied risk sources, the local authority will achieve a more sophisticated understanding of potential obstacles and weaknesses. A thorough assessment supports the construction of firm financial strategies, expressly designed to cushion against those identified threats, thereby bolstering the local authority’s resilience amid economic unpredictability.

Robust financial risk management within a local authority also entails the establishment of comprehensive risk mitigation plans. Analytical tools and software can be utilised to integrate risk management into everyday administrative duties, thus enabling a more effective and pro-active response to changing circumstances.  It is equally important to foster open communication channels within the organisation on matters of risk, fostering a dialogue to identify, assess and manage threats collectively. Encouraging such a culture of readiness and adaptability can enhance a local authority’s ability to navigate through potential financial hurdles.

A structured and collaborative approach to risk analysis across all local authority departments strengthens the overall integrity of risk management. The respective services should be responsible for the identification and management of their own risks, informed by the work of internal audit. The finance function should then quantify the potential financial impact of each identified risk should they occur. It is crucial that the finance function employ suitable quantitative risk assessment methods, such as statistical analysis or predictive modelling. By quantifying the potential financial impact, they can prioritise resources and focus on managing those risks that could have the most significant effect on their fiscal stability. 

Further to Section 1.3 ‘Balancing ambition with practicality to ensure successful implementation in challenging conditions’ which outlines the principles of scenario planning and horizon scanning, risk measures must be embedded into financial models at the planning stage. 

Risk management plans must be meticulously designed, ensuring alignment with both the annual budget planning and medium-term financial planning. Regular reviews and updates of these scenario plans are integral to this framework, adapting effectively to fluctuating circumstances and integrating new data insights.  Furthermore, the framework implements explicit mechanisms to understand the financial impact in areas including the use of reserves, delivery of savings, and the corresponding pressures on budgets under various risk scenarios. These strategies are informed by practical examples, such as sensitivity analysis, which provide valuable information on how different factors might impact financial results. This can be implemented in demand-driven services such as adult social care, children's social care, education (EHCPs), and temporary housing. The resulting analysis can inform a forecast of how different scenarios could impact the budget, thereby enabling a local authority to devise efficient strategies to navigate any potential financial ramifications. 

Essential components for scenario planning include: 

• Rigorously designing risk management plans. At times this may be executed directly by services, to ensure they are aligned with the annual budget and medium-term financial planning.
• Collaboratively working with services to regularly review and update scenario plans to adapt to changing circumstances and integrate new data insights.
• Implementing strategies informed by practical examples like sensitivity analysis to understand how different factors might affect financial results.

Having appropriate oversight mechanisms in place is crucial for effective governance as it ensures that staff are held accountable by defining roles and assigning responsibilities specifically for risk management. This includes the role of the audit committee in overseeing risk management for the local authority and providing strategic oversight. Decision makers need to be supported to have a good understanding of risks and it should be ensured that risks are effectively reported and mitigated at a service and strategic level in a meaningful, transparent and actionable way. 

For best practice refer to Financial Scrutiny Practice Guide (CIPFA) and the CIPFA Good Governance in the Public Sector framework

Unforeseen events can often lead to unexpected financial impacts that can disrupt a local authority’s financial stability. By establishing a robust contingency fund within the budget, local authorities can flexibly and promptly address costs without derailing ongoing services. There are two main external factors that can lead to financial risk for which reserves can be set aside.

1. Economic uncertainty can significantly erode revenue, and in such times, reserves act as a safety net. They can be deployed to ensure continuous service provision and prevent hasty borrowing which can be costly, thereby reducing the financial impact of such downturns. 
2. Sudden unforeseen incidents such as emergencies, spikes in demand for services, or sudden regulatory changes can stress a local authority’s finances. This is where the role of non-recurrent funding becomes critical, as it provides immediate access to funds that can mitigate these financial shocks, ensure services are not interrupted, and prevent the need for borrowing. By maintaining an appropriate level of contingencies, the local authority can effectively navigate such circumstances, thereby reducing potential financial and societal distress.

Key roles for the finance function in this action include:

• Establish a robust contingency fund within the budget to flexibly address unforeseen costs without disrupting services.
• Establish what level of contingencies the local authority would hold based on the quantification of risks in the organisation, and then how it will maintain this level (considering the use of top ups to maintain funding levels).
• In times of economic uncertainty, use the reserves as a safety net to ensure continuous service provision and to reduce borrowing costs. In case of sudden unforeseen incidents, access non-recurrent funding to mitigate immediate financial shocks, ensuring services are not interrupted and removing the need for borrowing.
• Establish guidelines for accumulating reserve funds to address unforeseen costs 
• Formulate a precise policy outlining the systematic process of accumulating reserve funds. This includes determining the percentage of revenue to be set aside regularly to build a robust reserve fund. 
• Set clear policies on the usage of reserves and contingency funds, including conditions triggering their usage. 
• Regularly review the adequacy of these funds and update reserve levels in light of changing fiscal conditions and risk assessments.