Apply The Principles of Budgeting Within A Municipality

US ID: 116345 Learner Guide
Municipal Governance
Municipal Governance
NQF Level 5
SAQA ID: 67467
Apply the principles of budgeting within a municipality
US ID: 116345
Apply the principles of budgeting within a municipality 1

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BBT-6-US: 116345

Table of Content
ACKNOWLEDGMENT.................................................................................................7
Preface:.............................................................................................................................. 8
1.Introduction..............................................................................................................9
2.2 Learner Support.....................................................................................................10
3. Assessment............................................................................................................... 11
3.1 Formative Assessment.......................................................................................11
3.2 Summative Assessment.....................................................................................11
4. Navigating the Learner Guide....................................................................................12
4.1 Use of Icons........................................................................................................12
Group Activity / Pair Activity:...............................................................................12
Individual Activity:...............................................................................................12
5. Learner Administration...............................................................................................13
5.1 Attendance Register...........................................................................................13
5.2 Learner Registration Form..................................................................................14
5.3 Programme Evaluation Form..............................................................................14
(US ID: 116345) Apply the principles of budgeting within a municipality..........15
Introduction....................................................................................................................... 15
SO1. Municipal Budgeting.......................................................................................16
1.1 Definition of municipal budgeting...........................................................................16
Individual Activity 1:............................................................................................19
1.2 Aims of budgeting..................................................................................................19
Municipal Budgeting......................................................................................................... 22
Group Activity / Pair Activity 1:............................................................................22
1.3 Importance of the budgeting...................................................................................23
Importance of effective municipal financial planning and management.........................23
What is financial management?....................................................................................23
1.4 Components of a budgeting...................................................................................24
The "Financial Year" and budget consultation...............................................................24
Types of budgets........................................................................................................... 24
The difference between the operating and capital budgets...........................................25
Sources of municipal income.........................................................................................25

Main sources of capital budget financing.......................................................................25

Main sources of operational budget financing...............................................................26
Components of the Capital Budget................................................................................27
1.5 Key stages within the budgeting process...............................................................27
Important Stages in Budgeting Process........................................................................27
The Budget process stages..............................................................................................28
STAGE 1: Estimates. Part A - Expenditure...................................................................28
STAGE 1: Estimates. Part B - Revenue........................................................................28
STAGE 2: First estimates of deficit................................................................................29
STAGE 3: Narrowing of the deficit.................................................................................29
STAGE 4: The Budget...................................................................................................29
So2. Municipal formats of budgets.........................................................................30
2.1 Budget formats........................................................................................................... 30
Objectives of the budget formats reform........................................................................30
Specific aims of the budget formats..............................................................................30
2.2 Various formats of budgets.........................................................................................32
Different Budget Formats...........................................................................................32
Group Activity / Pair Activity 6.............................................................................33
2.3 The existing practices within a municipality.................................................................33
Weaknesses in linking planning and budgeting practices in South Africa......................33
Recommendations as to how integrating planning and budgeting can be enhanced at
the local level in South Africa........................................................................................34
Group Activity / Pair Activity 7.............................................................................35
SO3. Municipal budgeting system..........................................................................36
3.1 Improving the format of a municipal budget................................................................36
Improving the Budgeting Process...........................................................................36
3.2 Approach of budgeting................................................................................................37
The Main Approaches to Budgeting..............................................................................37
Incremental Budgeting..................................................................................................37
Usefulness................................................................................................................. 37
Zero Based Budgeting (ZBB)........................................................................................37
Usefulness................................................................................................................. 37

Base Budgeting (BB).....................................................................................................38

Usefulness................................................................................................................. 38
Activity Based Budgeting (ABB)....................................................................................38
Usefulness................................................................................................................. 38
Kaizen Budgeting.......................................................................................................... 38
Usefulness................................................................................................................. 38
3.3 Annual budgeting........................................................................................................39
How to Set an Annual Budget........................................................................................39
Setting an Annual Budget: The Road Map to Profitability..............................................39
Setting an Annual Budget: Cash Flow is King...............................................................40
Setting an Annual Budget: The Start-up Budget Challenge...........................................40
3.4 Budgetary control processes.......................................................................................41
Budgetary control methods...........................................................................................41
SO4. Integrated development plan.........................................................................44
4.1 sector plans and municipal budget..............................................................................44
4.2 Integrated development plan.......................................................................................45
1. WHAT IS INTEGRATED DEVELOPMENT PLANNING?....................................45
2. WHY IS IT NECESSARY TO DO AN IDP...........................................................46
3. WHO ARE THE STAKEHOLDERS IN THE IDP PROCESS?.............................47
4. WHAT IS THE IDP PROCESS?.........................................................................48
PHASE 1 ANALYSIS.............................................................................................48
PHASE 2: STRATEGIES.......................................................................................48
PHASE 3: PROJECTS...........................................................................................49
PHASE 4: INTEGRATION......................................................................................49
PHASE 5: APPROVAL...........................................................................................50
5. THE IDP AND PUBLIC PARTICIPATION...........................................................50
Individual Activity 10:..........................................................................................51
4.3 Role of measurable performance................................................................................51
PERFORMANCE MANAGEMENT SYSTEMS..............................................................51
Group Activity / Pair Activity................................................................................52
4.4 IDP budgeting............................................................................................................. 52
LINKING THE BUDGET AND IDP................................................................................52

SERVICE DELIVERY BUDGET IMPLEMENTATION PLAN (SDBIP)...........................53

SO5. Municipal budget.............................................................................................55
5.1 Approaches of municipal budget.................................................................................55
THE MUNICIPAL BUDGETING PROCESS...............................................................55
The importance of budgeting in municipalities...............................................................56
The benefits of Budgeting.............................................................................................56
5.2 advantages and disadvantages of the municipal budgeting approach........................56
PITFALLS IN CITY BUDGETING..................................................................................57
5.3 strengths and weaknesses of budgeting approaches.................................................58
Strength & Weaknesses of Payback Approach in Capital Budgeting............................58
Capital Budgeting.......................................................................................................... 58
Payback Period Approach.............................................................................................58
Strengths................................................................................................................... 58
Weaknesses.............................................................................................................. 59
5.4 Budgeting Legislation..................................................................................................59
BASIC BUDGET LAWS................................................................................................60
Portfolio Activity: Assignment.............................................................................61
Resources:......................................................................................................... 61
Self Assessment............................................................................................................... 62
Learner Evaluation Form............................................................................................63

ACKNOWLEDGMENTError: Reference source not foundError:

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This learning material has been entirely developed and organized by Bull’s Business and
Skills training institute (BBT Institute) under supervision of NSA Consulting.
Many people have contributed in various ways to help develop and produce the original
version and the later edition of this manual. We wish to thank all those who have contributed
in one way or another.
We are heartily thankful to BBT and NSA agency employees, family and friends, whose
encouragement, guidance and support from the initial to the final level enabled us to compile
and have an understanding of this manual.
Lastly, we offer my regards and blessings to all of those who supported us in any respect
during the compilation of this Manual, especially LG SETA, for the practical support and
resources required to put up this manual.
Other sources
 National Department of Education

 South African Qualification Authority
 LG SETA
 SALGA
 The DTI
 DBSA
 NSA (Nsamba) consulting and training
 Wikipedia

Preface:Error: Reference source not foundError: Reference source

not found8
This guide should be used to prepare the learner to be able to participate in the Municipal
governance environment.
The qualification is aimed at senior managers and future senior managers in local
government. The typical learner will be an employee in local government, wishing to gain the
competence to fulfill the requirements of his/her current job obligations or a municipal
employee wishing to gain a qualification so as to advance his/her career opportunities. In
addition persons seeking future employment in the local government sector may choose to
complete the qualification. Persons employed in non-profit organizations and non-
governmental organizations as well as private sector agencies which interface with local
government would benefit from the qualification.
Qualifying learners may operate at the level of executive mayor, executive councilors,
councilors, municipal manager; chief financial officer; department managers; strategic
managers and managers of municipal entities.
Office bearers and employees at local government level are responsible for managing the
provision of services to the community. The Constitution of the RSA (Act 108 of 1996)
section 27 (1) states that all South Africans have the right to access health care services;
sufficient food and water and social security. Section 27(2) requires the state to take
reasonable measures within its available resources to provide these basic human rights. The
state is also responsible for providing education for the community and managing all of the
country's resources. The constitution therefore allows the community to demand that
services are met and that government office bearers and managers have the skills to take
reasonable measures in providing services.
In this manual, the knowledge and skills achieved will enable the learner to maximally
combat the processes involved in assessment and disseminate accurate and relevant
information regarding assessment procedures to achieve the specific outcomes.
Welcome come.
TRAINING MANAGER

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not found
1. Introduction
This Unit Standard is intended for practitioners at local government who are involved in
municipal policy decision-making and strategic planning. Learners who are required to
advise on the legislative mandate of municipalities from a provincial or national government
perspective will also benefit from this Unit Standard.
The Unit Standard will contribute to social and economic transformation by equipping
municipal practitioners with skills in budgeting which could translate into better use pof
resources and improved delivery services.
The qualifying learner will be able to:
 Explain the various approaches to budgeting within their organisation

 Ensure the strategic objectives of their organisation are achieved.
 Contribute to the efficient allocation of resources at municipalities
 Ensure that municipal funds are used effectively and efficiently.
UNIT STANDARD ESSENTIAL EMBEDDED KNOWLEDGE

 The role budgeting plays in promoting the efficient allocation of resources
within a municipality.
 Various budget formations.
 How strategic planning integrates with budgeting.
 Legislative requirements for municipal budgeting
 The link between budgeting and service delivery.

Critical Cross-field Outcomes (CCFO):
UNIT STANDARD CCFO IDENTIFYING

Identify and solve problems using critical and creative thinking processes, e.g. by
trying to find the best possible budget format and processes.
UNIT STANDARD CCFO WORKING

Work effectively with others as a member of a team, group, organization or

community, e.g. through communicating with others regarding legislative issues

and fostering team commitment amongst the staff involved in compiling and
implementing a budget.
UNIT STANDARD CCFO ORGANISING

Organise and manage oneself and one's activities responsibly and effectively, e.g.
through the demonstration of ethical and moral principles in all budgeting
processes.
UNIT STANDARD CCFO COLLECTING

Collect, analyse, organise and critically evaluate information, e.g. through assuring
that data used in a budget is accurate.
UNIT STANDARD CCFO COMMUNICATING

Communicate effectively using visual, mathematical and/or language skills in the
modes of oral and/or written persuasion, e.g. through advising and motivating
others with regard to risk management options.
UNIT STANDARD CCFO SCIENCE

Use Science and technology effectively and critically, showing responsibility to the
environment and health of others, e.g. use appropriate computer software for data
capturing and document storage purposes.
UNIT STANDARD CCFO DEMONSTRATING

Demonstrate an understanding of the world as a set of interrelated systems by
recognising that problem-solving contexts do not exist in isolation, e.g. in keeping
in mind that risk management effects the well being of not only the municipality but
the country as a whole.
UNIT STANDARD CCFO CONTRIBUTING

Participating as responsible citizens in the life of local, national and global
communities, e.g. acting as custodian of ethical behaviour and maintaining a high
level of commitment to providing effective risk management policies and practices.
2.2Error: Reference source not found Learner Support
Please remember that as the programme is outcomes based – this implies the following:
 You are responsible for your own learning – make sure you manage your study,
practical, workplace and portfolio time responsibly.
 Learning activities are learner driven – make sure you use the Learner Guide and
Portfolio Guide in the manner intended, and are familiar with the Portfolio requirements.
 The Facilitator is there to reasonably assist you during contact, practical and workplace
time of this programme – make sure that you have his/her contact details.

3.Error: Reference source not found Assessment
Learning Outcomes:
Please refer to the beginning of each module for the learning outcomes that
will be covered per module.
3.Error: Reference source not found1Error: Reference source not found

Formative Assessment
In this Learner Guide, several activities are spaced within the content to assist you in
understanding the material through application. Please make sure that you complete ALL
activities in the Learner Guide, whether it was done during the contact session, or not!
3.Error: Reference source not found2Error: Reference source not found

Summative Assessment
You will be required to complete a Portfolio of Evidence for summative assessment

purposes. A portfolio is a collection of different types of evidence relating to the work being
assessed. It can include a variety of work samples.
The Portfolio Guide will assist you in identifying the portfolio and evidence requirements for
final assessment purposes. You will be required to complete Portfolio activities on your own
time, using real life projects in your workplace environment in preparing evidence towards
your portfolio.
Portfolio Activity:
DO NOT WAIT until the end – the programme is designed to assist you in
evidence preparation as you go along – make use of the opportunity!
Remember:
If it is not documented, it did not happen!
In some evidence, the process you followed is more important than actual
outcome / end-product.
Therefore …
Please make sure all steps for the Portfolio ActivitiesError: Reference
source not found are shown where required.

4.Error: Reference source not foundError: Reference source not

found Navigating the Learner Guide
4.Error: Reference source not foundError: Reference source not found1Err

or: Reference source not foundError: Reference source not found Use of
Icons
Throughout the learning programme icons are used to focus your attention on important
aspects of the learning programme. The following icons are used in this learning programme
to direct your attention in using at as a reference guide.
Group Activity / Pair Activity:Error: Reference source not

foundError: Reference source not found
You will be required to complete an activity in your group or in pairs with

fellow colleagues / programme participants, and provide feedback to the
participants in a report back or presentation session.
Individual Activity:Error: Reference source not found Error:

Reference source not foundError: Reference source not found
You will be required to complete an activity on your own that relates to the
outcomes covered in the module.
Portfolio Activity:
Complete the assessment activity that will be assessed as part of your

Portfolio of Evidence for the particular module.
Self Reflection:
Reflect on the question(s) asked to identify the relevance of learning

outcomes in your own working environment.
Learner Tip:
A useful tip or essential element regarding the concept under discussion is

given as a basis to further discussion.

Resources:
Possible sources for further research and study is listed under this icon.
Resources may include additional reading, handouts, web-sites, multimedia
Facilitators Note:
Content matter that is critical to the understanding of the module. The

learner must pay careful attention to this section.
Mentored Discussion:
Refer to your Mentor or Workplace Supervisor to assist in this activity, as

they will conduct the assessment or sign off of the activity once completed.
Learning Outcomes:
Please refer to the beginning of each module for the learning outcomes that
will be covered per module.
Self AssessmentError: Reference source not found:
You have come to the end of this module – please take the time to review
what you have learnt to date, and conduct a self assessment against the
learning outcomes of this module
5.Error: Reference source not foundError: Reference source not

found Learner Administration
Learner Tip:
The following Learner Administration is critical in assisting your provider in

managing this programme effectively.
Please take a moment to familiarize yourself with the requirements.

or: Reference source not foundError: Reference source not found
Attendance Register

You are required to sign the Attendance Register every day of attendance. Please make
sure you sign daily!

or: Reference source not found Learner Registration Form
Pease refer to the portfolio Guide for the Learner Registration Form. Make sure you
complete it using the Key Document, and submit to your Facilitator before the end of the
contact session with a copy of your ID document.
Learner Tip/Truths:
Without the Learner Registration and ID Documents we will not be able to

register you with SETA for certification purposes.

or: Reference source not found Programme Evaluation Form
At the end of the Learning Guide is a Learning programme Evaluation Form. Please
complete the form before the end of the contact sessions, as this will assist us in improving
our service and programme material. Your assistance is highly appreciated!

(US ID: 116345) Apply the principles of budgeting

within a municipality
Learning Outcomes:
1. Demonstrate an awareness of the role of a budget in the municipal

context.
2. Differentiate between formats of budgets used in a municipality.
3. Evaluate a municipal budgeting system.
4. Contribute to preparing a municipal budget that reflects an

integrated development plan.
5. Differentiate between approaches to preparing a municipal budget.
Introduction
A budget is defined as the formal expression of plans, goals, and objectives of management
that covers all aspects of operations for a designated time period. The budget is a tool
providing targets and direction. Budgets provide control over the immediate environment,
help to master the financial aspects of the job and department, and solve problems before
they occur. Budgets focus on the importance of evaluating alternative actions before
decisions actually are implemented.
A budget is a financial plan to control future operations and results. It is expressed in

numbers, such as dollars, units, pounds, hours, manpower, and so on. It is needed to
operate effectively and efficiently. Budgeting, when used effectively, is a technique resulting
in systematic, productive management. Budgeting facilitates control and communication and
also provides motivation to employees.
Budgeting allocates funds to achieve desired outcomes. A budget may span any period of
time. It may be short term (one year or less, which is usually the case), intermediate term
(two to three years), or long term (three years or more). Short-term budgets provide greater
detail and specifics. Intermediate budgets examine the projects the company currently is
undertaking and start the programs necessary to achieve long-term objectives. long-term
plans are very broad and may be translated into short-term plans. The budget period varies
according to its objectives, use, and the dependability of the data used to prepare it. The
budget period is contingent on business risk, sales and operating stability, production
methods, and length of the processing cycle.
There is a definite relationship between long-range planning and short-term business plans.
The ability to meet near-term budget goals will move the business in the direction of
accomplishing long-term objectives. Budgeting is done for the company as a whole, as well

as for its component segments including divisions, departments, products, projects, services,
manpower, and geographic areas.
Budgets aid decision making, measurement, and coordination of the efforts of the various
groups within the entity. Budgets highlight the interaction of each business segment to the
whole organization. For example, budgets are prepared for units within a department, such
as product lines; for the department itself; for the division, which consists of a number of
departments; and for the company.
Master (comprehensive) budgeting is a complete expression of the planning operations of

the company for a specific period. It is involved with both manufacturing and
nonmanufacturing activities. Budgets should set priorities within the organization. They may
be in the form of a plan, project, or strategy. Budgets consider external factors, such as
market trends, economic conditions, and the like. The budget should list assumptions,
targeted objectives, and agenda before number crunching begins.
SO1. Municipal Budgeting
1.1 Definition of municipal budgeting
What is the Municipal Budget?
The Municipal Budget
 Budget is a projection of future revenues and expenditures

 At a minimum, used to control financial transactions
 Should also be used as a management and planning tool
Operating Budget (Recurrent Budget)
Concerned with the regular operation of services:
 salaries
 pension contributions
 purchase of short-life equipment
 repair and maintenance
 servicing of long-term debt (principal and interest)
Capital Budget
• Concerned with creation of long term assets
Municipal Budget Process
Roles: Administration and Council
 Administration has the responsibility of providing Council with timely, accurate

information and recommendations that will permit Council to approve funding that
provides the residents with the services they require or request. Information must be

in a format conducive to effective decision making (by program, project, department,

etc).
 Council in turn has an obligation to its stakeholders to get feedback on the nature
and level of services requested and the associated cost of providing these services.
This is often done through public meetings, surveys, and consultations.
 Budgeting must take into account goals and objectives established in conjunction
with strategic planning. What is the appetite for the status quo, addition of new
programs, capital needs, development pressures and other matters?
 It is important to avoid getting bogged down in the details. Having strategies for
moving on with the budgeting process is important, including setting dates for budget
meetings. It is important to be cognizant of council’s role as policy setter and trusting
administration to fulfill mandates established by council. Therefore, ensuring the
right balance of detail is provided to satisfy Council and providing additional
clarification at future budget meetings is imperative.
 Should there be ‘contingency funds’ for unforeseen emergencies established in the
budget? Tracking of actual expenses during the year and coding to the appropriate
budget area is often problematic. It is important that council and administration agree
on contingencies.
 How much latitude does administration have with moving budgeted amounts
between expenses within a department? How about moving expenses between
departments?
 The challenge of setting realistic targets for revenues and ensuring all budget
stakeholders take an objective look at the final numbers. For example, are recreation
user fees likely to cover utility costs of the arena?
Roles: Administration and Department Heads
 Administration must have budget responsibilities coordinated internally. Usually

Corporate Services (Finance and Administration) is responsible for summarizing
current expenditures and providing information in a user-friendly format to
department heads.
 Active participation by department managers provides valuable insight on current
year variances, long-term goals, and details about program revenues and expenses.
 Department heads work with Finance officers to develop appropriate estimates
based on level of services to be provided. In addition to councillors, these individuals
may be aware of new initiatives or expansion of existing programs.
 Brief notes should explain major variances between prior year’s actuals and budget.
For example, the impact of escalating fuel costs on road maintenance, the repair
costs for a major water/sewer line break or the change due to a new initiative such as
opening a subsidized day care under Community Services could be highlighted.
 Local government does not usually become involved in the selling of goods. There
can be exceptions; a municipality involved in weed control for instance, may choose
to sell the chemicals required for control at a price without a profit margin in order to
facilitate the lowest possible cost of control.
 The major source of funding for local governments is property taxation and grants.
The rate of taxation will be determined by the final budget. The expenses less other
sources of additional revenue like utilities will be divided by the current assessment
to determine the mill rate. The mill rate is the amount the will be charged per $1,000
dollars of assessment to “levy” the property tax required to fund the current years
operating and capital costs.

 Operational and Capital Budgets should be separated until the full impact of TCA
reporting is understood. This process is in transition with the PSAB requirements for
corporate style financial statements.
 Capital Expenditures are defined in the new TCA policies. These types of expenses
could be funded out of a current year’s revenue but should usually be derived from
long term planning and the creation of previous year’s reserves to self finance large
replacement projects such as water and sewer construction or a swimming pool.
Operating Budgets
 Timing of budget preparation: preliminary would be in the fall with finalization early in
the new year once grants, requisitions, and prior year actuals are available.
 A summary worksheet detailing gross revenues and expenses by
function/department provides the basis for budgeting. Spreadsheet columns could
include: Actuals, Budgeted Amounts, Approved, Variances. Detail at each program
level should be attached.
 Consistent application of a standardized Chart of Accounts provides the basis for
accurate, comparable financial information.
 The MACs system in Alberta has been in place for over 40 years. Example provided.
 Expenses should be broken down by key areas: Salaries/wages, Contracted
Services, Goods and Supplies, Grants to other organizations, Allowances, etc.
 Labour costs consist of projections for permanent, previously approved salaried
positions and wage costs (seasonal short term labour.) Permanent positions and the
applicable pay grades would be approved by Council prior to implementing and
recruiting to a position.
 Labour should be separated by department, which complies with your FIR
breakdowns. Council can request projections by position. Usually there will be a
previously negotiated COLA clause that can be identified and factored in; if not
Administration should be making a recommendation on no change or a change
based on Cost of Living.
Capital Budgets
 Recommend having five to ten year capital budgets updated annually which also
include the use or establishment of internal reserve funds.
 Adequacy of reserves is directly related to capital requirements and council’s attitude
to debenture borrowings or other debt.
 The first items that need to be identified are incomplete Capital Projects carried
forward from the prior fiscal year. Unexpended budgeted revenues should be
transferred to reserves or set up as deferred revenues if the criteria are met. The
impact of these projects must then be worked into the current budget.
 New projects should be defined and methods of funding should be identified –
reserve allocations, grants, current year taxation, offsite levies, or other revenue.
Capital borrowing required must be identified with the appropriate bylaws enacted.

 Equipment replacement is usually done in an orderly fashion over a pre-determined

time frame. Graders, snowplows and vehicles should be part of the Capital
Replacement Plan with appropriate funding determined.
Budget Review after Budget Approval
 Administration should be providing monthly financial summaries to Council. This can

be as detailed as Council requests and deems useful. Again, a word of caution
about providing excess detail. At a minimum, the summary should be by
function/department and include gross revenues, expenses and a brief explanation of
any variances. Proof of monthly bank reconciliations is also generally provided.
 Each quarter there should be a detailed analysis of significant variances provided to
Council.
 Errors in budgeting can occur and therefore these quarterly reviews are the
opportunity to go back to Council and request additional funding if required. As
council has a statutory liability for expenses that exceed budget (In Alberta), they
must be informed on a timely basis should significant budget differences arise.
 The format of the financial information provided to Council should be understandable,
accurate and timely. Municipal financial software often can be used to generate
meaningful reports.
Individual Activity 1:
1. What is municipal budgeting?

2. Describe the municipal budgeting process.
3. Describe the roles of administration and Council in municipal
finance.
1.2 Aims of budgeting
Aims and Objectives of Budgets
Organising
Planning
The organisation's goals are selected and actions established to meet these goals.
Budgeting forces key people in the organisation to plan. Participation by stakeholders in the
budgeting process leads to ownership of the budget and a greater awareness of
organisational requirements.
Leading

The organisation's goals are achieved by assisting organisational members to perform their
planned tasks through:
 communicating the budget's objectives and how they will be achieved; and
 motivating members to focus on their individual budgeted targets.
Organising
The organisation's goals are efficiently achieved by acquiring resources and allocating those
resources in a co-ordinated manner so that all parts of the organisation are efficiently
working towards the same objectives.
Controlling
The attainment of the organisation's goals is measured against set standards. Current
performance is measured and compared against those standards and where necessary
remedial action is taken.
At this stage the budget may be revised and the process begun again.
Financial management
One of the most important duties of a municipal council is to manage its funds effectively.
This means -
 Drawing up a budget - working out what income the municipality will receive and
balancing this with what they think they will have to spend it on
 Protecting the income, capital and assets such as money in the bank, motor vehicles,
computer equipment, by putting in proper controls
 Monitoring the actual income and expenditure and comparing this to the budget
through regular financial reporting and taking action to correct things when necessary
 Auditing on a regular basis and reporting the financial statements to all stakeholders
The Objectives of Budgeting
The objectives of budgeting depend on two key factors:
 the type of budget being produced;

 the organisation for which the budget is being produced.
Budgets have a key function in that they also serve a number of useful purposes which are
key to an organisation’s success, i.e.
 Planning;
 Co-ordination;
 Communication;
 Motivation;
 Control;

 Evaluation.
Planning
Managers are required to produce detailed plans to enable the implementation of the long
term or strategic plan. The annual budgeting process encourages managers to plan for
future operations, refine existing strategic plans and consider how they can respond to
changing circumstances. This encourages managers to anticipate problems before they
arise and ensures reasoned decision making. Without this incentive the pressures of day to
day operations may tempt managers not to plan for future operations and hasty decisions
based on expediency rather than reasoned judgement will be minimised.
Co-ordination
Budgeting facilitates consolidation and co-ordination and allows the actions of the different
parts of the organisation to be brought into a common plan. It also compels managers to
examine the relationship between the different parts of an organisation when making
decisions and in assists in identifying and resolving conflicts. Examples of the type of
conflicts which could arise in a manufacturing setting for example would be between a
purchasing manager who buys in bulk to obtain large discounts, a production manager who
wishes to avoid large stock levels and an accountant who is concerned about the impact on
the business’s cash resources. Budgeting aims to reconcile these differences.
Communication
All managers within the organisation must have a clear understanding of the role which they
are required to play in ensuring budgetary compliance. This ensures that the most
appropriate individuals are made accountable for budget implementation. Senior
management can also use budgets to communicate corporate objectives downwards and
ensure that other employees understand them and co-ordinate their activities to attain them.
The act of preparation as well as the budget itself will also improve communication.
Participation in budget setting relates to the extent that subordinates are able to influence
the figures incorporated in their targets. Participation is often referred to as bottom-up budget
setting whereas a non participatory approach whereby subordinates have little influence on
the target setting process is sometimes called top-down budget setting.
Motivation
Budgets can also provide a motivation for managers to perform in line with organisational
objectives. It therefore sets a standard which under circumstances managers may be
motivated to achieve. It is important, however, that managers are involved in the budget
setting process and that budgets are used as a tool to assist them in managing their

departments. With ‘top-down’ approaches there is a risk that dysfunctional motivational will
occur.

Control
Managers can also use budgets to control the activities for which they are responsible.
Analyses of variances allow managers to identify those costs which do not conform to the
long term plan and therefore may require alteration. By investigating the reasons for budget
deviations managers may also be able to identify inefficiencies.
The budget forms the basis of a controlling mechanism for the various resources of an
organisation which is achieved by comparing the resource measured to the end of a given
period with that which was expected. This approach can be used for all measurable
resources and activities within the organisation – not just those which are directly financial.
Budgetary control highlights variations from the expected in order that management can take
remedial action to ensure that the policy objectives set in the budget can be met. It is a
constant monitoring process and requires continual updating and amendment of the budget
through operational feedback. This also allows for performance against objectives or targets
to be measured.
Evaluation
Budgeting can also be used as an effective management tool. It provides an important

mechanism for informing managers as to how well they are performing in meeting
targets they have previously helped to set and an employee's ability to meet agreed
targets is used is many organisations to determine promotions and bonuses. In this
circumstance budgets will therefore influence human behaviour.
Municipal Budgeting
“A budget serves two primary purposes:
1. to set out a complete programme with regard to all expenditures of the municipality
during the coming year, and the purpose for which they are to be made, and to
forecast the revenues from which such expenditures are to be financed;
2. to provide a method of controlling expenditure so that a municipality may live within
its means.”
• “Municipal budgets should be designed to achieve the following objectives:
 to provide for the management of financial control;

 to provide information essential for useful and efficient management decisions;
 to improve program and financial planning.”
 “Local budgeting should take place within the
structure of a medium-term expenditure framework, both to ensure the proper financing of

investment projects, and to reduce the scope for short-term political manipulation of
budgets.”

Group Activity / Pair Activity 1:
1. Identify and describe the key function of budgeting.

2. Discuss the key factors of the objective of budgeting.
1.3 Importance of the budgeting
Importance of effective municipal financial planning and management
Effective financial management can help municipalities to transform their local areas into a
better place to live and work. Most councillors and members of the community know what
municipal services they would like to have in their area. This dream of the ideal community is
known as a "vision" for the municipality.
One of a councilor's greatest responsibilities is approving and regularly monitoring a

municipality’s budget that provides money to implement the visions. This work should be
done in consultation and co-operation with the ward committee. The community should be
involved as much as possible in deciding what should be the spending priorities for the area
they live in. Ward councillors and ward committees should report to ward meetings about the
broad budget plans and consult the residents about programmes and projects that will affect
them.
Without funds to implement the policies, councillors will not be able to "make a difference" or
serve their communities well. Effective financial management ensures that there are funds
available to implement council policies. This is a great responsibility as municipalities are
responsible for managing large amounts of money and delivering services that affect
people's lives every day. Councillors, committee members and officials all have a duty to
ensure that these monies are managed carefully, transparently and honestly.
Good financial management is the key to local delivery – local activists and ward committee
members should understand municipal finance and budgets so that they can engage
councillors on the bigger debates about spending and development priorities.
What is financial management?
The table below sets out the financial management processes that are used in
municipalities.
PROCESS WHAT IS IT?
Budgeting Working out what income the municipality will get and
balancing this with the planned expenditure, by preparing
detailed plans and forecasts.
Safeguarding Putting in place controls to ensure that the income, capital

and assets such as money, motor vehicles, computer
equipment etc., are safeguarded against misuse, damage,
loss or theft.

Monitoring Monitoring actual income and expenditure and comparing

(Financial this to the budget, through regular financial reporting and
Reporting) corrective action when needed.
Auditing Reporting financial results to all stakeholders by preparing

(Accountability) municipal financial statements that are audited by the
Auditor-General, who reports to Parliament.
Ward committees have the right (and duty!) to discuss, ask questions and make recommendations to
the council on the best ways to generate income, to keep costs down, prevent corruption and
safeguard the assets of the municipality. That is good financial management!
1. Describe the importance of effective municipal financial planning.

2. Describe the financial management processes used in the
municipality.
1.4 Components of a budgeting
The "Financial Year" and budget consultation
The financial year of South African municipalities runs from 1 July of each year to 30 June
the following year. Municipalities must prepare budgets for each financial year. Council must
approve these budgets before the new financial year begins, after proper planning and
consultation with ward committees and other stakeholder groups in the area. For example,
the budget for the financial year beginning in July 2002 must be approved before the end of
June 2002. The draft budget should be ready a few months before so that it can be used for
consultation. (Around March)
The approval of the budget is one of the most important tasks undertaken by councillors,
after consultation with ward committees and other stakeholders.
Ward committees should carefully look at the parts of the budget that affect the people in
their area. Ward councillors can also call ward meetings to discuss the budget. If your
organisation is affected by the municipal budget and plans, invite a councillor to come and
discuss the budget and plans with you. All members of the community also have the right to
observe the special council meeting at which the budget is debated and voted on.
Types of budgets
There are two types of budgets: operating budget and capital budget.
Capital budget deals with big costs that you pay once to develop something, and how you
will pay for this – for example putting in water pipes to a new township.
Operating budget deals with the day-to-day costs and income to deliver municipal services –
for example the meter readers’ wages and maintenance work to keep the water flowing.
The operating budget – the municipality’s operating budget lists the planned operating
expenditure (costs) and income, for the delivery of all services to the community.

Operating expenditure is the cost of goods and services from which there will be short-term
benefit - that is, the services will be used up in less than one year.
For example, the payment of staff salaries results in a short-term benefit as salaried
employees are paid monthly for one month's work. They could resign, next month, and the
municipality would not have the benefit of their skills anymore. Examples of operating costs
are salaries, wages, repairs and maintenance, telephones, petrol, stationery.
Operating income is the amount received for services delivered for a short-term period. For
example, ratepayers pay rates monthly or annually as payment to their municipality for
receiving municipal services. Examples of operating income are property rates, service
charges, investment interest, and traffic fines.
The capital budget - The capital budget puts money aside, for planned expenditure on long-
term purchases and big investments such as land, buildings, motor vehicles, equipment and
office furniture that will be a municipal asset for more than a year - probably for many years
to come.
A municipality's capital budget will list the estimated costs of all items of a capital nature
such as the construction of roads, buildings and purchase of vehicles that are planned in that
budget year.
The difference between the operating and capital budgets
A useful way for to look at the difference between operating and capital expenditure is to
think about the purchase of a car. The purchase of a car is capital as the expected life of the
motor vehicle is much more than one year. The cost of fuel and repairs only provide short-
term benefit (less than a year) and therefore is operating expenditure.
The capital budget and operating budget have to be prepared and discussed together. This
is important because planned expenditure that is included in the municipality’s capital budget
will impact on the operating costs and income needed to "operate" the municipality’s assets,
efficiently.
This link between capital and operating budgets can be explained by using the car example
again. If you decide to buy a car, in addition to including funds for this in your capital budget,
you are going to have to include money in the operating budget for tyres, driver’s wages,
petrol, service and other operating expenses.
The increase in operating expenditure needs to be considered when making a decision on

whether or not to buy a new car. If fuel, tyres, repairs and wages costs cannot be included in
the operating budget because of insufficient funds to pay for them, then the municipality
should not buy the car!
Sources of municipal income
Municipalities must ensure that there will be adequate money to pay for their planned
expenditure if they are to "balance the budget". There are various sources of income that
can be used by municipalities to finance their expenditure. This section outlines the various
sources of municipal income, and looks at ways of deciding which will be best for your
municipality’s needs.

Main sources of capital budget financing
External loans - External loans (from a bank or other financial institution) are an expensive
form of financing the capital budget because of the high interest rates in South Africa.
External loans should only be used to finance the purchase of major capital items such as
roads, buildings, sewerage works and water systems.
Internal loans - Many municipalities have internal "savings funds" such as Capital
Development Funds or Consolidated Loan Fund. These funds can make internal loans to the
municipality for the purchase or development of capital items, usually at a lower interest rate
than for an external loan and the municipality is paying the interest back to its own "savings
fund", which can later be used for another capital project.
Contributions from revenue - When purchasing a small capital item, the small total cost
can be paid for from the operating income in the year of purchase. This financing source is
known as "contributions from revenue". In most municipalities, this source of financing is
used to pay for smaller capital items, such as one or two items of furniture and equipment.
As no interest is payable, this source of financing is considerably cheaper than external or
internal loans.
Government grants - Municipalities may apply to national government for grants for
infrastructure development. The two main funds available are:
 CMIP [Consolidate Municipal Infrastructure Programme] – available from the

Department of Provincial and Local Government
 Water Services Projects – available from the Department of Water Affairs.
Donations and public contributions - Local and foreign donors may sometimes donate a
capital item or money to be used specifically for the purchase of a capital item, in a
disadvantaged area. They may want publicity for their donation, which the municipality can
arrange to acknowledge their sponsorship.
Public/Private Partnerships - Capital costs can be paid for by means of partnerships

between the private sector and the municipality. In most cases the private sector partner will
have a profit motive in the services and capital being financed, so the terms and conditions
must be carefully defined, to protect the community's interests.
Main sources of operational budget financing
Property Rates - All people and businesses who own fixed property (land, houses,
factories, and office blocks) in the municipal area are charged "Property Rates" - a yearly tax
based on the value of each property. Rates income is used by the municipality to pay for the
general services to all people, which cannot easily be charged to a specific service user as a
"service charge" for example roads, pavements, parks, streetlights, storm water
management, etc.
Service Charges / Tariffs - For specific services that can be directly charged to a house or
factory, the principle of "user pays" should be adopted. That is, to charge a price or "tariff" for
services such as water, electricity or approval of building plans; where the exact usage of the
service can be measured, to the person or business who actually used that service.
Fines -Traffic fines, late library book fines, penalties for overdue payment of service
charges: these fines are another source of income or "revenue" , while at the same time

motivating users of services to have a culture of obeying democratic laws, rules and
deadlines.
Equitable share - The equitable share is an amount of money that a municipality gets from
national government each year. The constitution says that all revenue collected nationally
must be divided equitably [fairly] between national, provincial and local spheres of
government. The local government equitable share is meant to ensure that municipalities
can provide basic service and develop their areas. The amount a municipality gets depends
mainly on the number of low-income people in the area – rural municipalities usually get
more. Most municipalities only get a small part of their operating budget from the equitable
share.
Components of the Capital Budget
 Inventory of Capital Assets

 Developing a Capital Investment Plan (CIP)
 Developing a Multi-Year CIP
 Developing a Financing Plan
 Implementing the Capital Budget
Public participation and Acceptance of the
Capital Budget is Crucial
 Degree of Urgency
 Benefits Derived
 Cost and Financial Impact
 Acceptability
1. Identify the types of municipal budgeting.

2. Describe the difference between the operating and capital budgets.
3. Identify the sources of municipal income.
1.5 Key stages within the budgeting process
Important Stages in Budgeting Process
A Budget is basically a financial document that encompasses planning for future savings and
expenses. It provides a future picture of the expenditures and revenues and also helps in t
he future spending pattern whether it be an organization or an individual.

There are not eight but six key steps in the Budgeting Process which are as follows:
 Determine your total monthly income

 Separate the expenses into fixed expenses and variable expenses.
 Find your discretionary income which is the difference between the expenses and the
total income.
 List all of your unsecured debts which includes the credit card bills, monthly interest
payments etc.
 Determine if there is any income left after paying off the debts. If the amount is in
negative, you must skip the 5th step. You must work on making this figure positive.
 Establish long term and short term goals according to your needs. Make a list and
get started this very month.
The Budget process stages
STAGE 1: Estimates. Part A - Expenditure
 The Constitution requires the government to present to Parliament a statement that

shows separately the expected revenues and expenditures, both current and capital
by heads of account.
 The Budget-making process, in normal times, gets set in motion by the third quarter
of the financial year.
 On the expenditure side, initial estimates are provided by the various ministries.
There are two components of expenditure - plan and non-plan. Of these, plan
expenditures are estimated after discussions between each of the ministries
concerned and the Planning Commission.
 Apart from allocations for continuing plan programmes initiated in earlier fiscal year,
the Planning Commission decides on the new programmes that can be undertaken
on the basis of a tentative estimate or resources available for plan expenditure that is
provided to it by the finance ministry.
 Non-plain expenditure for various ministries are prepared by their financial advisors.
These are sent to the expenditure secretary who, after exhaustive discussions with
financial advisors, makes an assessment of the likely expenditures for the ensuing
fiscal year.
 In one sense, the assessment of likely non-plan expenditure is comparatively simple.
Nearly 90 per cent of the non-plan expenditure is accounted for by interest payments,
subsidies (mainly on food and fertilisers) and wage payments to employees.
STAGE 1: Estimates. Part B - Revenue
 Parallel to the exercises on the expenditure side, an assessment is made of the

revenues which are likely to flow into the government kitty. Revenue receipts, like
expenditure, are of two types - capital and current receipts.
 Capital receipts include repayment of loans made by the federal government,
receipts from divestment of public-sector equity and borrowings - both domestic and
external.
 Current receipts, by and large, include tax revenues, receipts by way of dividends
from public-sector units and interest payments on loans given out by the federal
government.
 While both dividends from public-sector units and interest receipts are fairly easy to
assess, the amounts received by way of tax revenues is estimated on the basis of

existing rates of taxation and an assessment of the likely growth and inflation rate
over the ensuing fiscal year.
 On the capital receipts side, targeted amounts to be realised through divestment of
public sector equity and amounts to be realised by way of repayments of loans is
made. All the estimates flow to the revenue secretary.
STAGE 2: First estimates of deficit
 Once this exercise is completed expenditure estimates are matched with revenue
estimate to arrive at a first estimate of the shortfall in revenue to meet projected
expenditure.
 Following this the government, in tandem with its chief economic advisor, determines
the optimum level of borrowings that the government can resort to.
 The level of external borrowings is an easily estimated figure because much of the
external borrowing on government account consists of bilateral and multilateral
assistance which is known by the time budget exercises are undertaken.
 The level of domestic borrowing depends partly on the desired level of fiscal deficit
that the government targets for itself. A part of the revenue gap is left unfilled to be
met through the issue of ad hoc treasury bills. Over the past few years, this gap,
called the overall budget deficit, is government by an understanding between the
Reserve Bank of India and the finance ministry on the maximum level of ad hoc
treasury bills that can be issued during a fiscal year.
 This has been done to ensure that the issue of ad hoc treasury bills to fill revenue
gaps does not lead to problems of monetary management.
STAGE 3: Narrowing of the deficit
 After the targets for the fiscal deficits and the overall budget deficit have been
decided by the government, any remaining shortfall is filled through a revision in tax
rates where considered feasible and in keeping with fiscal incentive structure the
government wishes to put in place to stimulate the growth in different sectors.
 Subsequently adjustments are made in expenditures, should it be required, to ensure
that the fiscal and overall deficit remain at targeted levels.
 Such adjustments in expenditure are usually made on the plan side - the only item of
expenditure that offers any scope for adjustments. With nearly 90 per cent of non-
plan expenditure being accounted for by interest payments, subsidies and
administrative expenditure and the political sensitivities involved in reducing
subsidies, non-plan expenditure of the Indian government is characterised by an
extraordinary degree of rigidity.
 Inevitably, therefore, plan expenditures are determined as a residual after pre-
emptions have already been made for non-plan expenditure.
STAGE 4: The Budget
 The presentation of the Budget for the ensuing fiscal year (beginning April 1) is
usually done on the last working day of February. Parliamentary scrutiny of proposals
and the passage of the budget does not normally get completed until the second
week of May, well after the commencement of the new fiscal year.
 Since expenditures cannot be incurred in a new fiscal year without Parliamentary
approval, the government usually seeks an interim approval to meet emergent
expenditures that have to be incurred pending the approval of the budget.

1. Identify the key steps in the Budgeting Process.

2. What are the importance stages of budgeting process
So2. Municipal formats of budgets
2.1 Budget formats
Objectives of the budget formats reform
The objectives of the budget formats reform are to:
Ensure that municipal budget and financial reporting formats support the other financial
management reforms introduced by the MFMA;
Improve the local government spheres’ ability to deliver basic services to all by –
 addressing issues of financial sustainability; and

 facilitating informed policy choices and medium term planning of service
delivery by requiring targets to be aligned to achieve backlog elimination
If Councils are provided succinct and understandable financial and non-financial information
they will be better able to take informed decisions that promote effective financial
management, and that are aligned to service delivery performance.
Transparency, accountability and ‘understand ability’ are vital components of this

overarching objective. The allocation of financial resources aligned to service delivery
targets is intended to make it abundantly clear what services are being promised when
budgets are approved, when plans are varied and when actual service delivery achievement
is measured against the approved plans.
Formalise the norms and standards governing municipal budget and financial reporting
formats, so as to improve the credibility, sustainability, transparency, accuracy, and reliability
of budgets and in-year reports of municipalities and municipal entities, provide budget format
certainty and align budget format policy to financial\ reporting policy.
Specific aims of the budget formats
The budget formats were designed to achieve the following specific aims:
1. Strengthen the links between transparency, understandability and accountability. The

budget formats provide these links by –
 requiring that information covering seven years be presented, consisting of

the previous three financial years, the current year, the budget year, and the
following two MTEF years;

 ensuring consistency between budget and reporting formats (monthly,

midyear performance assessment, SDBIP and the reports relating to
municipal entities); and
 Ensuring consistency with national and provincial government reporting
requirements.
In financial management reforms elsewhere “a principle result of budget reform has been the
creation of a more transparent and user-friendly budget document”
These formats aim to achieve this in a number of ways:
 general alignment of financial reporting formats and the annual financial

statements to key budget format reforms;
 alignment of budget and reporting formats with generally recognised
accounting practice (GRAP) and principles; and
 Developing formats that are consistent across the entire budgeting and
reporting cycle; i.e. budget, adjustments budget, s71 reporting, municipal
entity budgeting and annual financial statements.
2. Promote ‘good practice’ in municipal financial reporting through –
(a) Promoting simplicity ahead of complexity by –
• ensuring terminology is consistent between all formats; and

• promoting the use of charts so as to simplify the interpretation of trends and
the impact of budgetary decisions.
(b) Ensuring standardisation across the local government sphere by very clearly specifying
the information requirements. This will enable municipalities and their information system
suppliers to develop software and report writing formats that are unlikely to need to be
changed in future. It will also facilitate reporting on the ‘whole-of-local government’, and thus
contribute to improved ‘whole-of government’ reporting, monitoring and evaluation.
(c) Developing a standardised budget structure that municipal councils will use to approve
municipal budgets. The structure will promote long-term consistency in monitoring
performance, and will preserve comparative financial performance history even when the
organisational structure of a municipality changes. The standardised structure provides that
–
All municipalities approve revenue and expenditure according to:
 a ‘modified’ GFS1 standard classification

 a vote structure that can be adapted to the needs of the municipality
 revenue by source and expenditure by type
• Allmunicipalities approve capital expenditure by GFS standard classification and by a vote

structure that reflects the needs to the municipality
• ensure that municipalities with entities will also approve a budget on a similar basis to the
‘parent’ entity and so achieve effective financial management control and consolidation; and

• promote vote approval flexibility that can facilitate improved budget control given the
specific organisational structure of each municipality. This recognises that structures vary
significantly across municipalities within South Africa.
The advantage of using GFS standardisation is that it transcends local requirements and
local changes in organisational structure.
(d) Minimising the cost of compliance and information gathering. The format templates are
designed to assist municipalities with the development of budgets, and so minimise the cost
of complying with the Municipal Budget and Reporting Regulations.
(e) Ensuring consistency and comparability with other spheres of government. This is
achieved by –
• presenting information across a seven-year time horizon as is done in national and

provincial budgets; and
•aligning the formats to the maximum extent possible with those prescribed for national and
provincial government, taking into consideration differences in accounting approaches.
It is anticipated that this will also facilitate credit rating agency and financial institution
understanding and assessment of municipal budgets.
1. Identify the types of municipal budgeting formats.

2. Describe the objectives of the municipal budget formats.
3. What are the aims of the budget formats?
2.2 Various formats of budgets
Different Budget Formats
Maintaining a budget can keep you organized, help to reduce stress and assist you with
planning for the future. However, responsible financial planning can require more than one
budget or spreadsheet. It's important to determine what formats you will need before
beginning to outline your budget and goals.
Tax Budgeting
Every year you will need to file taxes, but waiting until the last minute can cause
unnecessary stress. Consider keeping a separate tax budget. This spreadsheet format
works well for all people who work, but especially for freelancers or independent contractors
who need to track earnings. Set up a spreadsheet and take a few minutes every day to
record your earnings. At the end of the year, you will have a clear record of your taxable
income.
Zero Budgeting

Zero budgeting is a type of budget format that tracks your income and expenses. This type
of budget works well for people who have a consistent income, enabling them to track every
dollar that is going in and out of their bank account. To do this, add up all of your income and
all of your expenses, and then divide your money into categories such as rent, groceries,
electric, gas and other expenses. Sticking with the plan is key to this type of budgeting. One
tool to keep on track is to separate categories into envelopes with cash so that you have a
visual indicator of how much money you have left to spend in each category.
Long-Term Budgeting
For future financial goals, consider a long-term planning budget. This type of spreadsheet
will help you to create long-term goals and balance your expenses to achieve those goals
within a certain time period. The spreadsheet will calculate how much you have already
saved in your account and how much you have left to save to meet your goal by a certain
date.
Necessity and Luxury Budgeting
This type of budget format works well for young people who may not have the same types of
long-term goals as people who are saving for a house or retirement. Necessity and luxury
budgeting can teach teenagers to save for certain items such as clothes and electronics
without using a credit card. This budget format is very similar to zero-budgeting on a more
simple level.
Group Activity / Pair Activity 6
Identify the different formats of budgeting and give a brief description of

each.
2.3 The existing practices within a municipality
South African municipalities are required by law to use the Integrated Development Plans
(IDP) as a basis for formulating their budgets. To form the basis of municipal resource
allocation, IDP entail the integration of municipal strategic planning and budgeting processes
and a shift from input to outcomes based budgeting. Budgeting can be seen as the process
of resourcing strategic plans within available finances, in order to give effect to policies and
ensure service delivery. Without an understanding of the strategic priorities, public resources
end up not being directed in a way that achieves maximum impact.
Weaknesses in linking planning and budgeting practices in South Africa
Due to heavy resource requirements of the IDP process, municipalities were only required to
table an interim IDP in 2000 – a process that was met with mixed success. In 2002/2003 all
municipalities were required to table their first five-year IDPs. In the sample reviewed, the
IDP and budget processes are typically not integrated, nor have IDPs had a meaningful
impact on these municipalities’ budgeting processes. This section looks at a number of

contributing factors. Some of these may well be “teething problems”, but others are probably
more structural in nature.
 Municipalities tend to see the IDP and budget processes as separate.

 The IDP is still a new process and not clearly understood by all role-players.
Therefore there is a lack of clarity around the status of the IDP and what it should include.
Many municipalities and communities do not view the IDP as a prioritisation process and use
the IDP to produce “wish lists”. Councillors have been reportedly changed IDP plans after
IDP adoption without any adjustment to municipal budgets. Up until 2002, transfers to
municipalities from other spheres of government tended to be gazetted too late to inform
municipal planning processes. Whether the indicative allocations for transfers given for outer
years of the MTEF provided in the 2002 Division of Revenue Act are accurate enough to
allow for more informed budget planning remains to be seen.
Recent municipal demarcations have caused massive organisational restructuring in

municipalities. The organisational continuity required to carry out a process as complex as
the IDP is thus often lacking.
Municipal staff lacks necessary financial, project management and business planning skills
for the development of suitable project proposals and business plans that would result in
quicker disbursements from National and Provincial departments.
Up until November 2002 the assignment of powers and functions of core municipal services
to districts and locals has been unclear. This affected the willingness of municipalities to
allocate resources to these services, meaning that sectoral plans with accompanying
financial plans have not been developed.
There are alarming information voids in municipalities which range from a lack of information
on communities to costs of service provision. Municipalities are unable to model the
implications of varying tariff and rates levels on total revenue or realistically forecast the
financial implications (both capital and operational) of service expansion projects identified in
IDPs.
Municipalities are typically not collecting all revenue due from communities. The causes of
this are economic, structural and, in some instances, political. Predictions of future revenue
streams are thus not credible, undermining any existing linkage between IDPs and budgets.
Furthermore, municipalities are hard pressed to accumulate surpluses that could be used to
finance capital projects that often more a key component of IDPs.
Recommendations as to how integrating planning and budgeting can be

enhanced at the local level in South Africa.
As many of the problems mentioned above are interlinked, a holistic approach to developing
a set of solutions is required. The problems mentioned above could, however, be seen in the
context of four themes - information, capacity, process and structure.
The following sources of information are necessary to provide a means by which planning
and budgeting could be better integrated:
 Detailed databases of municipal communities that allow the grouping of

community members according to service levels received, charges levied and

collection rates. This would allow for easy tariff and rates modelling and an
understanding of affordability levels
 Detailed cost information on services and service expansions to provide
credible financial plans.
 Corporate level systems producing information in formats understandable to
all departments.
To improve the integration of planning and budgeting a number of skills should be

developed.
 Project design and specification skills leading better proposals and business
plans would allow IDP role-players a better understanding the financial
commitments, potential revenue sources and time spans involved in the
project.
 Municipal officials and councillors need to understand the process of
specifying objectives, outputs and outcomes in specific terms to aid current
budget reform processes.
 All role-players need view IDPs as a political process involving prioritising
activities so that remain within the resource constraints faced by
municipalities and not merely as a formality.
 Capacity in conflict resolution and negotiation would aid municipal officials,
politicians and communities to compromise where there are differences in
priorities.
The separation of the IDP and budget processes could be identified as the principle cause of
IDPs not impacting budgets. The following recommendations can be made in this regard:
 The IDP must be seen as the basis on which the budget is formed and
adjustments to the budget must be consistent with the IDP.
 The budget and IDP timetables within the municipality must be aligned to
ensure that the processes occur simultaneously and are integrated
 To conflict, the measurable performance objectives required by both the
Municipal Finance Management Bill and the Municipal Systems Act should
coincide in the IDP and the budget.
Municipalities need to restructure their organisations to encourage interdepartmental

communication and coordination. One way of doing this is to create an office that ensures
senior municipal management and the executive drive the IDP process.
Group Activity / Pair Activity 7
1. Describe the recommendations as to how integrating planning and

budgeting can be enhanced at the local level in South Africa
2. Discuss the Weaknesses in linking planning and budgeting practices
in South Africa

SO3. Municipal budgeting system
3.1 Improving the format of a municipal budget
Improving the Budgeting Process
One of the most non-value-added activities within financial management is budgeting.

Budgets are prepared to allocate and control how resources will be used in the future.
Unfortunately, the future is hard to predict and upper-level management doesn't always
communicate with people who prepare budgets. Because of poor communication, budgeting
becomes an exercise in futility. Some of the main problems associated with budgeting are:
 Poor communication from decision-makers.

 Too many people involved in the process.
 Budgets don't help manage our business.
 Budgets are outdated by external events.
 Budgets are difficult to revise.
Since upper-level management often circumvents the budgeting process, the first thing to do
in budgeting is to find out what does management expect from the budgeting process ?
Next, make sure management decision making is linked to the budgets. You can accomplish
this by creating budgets within the strategic planning process. Don't forget to include
external factors when preparing budgets. Outside events and issues can impact your budget
estimates.
Budgets should be easy to revise. When new planning data pops up, your budgeting
process should adopt and accept this new data. Hold you're cost centers responsible for
meeting their budgets. This can force feedback from end-users for improvements in the
budgeting process. If you find yourself always revising a budget, consider preparing several
budgets or setup a contingency budget if you expect changes. Prepare the basic outline or
summary of a budget and get approval before you spend lots of time preparing detail
budgets. Or better yet, try to reduce the detail in your budgets to streamline the entire
process.
Budgeting should be a dynamic process within strategic planning. The more your budgets
can react to change, the closer budgeting will be to a value-added activity. If your budgets
don't add value to decision making, than it's time to improve the process.
1. What are the main problems associated with budgeting?

2. Explain how you can improve the municipal budgeting format?

3.2 Approach of budgeting
The Main Approaches to Budgeting
“A budget is a comprehensive, formal plan, expressed in quantitative terms, describing the

expected operations of an organization over some future time period”
In any of the described approaches to budgeting, the key point is that the budget is a
management tool to assess whether the business is on track, or adjustments are required.
Budgets should take account of market conditions such as margin pressure, macroeconomic
factors such as changing tax legislation, as well as internal factors such as resource
allocation.
Incremental Budgeting
In Incremental Budgeting last year’s budget is used as a starting point for the new budget,
and a number of increases are ‘pre-programmed’. These include inflationary increases,
salary increases, and overall market growth increases.
Usefulness
Incremental budgeting is relatively easy to implement, but it has a number of serious

limitations, including:
 An inherent assumption that the current methodology and cost structure is the best
way, and should be built upon
 It encourages people to have expectations of inflationary increases in salary and
business, for doing the same role in a changing market
 It assumes that existing customers will grow in line with market growth, without
accurately reflecting the incremental costs of winning new customers
 It encourages departments to spend all of their allocated budget to ensure that there
is an increase next year
Zero Based Budgeting (ZBB)
In ZBB the budget for any activity at the start of each year is set at zero. All expenditure
must be justified on a cost/benefit basis, including justification of continuing existence.
Usefulness
ZBB introduces an environment where only the projects that deliver the best cost/benefit to
the organisation will succeed. This tends to focus all company resources on agreed goals
and objectives, since by inference, successful delivery of a justified project will deliver
cost/benefit. ZBB also gives managers a better understanding of the other parts of the
organisation, and the priorities of the company, as they can see relative project priorities. In
principle, ZBB leads to the most efficient allocation of resources, as they have to be justified
and deployed to the most important projects on a cost/benefit basis.
The limitations of ZBB include:

 Huge effort required to prepare cost/benefit analyses

 The focus on money-driven decisions can lead to short-term thinking rather than
long-term strategic thinking.
 There is a tendency to assume that since the budget approves all spending, that all
business decisions will somehow lie within the ‘Oracle of the budget’
Base Budgeting (BB)
In BB, Phase 1 of the budget is designed with ‘just enough’ resources to run the organisation
as a going concern. Any incremental spending above this level must be justified on a
cost/benefit basis.
Usefulness
BB is less resource intensive than ZBB, but once again has some limitations, including:
 Who decides ‘just enough’ resource allocation?

 ‘Just Enough’ is impacted by the anticipated revenue/margin levels, and the product
mix. For example, revenue of R1M may require one warehouse as a minimum, but
R2M may require three warehouses.
 BB does nothing to promote better productivity in the ‘Just Enough’ resource space.
For example, if the warehouse is always included, and alternatives such as
outsourcing are not considered, what incentive is there to drive costs down in the
warehouse?
Activity Based Budgeting (ABB)
In ABB, the budget recognises that it is activities which generate cost in a business, and the
desire is to control these cost drivers. For each identifiable activity, the cost of a unit is
measured, the demand is measured, a budgeted cost is set for each unit of activity, and the
budget is designed around activity terms (e.g. Laptop Z3200 Product Build) rather than the
traditional functional areas (e.g. Manufacturing).
Usefulness
ABB means that costs can be assigned to activity and product level, rather than averaged
out across a number of products or services. This means that real cost behaviour and cost
drivers can be analysed, leading to better cost focus and more targeted customer pricing.
ABB requires a large effort to measure and analyse activities, and assumes a causal, linear
relationship between activity and overheads. This may be erroneous, as multiple factors may
drive the costs, including the sharing of costs over activities, and the method of allocating
fixed and variable costs.
Kaizen Budgeting
Kaizen implies continuous improvement. As such, a Kaizen Budget is designed with

anticipated cost improvements integrated at the start of the year.

Usefulness
The process of designing a Kaizen Budget encourages analysis of performance

improvements and cost savings. The cost/benefit of any improvement can be analysed in
terms of best fit for the company. For example, if a department states a predicted saving of
Rx by changing a process, but to do so would lead to increased costs of >Rx in another, it
should be analysed in more detail. This is an example of sub-optimisation - “Situations
where a sub-system is configured such that its performance appears to be optimal, yet the
performance of the larger system is prejudiced.”
1. Identify different type’s approaches of budgeting.

2. Describe the limitations of the following:
 Incremental Budgeting
 ABB
 ZBB
3.3 Annual budgeting
Any budget that is prepared for a 12-month period. An annual budget outlines both the
income and expenditures that are expected to be received and paid over the coming year.
Annual budgets are used by individuals, corporations, governments and various other types
of organizations.
How to Set an Annual Budget
It seems to be the least sexy part of running a business, but maintaining a realistic budget -
and paying attention to it - can make or break your company.
Setting an Annual Budget: The Road Map to Profitability
An operating budget is a prediction of all expected revenues and expenses over a 12-month
period. It projects your gross and net sales, along with your net profits or losses.
On the expense side, it includes both one-time expenditures such as equipment purchases
and ongoing costs such as rent.
Some expenses commonly included in budgets are:
 Rent
 Insurance
 Personnel, including payroll taxes
 Costs of purchasing or producing your product
 Sales and marketing
 Phone, Internet, and utilities
 Repairs and maintenance
 Outside services (accounting, legal etc.)

 Fees and licenses

 Interest
 Depreciation
 Office supplies
 Company vehicles, travel
An operating budget allows you to try out different assumptions in advance for variables like
pricing and staffing, so you can take your best shot at making a healthy profit.
Setting an Annual Budget: Cash Flow is King
Novice business owners sometimes neglect the second kind of budget: a cash-flow budget.
But in fact, it is problems with cash flow rather than profitability that cause many new
businesses to fail.
Positive cash flow means you have enough money on hand to pay your bills at any given
point in the year. A business can be profitable but still have cash-flow problems if, for
instance, it has to shell out money in advance for inventory but doesn't receive payment from
buyers until months later.
"You can operate at a loss for a while – a lot of small businesses do when they start out –
but you can't operate with a negative cash flow," Long says.
To create a cash-flow budget, start with the assumptions about income and expenses that
you developed for your operating budget. Then figure out, month by month, when you can
expect to receive payments and when you'll have to pay bills.
"You may bill clients this month but not collect from them for 60 or 90 days," says Suiter. "If
you can see beforehand that you'll be short of cash, you can arrange to get a line of credit,
or borrow money, or pay (bills) out of your personal reserve."
Setting an Annual Budget: The Start-up Budget Challenge
Ongoing businesses can use the prior year's financial data as a starting point in setting next
year's budget. But start-ups don't have this advantage. They've got to come up with all their
budget numbers from scratch. Some questions you should ask yourself include: How much
should we charge for your product or service? How many units of it will we be able to sell in
our first year? How much will we need to spend on inventory or production? How many
employees will we need, and what will they cost when we add in payroll taxes, workers'
comp insurance, and benefits?
Owners of start-up businesses should do detailed research on their industry, their

competition and their target market to answer these kinds of questions.
Talk to owners of similar ventures that are not your direct competitors. Look at aggregate
industry data: You can find free financial benchmarks for a number of industries at Biz Stats,
or at some other sites mentioned by Long in her blog.

1. What are the expenses commonly included in business budgets?

2. Describe the setting of an annual budget.
3.4 Budgetary control processes
Budgetary control methods
a) Budget:
 A formal statement of the financial resources set aside for carrying out specific activities in
a given period of time.
 It helps to co-ordinate the activities of the organisation.
An example would be an advertising budget or sales force budget.
b) Budgetary control:
 A control technique whereby actual results are compared with budgets.
 Any differences (variances) are made the responsibility of key individuals who can either
exercise control action or revise the original budgets.
Budgetary control and responsibility centres;
These enable managers to monitor organisational functions.
A responsibility centre can be defined as any functional unit headed by a manager who is
responsible for the activities of that unit.
There are four types of responsibility centres:
a) Revenue centres
Organisational units in which outputs are measured in monetary terms but are not directly
compared to input costs.
b) Expense centres
Units where inputs are measured in monetary terms but outputs are not.
c) Profit centres
Where performance is measured by the difference between revenues (outputs) and

expenditure (inputs). Inter-departmental sales are often made using "transfer prices".
d) Investment centres

Where outputs are compared with the assets employed in producing them, i.e. ROI.
Advantages of budgeting and budgetary control
There are a number of advantages to budgeting and budgetary control:
 Compels management to think about the future, which is probably the most important
feature of a budgetary planning and control system. Forces management to look
ahead, to set out detailed plans for achieving the targets for each department,
operation and (ideally) each manager, to anticipate and give the organisation
purpose and direction.
 Promotes coordination and communication.
 Clearly defines areas of responsibility. Requires managers of budget centres to be

made responsible for the achievement of budget targets for the operations under
their personal control.
 Provides a basis for performance appraisal (variance analysis). A budget is basically

a yardstick against which actual performance is measured and assessed. Control is
provided by comparisons of actual results against budget plan. Departures from
budget can then be investigated and the reasons for the differences can be divided
into controllable and non-controllable factors.
 Enables remedial action to be taken as variances emerge.
 Motivates employees by participating in the setting of budgets.
 Improves the allocation of scarce resources.
 Economises management time by using the management by exception principle.
Problems in budgeting
 Whilst budgets may be an essential part of any marketing activity they do have a
number of disadvantages, particularly in perception terms.
 Budgets can be seen as pressure devices imposed by management, thus resulting
in:
a) bad labour relations
b) Inaccurate record-keeping.
Departmental conflict arises due to:
a) disputes over resource allocation

b) Departments blaming each other if targets are not attained.
 It is difficult to reconcile personal/individual and corporate goals.
 Waste may arise as managers adopt the view, "we had better spend it or we will lose
it". This is often coupled with "empire building" in order to enhance the prestige of a
department.

Responsibility versus controlling, i.e. some costs are under the influence of more than one
person, e.g. power costs.
 Managers may overestimate costs so that they will not be blamed in the future should
they overspend.
Characteristics of a budget
A good budget is characterised by the following:
 Participation: involve as many people as possible in drawing up a budget.

 Comprehensiveness: embrace the whole organisation.
 Standards: base it on established standards of performance.
 Flexibility: allow for changing circumstances.
 Feedback: constantly monitor performance.
 Analysis of costs and revenues: this can be done on the basis of product lines,
departments or cost centres.
Budget organisation and administration:
In organising and administering a budget system the following characteristics may apply:
a) Budget centres: Units responsible for the preparation of budgets. A budget centre may
encompass several cost centres.
b) Budget committee: This may consist of senior members of the organisation, e.g.
departmental heads and executives (with the managing director as chairman). Every part of
the organisation should be represented on the committee, so there should be a
representative from sales, production, marketing and so on. Functions of the budget
committee include:
 Coordination of the preparation of budgets, including the issue of a manual

 Issuing of timetables for preparation of budgets
 Provision of information to assist budget preparations
 Comparison of actual results with budget and investigation of variances.
c) Budget Officer: Controls the budget administration The job involves:
 liaising between the budget committee and managers responsible for budget
preparation
 dealing with budgetary control problems
 ensuring that deadlines are met
 educating people about budgetary control.

1. Identify the different types of budget responsibility centres.

2. Describe the Characteristics of a budgeting.
3. Identify the methods of budget control.

SO4. Integrated development plan
4.1 sector plans and municipal budget
Integrated development plan must reflect
a) The municipal council’s vision for the long term development of the municipality with
special emphasis on the municipality’s most critical development and internal
transformation needs;
b) An assessment of the existing level of development in the municipality, which must
include an identification of communities which do not have access to basic municipal
services;
c) The council’s development priorities and objectives for its elected term, including its
local economic development aims and its internal transformation needs;
d) The council’s development strategies which must be aligned with any national and
provincial sectoral plans and planning requirements binding on the municipality in
terms of legislation;
e) A spatial development framework which must include the provision of basic

guidelines for land use management system for the municipality;
f) The council’s operational strategies;
g) Applicable disaster management plans;
h) A financial plan, which must include a budget projection for at least the next three
years; and
i) The key performance indicators and performance targets determined in terms of

section 41.
Section 27 stipulates that:
1) Each district municipality, within a prescribed period after the start of its elected terms and
after following a consultative process with the local municipalities within its area, must adopt
a framework for integrated development planning in the area as a whole;
2) A framework referred to in subsection (1) binds both the district municipality and the local
municipalities in the area of the district municipalities;
3) The framework must ensure proper consultation, co-ordination and alignment of the IDP
Process of the district municipality and the various local municipalities.
Alignment between IDP, Budget and PMS

In terms of the Municipal Systems Act, municipalities are required to prepare organisational
performance management system that must be linked to the IDP. Tremendous progress has
been made with the process of aligning the IDP, Budget and Performance Management
System (PMS). Every endeavor is made in the 2010-11 financial year to link and integrated
these three processes to an even greater extent through the Process Plan. It should
however, be noted that the PMS on its own requires an in-depth process comparable to that
of the IDP. Such PMS is tightly linked and guided by the IDP and Budget processes.
The PMS process will address the following issues:
 Alignment of the PMS, Budget and IDP processes;
 Implementation of individual performance management system at managerial level
The IDP, performance management systems (PMS) and budget are all components of one
overall development planning and management system. The IDP sets out what the
municipality aims to accomplish, how it will do this. The PMS enables the municipality to
check to what extent it is achieving its aims. The budget provides the resources that th e
municipality will use to achieve its aims. As indicated earlier, every attempt has been made
in this process plan to align the IDP and PMS formulation and/or review, and the budget
preparation process.
1. Discuss the link between IDP and municipal budget.
4.2 Integrated development plan
1. WHAT IS INTEGRATED DEVELOPMENT PLANNING?
Local municipalities in South Africa have to use "integrated development planning" as a

method to plan future development in their areas. Apartheid planning left us with cities and
towns that:
 Have racially divided business and residential areas

 Are badly planned to cater for the poor - with long travelling distances to work and poor
access to business and other services.
 Have great differences in level of services between rich and poor areas
 Have sprawling informal settlements and spread out residential areas that make cheap
service delivery difficult.
Rural areas were left underdeveloped and largely unserviced. The new approach to local
government has to be developmental and aims to overcome the poor planning of the past.

Integrated Development Planning is an approach to planning that involves the entire

municipality and its citizens in finding the best solutions to achieve good long-term
development.
An Integrated Development Plan is a super plan for an area that gives an overall framework
for development. It aims to co-ordinate the work of local and other spheres of government in
a coherent plan to improve the quality of life for all the people living in an area. It should take
into account the existing conditions and problems and resources available for development.
The plan should look at economic and social development for the area as a whole. It must set
a framework for how land should be used, what infrastructure and services are needed and
how the environment should be protected
All municipalities have to produce an Integrated Development Plan (IDP). The municipality
is responsible for the co-ordination of the IDP and must draw in other stakeholders in the area
who can impact on and/or benefit from development in the area.
Once the IDP is drawn up all municipal planning and projects should happen in terms of the
IDP. The annual council budget should be based on the IDP. Other government departments
working in the area should take the IDP into account when making their own plans.
It should take 6 to 9 months to develop an IDP. During this period service delivery and
development continues.
The IDP is reviewed every year and necessary changes can be made.
The IDP has a lifespan of 5 years that is linked directly to the term of office for local
councillors. After every local government elections, the new council has to decide on the
future of the IDP. The council can adopt the existing IDP or develop a new IDP that takes
into consideration existing plans.
The executive committee or executive mayors of the municipality have to manage the IDP.
They may assign this responsibility to the municipal manager.
In most municipalities, an IDP co-ordinator is appointed to oversee the process. The IDP co-
ordinator reports directly to the municipal manager and the executive committee or the
executive mayor.
The IDP has to be drawn up in consultation with forums and stakeholders. The final IDP
document has to be approved by the council.
2. WHY IS IT NECESSARY TO DO AN IDP
There are six main reasons why a municipality should have an IDP:
 Effective use of scarce resources
The IDP will help the local municipality focus on the most important needs of local
communities taking into account the resources available at local level.

The local municipality must find the most cost-effective ways of providing services and
money will be spent on the causes of problems in local areas.
For example, a municipality may decide to allocate resources to building a canal that will
prevent homes being damaged during the flood season. This will reduce the financial burden
placed on the municipality’s emergency services.
 It helps to speed up delivery
The IDP identifies the least serviced and most impoverished areas and points to where
municipal funds should be spent. Implementation is made easier because the relevant
stakeholders have been part of the process.
The IDP provides deadlock-breaking mechanisms to ensure that projects and programmes are
efficiently implemented. The IDP helps to develop realistic project proposals based on the
availability of resources.
 It helps to attract additional funds
Government departments and private investors are willing to invest where municipalities
have clear development plans.
 Strengthens democracy
Through the active participation of all the important stakeholders, decisions are made in a
democratic and transparent manner.
 Helps to overcome the legacy of apartheid
Municipal resources are used to integrate rural and urban areas and to extend services to the
poor.
 Promotes co-ordination between local, provincial and national government
The different spheres of government are encouraged to work in a co-ordinated manner to

tackle the development needs in a local area.
For example: The Department of Health plans to build a clinic in an area. It has to check that
the municipality can provide services like water and sanitation for the effective functioning of
the clinic.
3. WHO ARE THE STAKEHOLDERS IN THE IDP PROCESS?
 Municipality
The IDP guides the development plans of the local municipality.
 Councillors

The IDP gives councillors an opportunity to make decisions based on the needs and
aspirations of their constituencies.
 Communities and other stakeholders
The IDP is based on community needs and priorities. Communities have the chance to
participate in identifying their most important needs.
The IDP process encourages all stakeholders who reside and conduct business within a
municipal area to participate in the preparation and implementation of the development plan.
 National and provincial sector departments
Many government services are delivered by provincial and national government departments
at local level -for example: police stations, clinics and schools. Municipalities must take into
account the programmes and policies of these departments. The departments should
participate in the IDP process so that they can be guided how to use their resources to address
local needs.
4. WHAT IS THE IDP PROCESS?
Before starting the planning process, an IDP Process Plan must be drawn up. This plan is
meant to ensure the proper management of the planning process.
This plan should outline:
 The structures that will manage the planning process

 How the public can participate and structures that will be created to ensure this participation
 Time schedule for the planning process
 Who is responsible for what
 How will the process be monitored
At District Council level, a framework will be developed in consultation with all local
municipalities within the district. This framework will ensure co-ordination, consultation and
alignment between the district council and local municipalities. The framework will guide the
development of the IDP Process Plan for each local municipality.
The process undertaken to produce the IDP consists of 5 phases:
PHASE 1 ANALYSIS
During this phase information is collected on the existing conditions within the municipality.
It focuses on the types of problems faced by people in the area and the causes of these
problems.
The identified problems are assessed and prioritised in terms of what is urgent and what
needs to be done first.

Information on availability of resources is also collected during this phase.
At the end of this phase, the municipality will be able to provide:
 An assessment of the existing level of development

 Details on priority issues and problems and their causes
 Information on available resources
PHASE 2: STRATEGIES
During this phase, the municipality works on finding solutions to the problems assessed in
phase one.
This entails:
 Developing a vision -
The vision is a statement of the ideal situation the municipality would like to achieve in the
long term once it has addressed the problems outlined in phase one. The following is an
example of a vision statement:
An economically vibrant city with citizens living in a secure, healthy and comfortable
environment
 Defining development objectives
Development objectives are clear statements of what the municipality would like to achieve
in the medium term to deal with the problems outlined in phase one.
For example: Provide access to clean water for all residents living in the informal settlement
 Development strategies
Once the municipality has worked out where it wants to go and what it needs to do to get
there, it needs to work out how to get there. A development strategy is about finding the best
way for the municipality to meet a development objective.
For example: Co-operate with the Department of Water Affairs to provide one water stand
pipe for every 20 households.
 Project Identification
Once the municipality has identified the best methods to achieving its development objectives
it leads to the identification of specific projects.
PHASE 3: PROJECTS
During this phase the municipality works on the design and content of projects identified
during Phase 2.

Clear details for each project has to be worked out in terms of:
 Who is going to benefit from the project?

 How much is it going to cost?
 How is this project going to be funded?
 How long would it take to complete?
 Who is going to manage the project?
Clear targets must be set and indicators worked out to measure performance as well as the
impact of individual projects.
PHASE 4: INTEGRATION
Once all projects have been identified, the municipality has to check again that they
contribute to meeting the objectives outlined in Phase 2. These projects will provide an
overall picture of the development plans.
All the development plans must now be integrated. The municipality should also have overall
strategies for issues like dealing with AIDS, poverty alleviation and disaster management.
These strategies should be integrated with the overall IDP.
PHASE 5: APPROVAL
The IDP is presented to the council for consideration and adoption. The Council may adopt a
draft for public comment before approving a finalised IDP.
5. THE IDP AND PUBLIC PARTICIPATION
The DPLG proposes that an IDP Representative Forum be established to encourage the
participation of communities and other stakeholders.
The forum may include.
 Members of the executive committee of the council

 Councillors including district councillors
 Traditional leaders
 Ward committee representative
 Heads of departments and senior officials from municipal and government department
 representatives from organised stakeholder groups
 People who fight for the rights of unorganised groups – e.g. A gender activist
 Resource people or advisors

 Community representatives (e.g. RDP Forum)
The purpose of the this forum is to:
 Provide an opportunity for stakeholders to represent the interests of their constituencies.

 Provide a structure for discussion, negotiations and joint decision making
 Ensure proper communication between all stakeholders and the municipality
 Monitor the planning and implementation process
A code of conduct should be drawn up for these forums that provides details on:
 Meetings – frequency and attendance

 Agenda, facilitation and recording of proceedings
 Understanding the role of various stakeholders as representatives of their constituencies
 How feedback to constituencies will take place
 Required majority for decisions to be taken
 How disputes will be resolved
The Council should also approve a strategy for public participation. The strategy must decide,
amongst other things, on:
 The roles of the different stakeholders during the participation process

 Ways to encourage the participation of unorganised groups
 Method to ensure participation during the different phases of planning
 Timeframes for public and stakeholder response, inputs and comments
 Ways to disseminate information
 Means to collect information on community needs
1. Who are the stakeholders in the IDP process?

2. Describe the IDP process.
3. Explain the main reasons why a municipality should have an
IDP?
4.3 Role of measurable performance
PERFORMANCE MANAGEMENT SYSTEMS

The framework of Chapter 6 of the Local Municipal Systems Act requires municipalities to
develop performance monitoring systems that are intended as strategic management tools
to enable municipalities to :
 Monitor their own performance in the implementation of IDPs

 Improve efficiency, effectiveness, quality and accountability in delivery of services
 Enable communities to hold municipalities accountable for performance.
Integrated Development Plans are regarded by government as the primary tool to re-
orientate local authorities to be more “ developmental”, customer-focused and effective in
meeting basic needs. The IDP process has :
 Identified the needs and priorities

 Established development objectives
 The setting of local key performance indicators and targets that are feasible.
Performance management is aimed at ensuring that municipalities monitor their IDPs

and continuously improve their operations and in terms of Section 19 of the Local
Government Municipal Structures Act, that they annually review their overall
performance in achieving their constitutional objectives. A local Performance
Management System must :
 Set appropriate performance indicators, including outcomes and impact, with regard
to the municipality’s development priorities and objectives set out in the IDP
 Set measurable targets
 Monitor performance
 Measure and review performance at least once a year
 Aim to improve performance
 Establish a process of regular reporting.
As there is currently no performance management system in Buffalo City Municipality, such

a performance management framework is required to be developed during the first year of
the IDP which will satisfy the legal requirements as summarized above. The framework for
Performance management for Buffalo City should describe how the processes of
performance planning, monitoring, measurement, review and reporting will happen. The
framework must also indicate how the above process will be organized and managed, by
determining the functions of different role-players.
The Local Government: Municipal planning and Performance Management Regulations,

2001, require that the system must : -
(a) comply with al the requirements set out in the Municipal systems Act ;
(b) demonstrate how it is to operate and be managed from the planning stage up to the
stages of performance review and reporting ;

(c) clarify the roles and responsibilities of each role player, including the local community, in
the functioning of the system ;
(d) clarify the processes of implementing the system within the framework of the integrated
development planning process ;
e) determine the frequency of reporting and the lines of accountability for performance ;
(f) relates to the municipality’s employee performance management processes.
Group Activity / Pair Activity
Describe the performance management system of IDP.
4.4 IDP budgeting.
LINKING THE BUDGET AND IDP
The Integrated development Plan (IDP) is a strategic document that clearly outlines the city’s
development objectives and provides a policy framework that guides management in
decision making related to budgeting and planning of the city.
In terms of the eThekwini Municipality we have an eight-point plan within the IDP that is
outcomes based :-
 Sustainable economic growth and job creation

 Fully serviced, well maintained, quality living environments
 Safe and secure environment
 Healthy and empowered citizens
 Embracing our cultural diversity
 Sustaining the natural built environment
 Democratising local government
 Financially viable and sustainable local government
Budgeting is a careful juggling/balancing act
Input from all stakeholders considered and prioritisation
In compliance with the Municipal Structures Act and MFMA the city’s budget must be
informed by and aligned to the IDP objectives
The budgetary allocations for both capital and operating expenditure needs to be undertaken
in a manner that will not only ensure that the IDP outcomes are achieved but also leads to
the city’s vision being realised
This is an evolutionary process – capital easier than operating
It is a process not an event and requires continuous improvement to the budget and IDP
processes to ensure a seamless process eventually

However, we can commence with alignment on operating side and ensure that the key
priorities of the IDP are given a bigger slice in terms of new spending
PROCESS : BUDGET LINK TO IDP
• IDP Approval & Budget Review

• Assess previous year’s spend
• Commitments
• Approve budget Principles (capital and operating), which provide guidance on how
allocations are made and budgets are spent. Principles are drawn from intent of IDP.
• Key projects prioritised as identified in the IDP and allocated budgets (if not
previously budgeted as part of MTEF)
• inalisation of budget process
• Review and prioritise all requests
• Finalise impact of tariff inceases
• Approval by Council
• Feedback/presentation to business, community based organisations and wards
• Prepare SDBIP
• Quarterly monitoring
SERVICE DELIVERY BUDGET IMPLEMENTATION PLAN (SDBIP)
The MFMA requires municipalities to prepare a service delivery and budget implementation
plan as a strategic financial management tool to ensure that budgetary decisions that are
adopted by municipalities are aligned with the IDP strategy
The SDBIP serves to provide an implementation plan that covers all functional areas of the
municipality and focuses on actual implementation and delivery with mechanisms for regular
review
The primary objective of the SDBIP is to strengthen local accountability and governance
and improve capital, as well as operational, planning, spending and service delivery
To avoid issues related to budgets being underspent and not achieving the programme’s
desired outcomes an outline of quarterly projections of service delivery targets and
performance indicators are also included.
Describe the link of budget and IDP.

SO5. Municipal budget
5.1 Approaches of municipal budget
Approaches to Municipal Budgeting
There are many ways to approach budgeting for governments such as cities, towns,
counties, states, and the federal government. Several of the most common approaches to
budgeting for municipalities will be discussed and analyzed in the following paragraphs. The
primary emphasis in this paper is on cities, rather than county, state or federal units.
Performance-Based
Another budgeting approach, which is based on allocating resources (via budgets) to desired
levels of support for government programs or services, is called performance budgeting, or
performance-based budgeting. Rivenbark & Kelly (2006, p. 36) state that "Performance
budgeting occurs when performance results are used to inform decisions during budget
preparation and adoption." Or, performance budgeting may attempt to identify desired levels
of specific outcomes and then allocate funds to the program or service based on a per unit
cost allocation (Franklin & Carberry-George, 1999). Performance measures may be used to
inform budget decisions and allocation of funds when the budget request is new or
significantly expanded from prior periods (Rivenbark & Kelly, 2006).
Hybrid Approach
Many municipalities use a combination of two or more budgeting frameworks in their

approaches to budgeting, a contention supported by a study performed by Franklin and
Carberry-George (1999). For example, a local governmental unit may primarily rely on an
incremental budgeting approach, but also has input from citizens through budget hearings.
In fact, budget meetings or hearings that are open to the public are often mandated by
statute.
And some municipalities may collect performance measures without adopting a formal
performance measurement system; for example, public safety departments usually monitor
call volumes and/or response times, but may not directly tie those measures to the budget
process (Rivenbark & Kelly, 2006).
THE MUNICIPAL BUDGETING PROCESS
The budgeting process is the essential first phase of a municipality’s financial management
cycle. This includes a variety of related activities and programs that, if carried out with care
and diligence, will produce a valuable planning tool for the municipality to use as a guide in
the management and operation of the municipality. “Municipal budgets are developed to
cover a three-year budget period, which forms the medium term planning framework. Budget
tables will show figures for the actual fiscal year, plus for the following two years.
The value of the medium-term planning framework for budgeting is that it:
a) Makes budget plans more predictable

b) Can be aligned to the longer term plans of the IDP
c) Highlights priority areas by showing whether expenditure is increasing or decreasing.
The importance of budgeting in municipalities
The following are some of the advantages of developing and using a realistic budget:
a) Budgeting sets standards for controlling costs ahead of time
b) Allows regular comparisons of estimated costs to actual costs during a given fiscal or
financial period. Knowing where the Council is in terms of its financial picture is important.
c) Budgeting must also be done in order to establish the tax rates for a municipality
d) It ensures that realistic planning of programs, services and estimated revenues is

undertaken
e) Budgeting provides a vehicle for communicating the plans and activities of Council to the
general public, the provincial government or to other agencies.
The benefits of Budgeting
Control
Control sets limits for employees; permit top management to identify deviation from plans
and individual commitments.
Motivation
A good budget system allows individual employees to participate in performance target

setting and to have the benefit of immediate feedback on their performance through budget
reports.
Evaluation
Another benefit of budgeting is that it provides an objective basis for rating performance.
1. What are the benefits of budgeting?

2. What is the importance of budgeting in the municipality?
3. Describe the municipal budgeting process.
5.2 advantages and disadvantages of the municipal budgeting

approach
From the perspective of the municipal government, the idea of participatory budgeting does
have the potential to allow the local government to draw upon the collective experience of
businesspeople as well as others within the community. That experience can sometimes

provide additional insight into the benefits of key services or projects that help to increase
the standard of living and the appeal of the municipality to others who may be looking for a
home. While this approach can be somewhat more cumbersome than the creation and
management of a budget by a few appointed or elected officials, participatory budgeting can
also make the process of financial management of the city’s assets much easier over the
long run.
While processes for participatory budgeting may vary slightly, depending on the size of the
municipality or community involved, most approaches will involve a few basic steps. This
begins with citizens and officials identifying priorities for inclusion within the budget, creating
delegate committees to assist in the planning, working with officials to develop proposals
that are presented to the city at large, based on the style of government involved, and finally
a public vote on the allocations within the budget. Since this approach allows citizens from
all economic classes and backgrounds to participate, the outcome usually has a greater
share of support in the wider community than would be possible using other methods.
PITFALLS IN CITY BUDGETING
In budgeting, cities may use “Base Budget Additions,” where money is added every year to
each category rather than using the Zero Based Budgeting approach in which every program
and expenditure has to be justified each year. This could lead to unnecessary expenditures.
Another potential pitfall is that individual city departments may not be well-trained in the
budgeting process. They might not approach the process analytically, which often leads to
irrational requests for expense line items. They may look at the total dollar and not the
underlying components of expenses. Usually they look at previous numbers and build on
them without justifying future expenses. They are either not fully cognizant or intentionally
ignore the relevant.
Incremental budget
• This is a budget prepared using a previous period’s budget or actual performance as

a basis with incremental amounts added for the new budget period
• The allocation of resources is based upon allocations from the previous period.
• This approach is not recommended as it fails to take into account changing
circumstances
• Moreover it encourages “spending up to the budget” to ensure a reasonable
allocation in the next period. It leads to a “spend it or lose” mentality.
Advantages of incremental budgeting
• The budget is stable and change is gradual.

• Managers can operate their departments on a consistent basis.
• The system is relatively simple to operate and easy to understand.
• Conflicts should be avoided if departments can be seen to be treated similarly.
• Co-ordination between budgets is easier to achieve.
• The impact of change can be seen quickly.
Disadvantages of incremental budgeting
• Assumes activities and methods of working will continue in the same way.
• No incentive for developing new ideas.
• No incentives to reduce costs.
• Encourages spending up to the budget so that the budget is maintained next year.

• The budget may become out of date and no longer relate to the level of activity or
type of work being carried out.
• The priority for resources may have changed since the budgets were set originally.
• There may be budgetary slack built into the budget, which is never reviewed-
managers might have overestimated their requirements in the past in order to obtain
a budget which is easier to work to, and which will allow them to achieve favourable
results.
1. Describe the advantages and disadvantages of different

budgeting approaches.
5.3 strengths and weaknesses of budgeting approaches
Strength & Weaknesses of Payback Approach in Capital Budgeting
Capital budgeting involves the financial planning needed for companies to expand and grow.
This type of planning enables companies to leverage existing and future cash flows while
reaping the best possible profits. As one of many methods of capital budgeting, the payback
approach helps companies identify rates of return on an investment or project. The strengths
and weaknesses of the payback approach can vary depending on the types of projects
under consideration.
Capital Budgeting
Companies considering expansion projects, research and development plans or new product
line offerings use capital budgeting as a way to compare the costs and benefits of different
project options. Companies invest large amounts of cash for long periods of time, so project
selection becomes a priority. Different capital budgeting methods use different criteria for
determining the strengths and weaknesses of each project. One company may wish to know
each project's profit earnings capacity while another focuses on each project's overall costs
versus revenues. Companies concerned with recouping the monies invested in a project
may opt to use the payback period approach in their capital budgeting process.
Payback Period Approach
With any project investment, companies attempt to maximize their return on investment in
one way or another. For some companies, recouping their initial cost in as short a time as
possible provides the maximizing effect needed. The payback period approach enables a
company to calculate the length of time it will take before a project generates as much
money as it costs. When comparing two or more project options, the length of time it takes
each project to pay for itself becomes the determining factor in project selection when
companies use the payback period approach. In other words, the faster a project can recoup
its initial investment cost the more likely a company will consider investing in it.
Strengths
The payback approach may offer advantages in cases where a company has certain time
requirements in terms of how long a project will take to pay for itself. Because of its focus on

cost returns, companies can use the payback approach as an initial screening tool when
comparing two or more project options. Knowing how long an investment will take to pay for
itself also comes in handy in cases where project investments tie up large amounts of money
for long time periods. For companies just starting, a need for cash flow may require a project
to generate a fast return on investment. The payback approach helps identify which projects
offer the quickest payback period.
Weaknesses
Because different capital budgeting methods emphasize different aspects of a project

investment, the weaknesses in the payback approach result from its focus on the payback
period. Other important factors to consider in project selection involve a project's profit
earnings capacity, overall return on investment and time period comparisons. Projects that
require a long payback period may actually generate larger returns than a project with a
short payback period. The payback approach provides little to no information regarding the
rates of return when comparing two or more project options, meaning one project may
generate increasing returns after a longer period of time. In effect, the payback approach
leaves out information regarding profitability during project payback periods as well as any
profits made after payback periods end.
In your own groups discuss the strength and weaknesses of different

budgeting approaches.
5.4 Budgeting Legislation.
The one bill deals with the approval of unauthorised expenditure while the other facilitates
the transfer of money to the South African National Roads Agency Limited (SANRAL) to
assist with the e-tolls debt.
The Finance Act focuses on the approval of unauthorised expenditure for the defence and
military veterans departments as well as correctional services.
The Public Finance Management Act defines unauthorised expenditure as either

overspending of a budget vote or expenditure that falls outside the scope of the vote.
Spending on something that is not government policy is also deemed to be unauthorised.
In the first two schedules, amounts of approximately R40 million and R21 million are
authorised for the defence and military veterans departments.
The amounts refer to a number of financial years.
In the third schedule, a total of approximately R484 million was authorised for the
correctional services department.
It applies to the 2008/9 financial year.

According to the act, the expenditure must be charged against the budget allocations of the
correctional services department over the next three years.
The Additional Adjustments Appropriation Act allows for national treasury to provide R5.75
billion to SANRAL to help pay for the Gauteng Freeway Improvement Project (GFIP).
On budget day this year, the finance minister, Pravin Gordhan, announced that the capital
injection had been approved. The money was to be made available in the current financial
year.
SANRAL had incurred a debt of R20 billion for GFIP during the construction phase.
BASIC BUDGET LAWS
What laws govern the budget cycle?
The budget cycle can be divided into three distinct phases that are generally sequential and
yet intertwined. The first phase, which culminates in the transmittal of the President's budget
proposals to the Congress, is called the budget formulation phase. In the next phase, the
Congress acts upon laws that together constitute the enacted budget. Once the laws have
been enacted, executive agencies carry out the laws in the budget execution phase. The
budget cycle is governed mainly by the following laws, which we describe below:
 Budget and Accounting Act.

 Congressional Budget Act.
 Ant deficiency Act.
 Impoundment Control Act.
 GPRA Modernization Act of 2010 (formerly Government Performance and

Results Act).
 Credit Reform Act.
Why is the Budget and Accounting Act important?
Before enactment of this law in 1921, there was no annual centralized budgeting in the
Executive Branch. Government agencies usually sent budget requests independently to
congressional committees with no coordination of the various requests in formulating the
Government's budget. The Budget and Accounting Act required the President to coordinate
the budget requests for all Government agencies and to send a comprehensive budget to
the Congress. It created the Bureau of the Budget, now the Office of Management and
Budget (OMB), to help the President implement these requirements. It also required the
President to include certain information in the budget. These are some of the requirements:

• "On or after the first Monday in January but not later than the first Monday in
February of each year, the President shall submit a budget of the Government for the
following fiscal year."
• "Each budget shall include a budget message and summary and supporting
information. The President shall include in each budget the following...." The
provision goes on to list about thirty items, such as expenditures and receipts for the
past year through the fourth year following the budget year, information on debt,
financial information, and information on employment levels.
1. Explain why is the Budget and Accounting Act important?

2. Identify the laws that govern the budget cycle.
Portfolio Activity: Assignment
1. Identify the different approaches for preparing a municipal budget.

2. Describe the schedule for integrated development planning and
municipal budget processes.
3. What is the impact of human aspects in budgetary control processes?
4. How best can you improve the format of a municipal budget?
5. Define the following:
a) Municipal budget
b) OMB
c) IDP
6. Identify the key stages within the budgeting process.
Resources:
Read more: Different Budget Formats | eHow.com

http://www.ehow.com/info_7960833_different-budget-
formats.html#ixzz1wHCb56Me
Read more:http://www.investopedia.com/terms/a/annual-
budget.asp#ixzz1wHe0l4M9
Read more: Strength & Weaknesses of Payback Approach in Capital

Budgeting | eHow.com http://www.ehow.com/info_10071038_strength-
weaknesses-payback-approach-capital-budgeting.html#ixzz1wKfLkR7v

Self Assessment
Self Assessment:
You have come to the end of this module – please take the time to review
what you have learnt to date, and conduct a self assessment against the
learning outcomes of this module by following the instructions below:
Rate your understanding of each of the outcomes listed below:
Keys:  - no understanding
 - Some idea
 - Completely comfortable
SELF
RATING
NO OUTCOME
  
1.
Demonstrate an awareness of the role of a budget in the municipal
context.
2.
Differentiate between formats of budgets used in a municipality.
3.
Evaluate a municipal budgeting system.
4.
Contribute to preparing a municipal budget that reflects an
integrated development plan.
5.
Differentiate between approaches to preparing a municipal budget.

Learner Evaluation Form
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US ID: 116345 Learner Guide

Apply the principles of budgeting within a municipality 1

Developed by BBT INSTITUTE info@nsaconsulting.co.za

Apply the principles of budgeting within a municipality 2

Apply the principles of budgeting within a municipality 3

Main sources of capital budget financing.......................................................................25

Apply the principles of budgeting within a municipality 4

Base Budgeting (BB).....................................................................................................38

Apply the principles of budgeting within a municipality 5

SERVICE DELIVERY BUDGET IMPLEMENTATION PLAN (SDBIP)...........................53

Apply the principles of budgeting within a municipality 6

ACKNOWLEDGMENTError: Reference source not foundError:

 National Department of Education

 NSA (Nsamba) consulting and training

Apply the principles of budgeting within a municipality 7

Preface:Error: Reference source not foundError: Reference source

Apply the principles of budgeting within a municipality 8

IntroductionError: Reference source not foundError:

The qualifying learner will be able to:

 Explain the various approaches to budgeting within their organisation

 Contribute to the efficient allocation of resources at municipalities

 Ensure that municipal funds are used effectively and efficiently.

UNIT STANDARD ESSENTIAL EMBEDDED KNOWLEDGE

 Various budget formations.

 How strategic planning integrates with budgeting.

 Legislative requirements for municipal budgeting

 The link between budgeting and service delivery.

UNIT STANDARD CCFO IDENTIFYING

UNIT STANDARD CCFO WORKING

Apply the principles of budgeting within a municipality 9

community, e.g. through communicating with others regarding legislative issues

UNIT STANDARD CCFO ORGANISING

UNIT STANDARD CCFO COLLECTING

UNIT STANDARD CCFO COMMUNICATING

UNIT STANDARD CCFO SCIENCE

UNIT STANDARD CCFO DEMONSTRATING

UNIT STANDARD CCFO CONTRIBUTING

2.2Error: Reference source not found Learner Support

Apply the principles of budgeting within a municipality 10

3.Error: Reference source not found Assessment

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You will be required to complete a Portfolio of Evidence for summative assessment

If it is not documented, it did not happen!

Apply the principles of budgeting within a municipality 11

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You will be required to complete an activity in your group or in pairs with

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Complete the assessment activity that will be assessed as part of your

Reflect on the question(s) asked to identify the relevance of learning

A useful tip or essential element regarding the concept under discussion is

Apply the principles of budgeting within a municipality 12

Content matter that is critical to the understanding of the module. The

Refer to your Mentor or Workplace Supervisor to assist in this activity, as

Self AssessmentError: Reference source not found:

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The following Learner Administration is critical in assisting your provider in

Please take a moment to familiarize yourself with the requirements.

Apply the principles of budgeting within a municipality 13

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Without the Learner Registration and ID Documents we will not be able to