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How to read a balance sheet, interpret a budget and stick to it ...
How to read a balance sheet, interpret a budget and stick to it

Knowing how to read a balance sheet is not just essential for people who play fast and loose on the stock market. With the government's drive to publish the equivalent of a commercial balance sheet for the public sector, councils will also have to fine tune their financial savvy.

The balance sheet is a document which sets out the council's financial position. It shows what it owns and what it owes. A balance sheet incorporates all the council's funds, both capital and revenue, and what the money is spent on.

With 'whole of government accounts' on the horizon, councils will have to make their financial processes even

more transparent. The Treasury claims this will make tax and spend decisions more open and honest. If it works, formal accounts and budgets will be aligned across the public sector, taxpayers will find it easier to see what their money pays for, and liabilities, assets and revenues will be outlined in black and white.

Already, local government is having to adopt the same kind of accounting techniques as central government, and much of what council finance directors now do is becoming increasingly transparent.

Therefore interpreting and sticking to a budget is becoming more important than ever. In theory, the rules are simple - work out how much a department brings in, how much it spends and where it all goes.

Start by calculating income and expenditure over a period of time. A long enough timespan must be used to include the unpredictables that often befall the best-laid plans. Then establish what has to be accomplished within the budget.

If expenditure exceeds income, then what is paid out must be cut or what come in increased - always tricky for councils charged with providing good services while under huge pressures not to increase taxes.

That is why budgeting theory is something of a chimera in the world of local government, where overspend and debt are almost unavoidable. So, if the books cannot be perfectly balanced, at least know exactly where the money goes and eliminate any black holes.

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