Councils in Scotland have managed their finances well but face big challenges ahead, spending watchdogs have warned.

In its annual review, the Accounts Commission, which oversees Scottish local authorities' financial management, said councils had remained within their overall budgets, increased their reserves slightly and reduced their debt in 2015/16.

But it said all councils face financial shortfalls requiring further savings or using reserves and they need to 'change the way they work' if they are to make the spending reductions required.

Income from the Scottish Government, which provides around 60% of councils' total funding had fallen by 8.4% in real terms over the past six years.

The commission warns that further reductions are expected while demand on key services, particularly social care, continues to rise. Councils also face increased cost pressures in areas such as pension provision.

The commission's deputy chair Ronnie Hinds said: 'Councils are generally doing a good job with their finances in difficult circumstances.

'But pressures continue to increase on a number of fronts at the same time as they face the prospect of further reductions in their funding.

'It's vital that councillors and officers set medium and long-term financial plans based on clear priorities for the services they provide to their communities.'