Embracing the unknown: how federal agencies can leverage flexibility to create more resilient fiscal plans

Accounting for uncertainty is a key aspect of smart financial planning, especially for federal agencies that must operate in an ever-changing geopolitical landscape. Take the Defense Health Agency (DHA), for example. Their massive scope of operations has taught the DLA how to strike a balance between sufficient funding and careful planning to ensure the US has a ​​medically ready force as well as a ready medical force in peace and wartime alike. However, with an operation of this size, they’ve also experienced a number of unique difficulties over the past three years.

Ongoing challenges like the pandemic, supply chain constraints, and accelerating inflation have forced federal agencies like the DHA to course-correct over the past three years. Some of these obstacles, like the start of the COVID-19 pandemic in early 2020, were unforeseen. Others, such as the subsequent supply chain restrictions and rising inflation, came with earlier warning signs. Regardless, each one played a significant role in the development of the 2022 federal budget.

But how can government agencies prepare for the unknown? By intentionally creating room for flexibility in fiscal planning, agencies like the DHA are better able to react when unforeseen expenses arise — creating a more resilient budget overall.

Understanding requirements is the key to true flexibility

Interestingly enough, truly flexible budgets are less about the money and more about understanding your requirements. As federal financial managers, before we can land on a number, we first need to understand a few different factors:

• What are your goals?
• What steps will we need to take to achieve those goals?
• How much money will each of those steps cost?
• Are there any potential blockers that we may face?

Federal agencies must thoroughly understand their requirements in order to effectively operate in the space that they have been tasked to perform.

Once we know how these capabilities and functions come together to give rise to the deliverables that the agency has been charged with, then we can start implementing a plan. As part of the DoD, the DHA uses an integrated priorities list method. And while the dollars for each situation, capability, and function are fairly fixed, agencies are frequently in communication with Congress regarding their status and any unexpected challenges they’ve experienced throughout the course of the year. This allows us as financial managers to flex those budgetary numbers — whether it be through reprogramming efforts or through the passage of supplemental appropriations to complement the existing baseline budget.

However, the key to being able to justify any requested appropriations or changes to the predetermined plan is knowing how to throttle requirements based on the risk — as well as the associated cost of that risk — to the next item on that integrated list

For example, say that the DHA planned to open a certain number of new military treatment facilities (MTFs) across the US in 2022 but an unexpected supply chain challenge emerged that is preventing them from getting critical supplies to their existing MTFs. It’s up to the agency and Congress to decide if they should keep working towards the next item on their list or if they should shift priorities to deal with the emergent situation. A strong financial management partner can help articulate those requirements and risks in budgetary terms.

Good financial planning isn’t about right or wrong

For financial planning to be truly productive, terms like “right” and “wrong” need to be removed from the equation. The reality is, no forecast number is ever going to be 100% accurate. There are ways that federal agencies can use past experiences to improve their forecast — the pandemic taught us that — but ultimately, real life will never fit neatly into a spreadsheet. And even when we don’t hit our forecast number, there is still a lot that can be learned from the discovery and planning process. Leveraged correctly, these insights can be used to help the agency become more adaptive in the face of future challenges.

By focusing on right versus wrong, we create blockers for transparency. Instead, the real focus should be on open, honest, and frequent communication. Instead, federal agencies should focus on communicating what’s happening in real time and leverage those insights to improve future budget planning.

Communication starts with data

A key factor for this communication is robust data analytics. Not only do federal agencies need to know their current financial state — how much has been spent, how much is left, and what has been accomplished thus far — but they also need to know their past and future state. Because the DHA operates on such a large scale and within critical functions, data analytics help enable rapid response to emerging issues. Financial management partners like MDC can help codify the agency’s functions and capabilities into budgetary details so that the agency can satisfy its requirements with minimal disruption to the mission. Post-execution forensics can also be leveraged to improve governance processes moving forward.

Ultimately, the core challenges that agencies like the DHA face remain consistent: it’s impossible to predict the future and the government runs on limited financial resources. But in order to find a good path forward, federal agencies must have thoughtful, deliberate mechanisms in place to thoroughly articulate their requirements as well as the risks associated with executing on those requirements. In doing so, senior officials are better able to allocate funds and safeguard the mission across an integrated, holistic government perspective.

Visit our financial accounting and management page to learn how MDC can help you create a flexible financial plan for future mission success.