Federal financial management: How governments can do more with the budgets they have

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Throughout the world, people have been seeing higher prices at the grocery store, the gas pump, and elsewhere in their daily lives, and many are adjusting how they budget in response.1 Costs are going up for federal governments too, yet agencies and departments may not register that decrease in buying power for months or even years, making it harder for them to deliver on missions and maximize the impact of taxpayer funds.

Although this current inflationary period will pass, it highlights a perennial question for government leaders: How can we deliver more to the people we serve with the budget we have? In our experience across the US federal government, we’ve heard agency heads and other leaders ask questions such as the following:

  • Which costs are truly fixed and which ones are adjustable?
  • What percentage of fiscal flexibility do we have in our budget and how can we double it?
  • What are the true, fully loaded costs of our key outputs?
  • What is driving costs up and what can we do to reduce them?

Building internal financial tools can help answer all these questions by boosting financial management agility and transparency. Government agencies have long sought to bring clarity and transparency to their large and complicated budgets; indeed, this was a major focus of congressional oversight and department-level regulations as early as the 1960s. In the 21st century, however, digital tools have opened up a new horizon of opportunity for the public sector. They can help leaders develop a “decision making” view of finances and automate reporting to “close the books” sooner, creating more capacity for finance teams to partner with operations and tie financial resources directly to mission outcomes.

Enabling strategic decision making

For many federal agencies, the year-round activities of budgeting and ensuring legal and regulatory compliance typically absorb the bulk of the finance team’s time, attention, and resources. That already considerable strain on capacity is often exacerbated by additional reporting requirements to senior, external government organizations.

However, narrowly focusing on financial compliance can obscure financial transparency, thwart agility, and stymie the potential for fruitful collaborations between the finance team and other parts of the organization. This is not to diminish the crucial role that financial transaction and process expertise play in federal agencies, but when federal finance teams are focused primarily on compliance and reporting, it’s harder for them to support more strategic decision making.

To move beyond compliance, we’ve identified three best-practice solutions from the private sector that federal agencies and departments could consider utilizing to enhance strategic financial management.

  1. Boost internal transparency by developing a “decision making” view of finances. Large, private-sector organizations often have robust internal reporting to build a more holistic view of funds and costs. The most ubiquitous of these tools is the “profit and loss statement,” which is viewed and acted upon internally at least once a month. Other tools include budget portfolios for product and service lines, monthly spending plans, and monthly analysis comparing those plans to what was actually spent. Tools like these can foster greater financial transparency to help answer questions like: How much additional funding will we have this year? How effective is our current spending plan? Does it match our priorities? How much is it truly costing to deliver this current product, service, or capability? These private-sector tools look and feel quite different than the reporting required of public-sector agencies for financial oversight, and given the resources required to maintain compliance with statute, it can feel difficult to add other reports and analyses to the finance team’s plate. However, the strategic value of a decision-making view can begin to emerge quickly with a few key shifts.

    Leaders can start building internal financial tools by organizing finances along core sets of program and mission priorities that are likely to endure as leadership, administrations, and fiscal priorities change (exhibit). These priorities can (and often are) distinct from the overarching organizational structure, but once they have been identified, financial resources can be directly linked and allocated to them to drive specific mission goals. Funding types and expenses can be segmented by program area—lines that are ideally high level enough to warrant engaging leadership, while providing enough detail to drive truly informed decision making. For example, the “revenue line” could include four to seven funding types by category and source of funding. Costs can then be categorized as either “direct” or “indirect,” and additional subcategories can be added that are relevant to specific organizations and program areas.

    Though complex, federal agencies and departments could generate initial views of financials and start identifying opportunities within weeks. One military service organization recast its budget from a “source of funds” to “four stated missions,” identified $400 million in contract savings, and improved internal discussions on balancing strategic portfolio decisions.

  2. Close the books sooner by automating data reporting. Automating financial reporting in full or in part helps private-sector organizations to close out their books every month, giving them near-real-time data to drive decisions. Federal government agencies could do the same. Advanced tools can generate a near-real-time visualization of finances and enable deep dives to support categorization and reporting that is consistently correct.

    Federal agencies could start building this capability by creating a joint finance and IT/digital team to build bespoke, automated tools that capture data across the organization. This team is ideally helmed by a senior leader who can champion its development and convey the impact of its efforts to other agency heads. Once the team is in place, it can align on developing tools to capture and visualize core program data through an automated process. It will likely require new ways of thinking and working for these tools to reflect all the financial nuances of the organization. Notably, the optimal level of precision and detail they yield entails weighing how much effort it would take to produce those granular findings, against the level of impact that information could deliver: for example, would it make sense to invest three months of effort to yield data that is accurate down to the exact dollar?

    One $40 billion government agency that developed these tools dramatically reduced the time it took to close its books, from five weeks to three days. These tools enabled leaders to know almost in real time when they were approaching overruns or underruns. In 2020, this agency achieved a 5 percent reduction in annual costs, despite unpredictable demand for its services and in the face of extreme supply chain disruptions.

  3. Create an operations-finance partnership. When finance teams have more bandwidth, they can think more strategically and gain a deeper understanding of how finances affect mission outcomes. For example, the extra time and resources recaptured from automated data collection can be invested in other efforts such as working more closely with operational leaders to enhance program resilience and shifting the focus of meetings from documentation and reporting to discussing trends, opportunities, and alternative courses of action.

    Greater bandwidth can be used to strengthen the operations-finance partnerships, shifting both mindsets and capabilities. Financial and operational leadership could work together to develop a joint decision-making view—one that achieves the optimal level of detail to drive informed decisions. They can review automated visualizations monthly to compare budgeted finances to actual finances, discuss actions to adjust for in-year cost overruns or underruns, determine where resources may need to be realigned to deliver on a priority program or mission, and make other data-driven decisions. They can also compare their agency’s cost structure with other organizations to identify and address inefficiencies.

    This may require reskilling members of the finance team. The approach could also be rolled out as a pilot involving one program and one conversation between finance and operations leadership. Then, as the new ways of working unfold and feedback helps improve outcomes, more programs could be added.

    One military service organization recast its budget along new “mission areas” to drive investment decisions and portfolio management within its operations organization. The new financial views enabled operational leaders to better understand portfolio trade-offs and the underlying resources needed to deliver on each mission. As a result, the finance team plays an integral role in portfolio-level decisions and shaping the “out years” (three- to five-year horizon) of the organization’s budget.

    Similarly, one federal law enforcement agency accounts for every single dollar that has been allocated to each of its mission areas in its end-of-year financial report. This allows the agency to view its portfolio based on mission outcomes over time and, if necessary, make trade-offs across and within each of them.

Reorienting finances from an organizational basis to an activity basis can help federal agencies tie resources directly to mission outcomes.

Image description:

A flow diagram with two columns and connections in between shows a case study of a government organization where finances are reoriented from a departmental basis to an activity basis. The left column shows rectangles representing departments in the organization to demonstrate how an agency’s budgets were built departmentally, with limited linkage between costs and the activities that spurred them. The right column shows rectangles representing different “service lines.” Lines from the departments in the left column flow into the service lines, with multiple departments sometimes flowing into one service line. This demonstrates how moving to an activity basis allowed a team to increase transparency around the decisions that spurred costs, shaping how the organization thinks about its finances.

End of image description.

Automating financial reporting in full or in part helps private-sector organizations to close out their books every month, giving them near-real-time data to drive decisions.

Navigating a complex and ever-changing financial landscape is challenging, especially when organizational resources are not tied directly to desired outcomes. For many federal agencies, closing the gap between resourcing decisions and mission impacts could help them deliver more with the budgets they have. Building internal financial tools, automating capabilities, and creating a joint finance and operations team can serve as initial steps to guide their efforts, and help them achieve greater financial transparency, agility, and impact for the American people.

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