Transcript Budgeting Basics

BUDGETING BASICS
Hal Jankowski, University of Cincinnati
Katharine Bonneson, University of Minnesota
CACUBO Winter Workshop, Kansas City, April
2014
Goals and Learning Outcomes
• Define common terminology
• Define the role of the budget
• Introduce budget models
• Introduce the basic concept of how budgets are
structured
• Introduce the concept of budgets as a planning
and measurement tool
“No man is an island, entire of itself…” –
Donne, Meditation XVII
Terms, basic:
• Budget: A management tool to allocate funds,
authorize spending, and measure actual
results
• Permanent Budget: The expected recurring
amount for expenditures or revenues. Also
called "recurring" or "base" budget
• Cash Budget: One-time authorization to
spend. Also called "one-time" budget
Terms, basic:
• Operating Budget: A budget for recurring
expenses required for successful operations of a
program
• Capital Budget: A budget for large projects that
generally are not recurring
• Restrictions: Requirements placed on the funding
to be used in a certain way
Terms, funds:
• General Fund: Home of the revenues and
expenses for the primary operations of the
enterprise
• Designated Funds: Generally funded by transfers
from the general fund, designated refers to an
internal restriction placed on funds by management
Terms, funds:
• Auxiliary Fund: Home of the revenues and
expenses for the auxiliary operations of the
enterprise
• Restricted Funds: Generally funded by
gifts, restrictions are placed on the spending
of these funds to achieve a donor directed
objective
• Agency Fund (rare): Funds held in trust for
another organization
How does a budget fit into strategy and
operations?
Mission
Vision
Strategic Plan
Operational Plan
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Planning and budgeting should
be dynamic
Budgets enable plans
Both are a snapshot in time
Both must be adaptable to
change
Plans can and should influence
budget
Unfortunately, budget can
influence plans
Long range forecasts
Academic plans
Forecast of revenues
Capital plans
and expenses
For an operating
period (one year)
Authorizes spending
Basis for
performance
measurements
What are some budget models?
• Incremental
• Zero-based
• Revenue/Responsibility Management
• Performance Based
• Formula Based
Budget models
• Incremental
• Budget generally stays
the same from year to
year
• Supposes priorities
don’t change
dramatically from yearto-year
• Adjustments should be
made to refine and
ensure prioritization
• Zero-based
• Start at $0 and build
up based on needs
• Requires priority
ranking of all activities
• Everything is up for
grabs
• Rare in practice
Budget models
• Revenue /
Responsibility
Management
• Unit projects and controls
all revenues and
expenses
• Non-revenue producing
units funded by
assessments
• Units responsible for
deficits, benefits from
surpluses
• Performance/Formula
Based
• Budget is established
based on performance to
metrics
• Increases or decreases
to budget are directly tied
to metrics
• Strategy can be driven
by achieving metrics
How do you budget?
• Budget by natural classification/object, e.g.
salaries, benefits, travel, operations, etc.
• Budget by function, e.g. instruction, support,
service, etc.
• Budget by fund type, e.g. unrestricted, restricted,
endowment, gift, etc.
BUDGET
Fund
How do you budget?
How do you budget?
• Generally, revenues/transfers in must equal
expenses/transfers out
• Expenses must match restriction for the fund
• Expenses should (generally) be related to the
activity that produced the revenue
Examples
• In a university, the general fund collects the
revenue from tuition, fees, state subsidy for
instruction. Expenses for instruction and support
generally should not exceed these amounts.
• If the federal government gives the institution a
grant, that grant funding must be spent only for the
purpose of the grant
Types of revenues
• Tuition
• Enrollment, retention, student mix (in-state, out-of-state)
• Price (public schools may be constrained; programs may charge
differential tuition)
• Fees (generally associated with a specific purpose)
• Gifts
• Watch restrictions
• Hard to predict
• Endowments & Investments
• Dependent on the market
• Endowments may be restricted
• May need to preserve corpus
Types of revenues
• Research
• Often restricted in use
• May consider return of facilities & administration costs (aka indirect
cost recovery)
• Who owns?
• Sales & Service
• Activity has the look of a for-profit
• Generally, should be self sufficient, including all indirect costs and
debt service
• Subsidies should be understood and budgeted
• Examples: conferences, housing, clinical operations, rents, etc.
Types of expenditures
• Salary
• Position control
• Cost of benefits
• Use of vacant position dollars
• Financial Aid/Scholarships
• Discount (from general fund)
• Scholarship (from other funds)—these are often subject to
restrictions
• Materials, maintenance, supplies
• Travel & Training
• Equipment
• Consider implementing life-cycle funding/equipment replacement
plans
Institutional Budgeting Considerations
• All funds budgeting
• Budgeting net income
• Budgeting cash reserves
• Budgeted deficit spending
How can we afford [X] but not [Y]?
• There’s always competition for priority in budgeting
• Some classifications of expense aren’t as flexible as others,
e.g. personnel.
• Generally, personnel aren't added to the budget unless there
is a guaranteed source of funds in perpetuity (or, at least the
foreseeable future), either from a permanent budget on the
general fund or other activities that can be reasonably
predicted to generate funds into the future
• That big expense is probably paid for out of one-time money,
or money that is restricted to a certain purpose (e.g. a capital
fund, a grant, a restricted gift, or a specific appropriation)
Restricted to a certain purpose?
• Restricted funds: Generally, money from outside
the enterprise, given for a specific purpose and
restricted by agreement. e.g.:
• Endowments for personnel
• Gifts for scholarships
• State money for capital projects
• Federal grants for specific research
• These funds typically require reporting on activity,
e.g. did you do what you said you would?
• Should consider overall strategy for how to
manage, inclusive of other funding sources
What about unrestricted money?
• Unrestricted money is either permanent or
one-time
• As a budgeting best practice, personnel aren't
added unless there is a permanent funding
source to cover those positions
• Cash-funded positions do exist, but those
positions are specified as cash funded or
limited term when offered and a date is
provided when funding is expected to run out.
• Consider how to budget faculty who are on an
administrative appointment
And designated money?
• Generally, designated money is not permanent.
• i.e. once the funding is gone, it's gone unless more
funding is designated and transferred
• May require reporting similar to restricted funds
The take away?
Don’t make a permanent or
long-term commitment
without permanent or longterm funding… don’t set
yourself up for a future cliff.
Gauging performance
• Also called variance analysis
• Negative variance = bad (generally)
• Less revenue than forecast
• More expense than forecast
• Positive variance = good (generally)
• More revenue than forecast
• Less expense than forecast
• Devil is in the details, i.e. why does the variance exist?
• Bad forecasting?
• Change in environment?
• Less expense is not always good—what’s the qualitative
impact? Money shouldn’t be the primary driver of
decisions
Gauging performance
• Who owns budget variances?
• Governing boards
• President
• Provost
• CFO
• Deans and directors
• How often to review?
• Depends on details of business cycle
• Business type activities, at least quarterly
• Tuition, at least with every term
• Review more frequently near year-end
• Use budget to help identify internal control deficiencies
Budget Types
• Operating Budgets
• Generally for an operating period (fiscal year)
• Authorizes spending for the period
• Used to measure performance to plan
• Examples of items in this budget:
• Operating revenues
• Some non-operating revenues (e.g. general appropriations, short term
investment income, etc…)
• Salaries
• Operating expenses
• Depreciation (transfers could be used to fund capital budgets!)
Budget Types
• Capital Budgets
• Longer term view
• Implemented over multiple operating cycles
• Examples of items in this budget
• Some non-operating income (e.g. capital appropriations, long term
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investment income for capital, transfers from other funds for capital)
Capital equipment
Enterprise software
Renovations
New construction
Infrastructure
• Must always consider the impact of capital budgets on operating
budgets
Budget Cuts
• Timing usually depends on why and how predictable the reason for
the cut
• Mid-year is usually operational (incoming class didn’t materialize, retention
wasn’t as good as predicted)
• Beginning is usually environmental (reduced appropriation, trending down in
enrollment)
• How is the budget being cut? Consider one-time (cash) or ongoing
(permanent)
• How to deal:
• Understand why and respond appropriately—address operational problem or
respond to environmental problem
• Cut or off-load expenses:
• Salaries
• Hiring Freeze
• Slow down hiring process
• Reduction in force
• Eliminate non-mandatory spending
• Specific/targeted expense reduction
• Defer expense
Questions?