BUDGETING BASICSHal Jankowski, University of CincinnatiKatharine 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

Long range forecastsAcademic plansCapital plans

Operational Plan

Forecast of revenues and expensesFor an operating period (one year)Authorizes spendingBasis for performance measurements

• 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

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 year-to-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.

How do you budget?

Fund

Function

Natural Classification

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 long-term 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 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?