Integrating forecasts into decision-making.

AuthorKavanagh, Shayne
PositionBest Practices

Forecasting can be a powerful tool that informs financial decisionmaking, but financial forecasts are surprisingly ineffective in influencing decision makers. (1) What steps can be taken, then, to make forecasts more meaningful to the people who need them?

The answer lies in the power of the organizational milieu--especially procedures, policies, and institutional identity --to shape the decisions we make. A simple thought experiment illustrates the power of milieu in public financial management to shape financial choices in local governments. Exhibit 1 invites you to consider two hypothetical cities, imaginatively named A and B. Assuming both cities face similar socio-economic conditions and are run in similar ways, which one do you think will make better use of forecast information and make consistently better choices?

The hypothetical cities above imply that governments need to focus on three key areas: financial policies, budgeting practices, and strategic planning. Establishing a solid foundation of policies, procedures, and goals makes it easier to evaluate forecasts in light of existing protocols and institutional objectives, and is therefore necessary in building an organizational milieu that readily incorporates forecasts into the decision-making process.

ESTABLISH FINANCIAL POLICIES

How can public managers create an environment that supports using financial forecasts to make decisions? Financial policies are a good place to start. Financial policies establish local standards for acceptable and unacceptable courses of financial action, guidelines under which the government can operate, and a standard against which the government's fiscal performance can be judged. Financial policies provide details to back up the principles, without crossing the line into administrative procedure. Types of financial policies that are especially important for creating a good environment for using forecasts in decision making include:

* Reserves. A reserve is the portion of fund balance (or working capital, in an enterprise fund) that is put aside as a hedge against risk. A reserve policy establishes the desired level of fund balance to maintain as a hedge--for example, the policy might require the government to maintain reserves equal to at least 17 percent of its regular operating revenue. A reserve policy implies the need for good forecasting to predict whether reserves will remain at desired levels, given future revenues and spending.

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