Hers Institute
2016
Budgeting
• The Purpose of the
Budgeting Process
• Budget Types
• Approaches to
Budgeting
• The Budget Process
This Session Will Include a
Discussion of:
Why
Budget?
• It is a FINANCIAL MAP of the institution’s strategic plan -- guides an institution on its journey in pursuit of its mission.
• Detailed RESOURCE ALLOCATION PLAN to outline how the institution’s resources will be utilized to achieve institutional goals.
• A FORECAST of the institution’s financial picture at some point in the future.
• A CONTRACT between management and the operating units charged with carrying out plans for the institution.
• Used as a management tool to control or achieve ACCOUNTABILITY from budget managers.
Why do we participate in the budget
process? What is a budget?
Budget
Types
• Operating Budget
• Capital Projects Budget
• Restricted/Special Projects Budget
What are the types of the budgets used
by institutions?
• The most commonly known and discussed
budget type.
• The budget that captures the operating revenues
that are used to finance current expenses (the
vast majority of revenues collected during a
period are expended during that same period;
unexpended revenues are used as reserves).
• Operating budgets capture the “day to day”
expenses incurred by the institution to achieve
its mission.
• EVERYONE CAN CONTROL
SOME PORTION OF THIS
BUDGET
Operating
Budget
Operating
Budget
• Tuition and Fees
• Governmental
– Appropriations; Grants &
Contracts (Direct & Indirect
Cost)
– Federal, State, and Local
• Gifts
• Endowment Income
• Auxiliary Enterprises
• Patient Services
• Other
The Operating Budget
(Revenue Sources)
Operating
Budget
The Operating Budget (Expenses)
Expenses are displayed using either the natural classification or functional classification (programmatic classification).
Natural Classification – expenses are identified by type versus purpose (salaries, benefits, travel and supplies).
Functional (Programmatic) Classification - expenses are organized by the nature of the activity the expenses support (instruction, academic support, student support, and institutional, etc.,)
Most Operating Budgets contain RESERVES for future capital work
Capital
Projects
Budget
• This budget maps out the finances for
construction and other acquisition plans
related to a campus’s physical facilities
and infrastructure.
• It addresses the revenues, expenses and
reserves much like the operating budget.
• The revenue sources might include:
tuition and fees; governmental
appropriations; auxiliary revenues; or
gifts.
• Additional financing considerations
include the use of reserve or borrowed
funds.
Capital
Projects
Budget
Reserve funds – reserve funds are funds that
have been accumulated through savings or
have been funded as a part of the operating
budget. Institutions often specify that a
certain portion of an annual operating budget
be set aside to cover cost that will be incurred
in future periods.
Borrowed funds – borrowed funds are either
construction loans or long-term bonds that are
used to finance the acquisition or construction
of new facilities, major equipment, or
infrastructure upgrades or additions. Colleges
and universities typically use tax-exempt
bonds to fund capital expansion.
Restricted/
Special
Projects
Budgets
Many institutions prepare budgets
focused only on restricted funds. In these
instances resources are provided by
external parties and carry stipulations
about how the resources can be
expended. Restricted budgets indicate
resources and expenses for specific
activities.
Examples include: endowment income
for scholarship or library funds; federal
grant programs (Title III, Upward Bound,
etc.,); externally funded research
projects.
Approaches
to Budgets
• Incremental Budgeting
• Zero-Based Budgeting
• Performance Based Budgeting
• Formula Budgeting
• Responsibility Center
Budgeting
• Initiative Based Budgeting
• Hybrid Model
Incremental
Budgeting
Using incremental budgeting each program or activity’s budget is increased by a specified percentage. The theory supporting the use of incremental budgeting is that the basic aspects of programs and activities does not change significantly from year to year.
At some institutions differential factors are use for various organizational segments. For example, once a certain category of expenses has been budgeted for (salaries, utilities, debt service, etc.,) the institution may apply one percentage increase for academic units and a different increase for non-academic units.
Strengths – most efficient approach. It is simple to implement, more controllable, adaptable and more flexible because it does not include an emphasis on analysis.
Weaknesses – maintains the status quo and does not integrate the impact of planning assumptions or decisions. It does not take into consideration what is being accomplished through the base budget and it avoids the question of whether there are more optimal resource allocations.
Most widely used budgeting technique.
Zero-
Based
Budgeting
(ZBB)
This budget approach assumes no budget from the prior years; instead, each year’s budget begins at a base zero. Each budget unit evaluates its goals and objectives and justifies its activities in terms of the benefits of its activity and the consequences if it were not performed.
A decision package is developed for each activity which includes a description of the activity, a definition of alternate levels of activity, performance measures, and the costs and benefits.
Strengths – the review of the decision packages provides decision makers with a better understanding of the institutional activities than the other budget techniques.
Weaknesses – it does not assume any budget history; it does not recognize commitments that are continuous (tenured faculty members, senior administrators); consumes an enormous amount of time and generates massive volumes of paperwork.
Formula
Based
Budgeting
Primarily used by public institutions, formula based budgeting is
a procedure for estimating resource requirements through the
relationship between program demand and program cost. These
relationships are most often expressed as mathematical formulas
that can be as simple as “student-faculty ratio,” or as complicated
as an array of cost per student credit hour by discipline for
multiple levels of instruction .
The basis for budget formulas can be historical data, projected
trends, or negotiated parameters to provide desired levels of
funding.
Strengths – the quantitative nature of most budget formulas
gives them the appearance of an unbiased distribution of
resources; in a stable economic environment it helps reduce
uncertainty by providing a mechanism for predicting future
resource needs.
Weaknesses – because it often focuses on historical data it can
discourage new programs or revisions to existing programs;
given its focus on quantitative data it can suffer from the same
faults identified in incremental budgeting; they can have an
unequal or even negative impact on participating institutions.
Performance
Based
Budgeting
(PBB)
Performance based budgeting places its focus on outcomes. Specific outcomes are defined in both quantitative and qualitative measures. Explicit indicators of input-output relationships or indexes relating resources to outcomes are defined. Goals are specified in terms of performance measures (desired input-output ratios).
The development of performance measures typically flows from the state to the institution and frequently may not reflect an understanding of the factors influencing the measure.
Strengths – provides a mechanism for allocating supplemental resources when measures are achieved.
Weaknesses – performance measures at high levels of program aggregation are not easily linked with organization divisions and departments - the structure used to allocate resources on most campuses.
Responsibility
Center
Budgeting
(RCB)
“Every Tub
On Its
Bottom”
Also know as “cost center budgeting,” “profit center
budgeting,” “revenue responsibility budgeting,” is the
technique where units manage the revenues that they
generate. Rather than a central focus on budgetary
control, the emphasis shifts to program performance.
Under RCB, schools and colleges and other organizational
units become revenue centers, cost centers, or a
combination of the two. Based on the activity occurring
within the unit, all revenue that it generates are assigned
to it, including tuition & fees, research grants and
contracts, gifts, and endowment income.
Strengths – this technique helps communicate the
message that academic decisions have financial
consequences.
Weaknesses – this technique is accused of focusing too
much attention on the bottom line versus academic quality
or other priorities; a lack of coherence between planning
and budgeting may evolve as a result of unit autonomy;
may encourage competition/duplication between schools;
institutional priorities may be ignored; difficulty in
developing formula for assigning central costs.
Initiative
Based
Budgeting
(IBB)
This technique is considered a structural approach to the establishment of a resource pool for funding new initiatives or enhancing higher-priority activities.
IBB provides the side benefit of assuring that units conduct a review of the existing activities to make certain that they remain productive.
Example: an institution may require that all units reduce their base budgets by 2% to fund a pool. Once funded there are many ways to reallocate the savings but most include a proposal process. All units seeking to obtain funds from the pool are required to submit a proposal identifying the proposed activities, the institutional priority that the activities satisfy, and the amount requested.
It is important to note that IBB is not a technique that can be practiced indefinitely.
Hybrid
Model
• Incremental base budget, with new resources allocated using performance, formula, or initiative models.
• Responsibility centered budget, with a significant tax to be re-allocated on an initiative model.
• Zero-based budget for 1/3 of units each year so that every 3 years every unit is subject to this practice. For 2/3 of units not using zero-based budget in a given year, incremental model is used.
This approach combines several of the
methodologies we’ve discussed in order to
take advantage of strengths and minimize
weaknesses. For example,
The
Budget
Process
• Centralized versus Decentralized
Budgeting
• The Budget Cycle
• Factors Affecting the Budget
Process
• Critical Steps in the Budget
Process
Centralized vs. Decentralized Budgeting (Smaller institutions = centralized; larger institutions typically = decentralized)
Practice Centralized Decentralized
Budgets are estimates, subject to change President, VPs make changes Deans/ dept. heads
Faculty Hiring Decisions Provost approves Dean/ dept. heads
Level of Budgetary Control At object level At fund level
Capital Investment Funded from central reserve Funding at school, dept. level
Recruitment Packages Funded from central reserve Funding from school’s reserves
Contingency Reserves Held centrally Deans/dept. heads planning for contingencies
Budget Reductions Decisions Pres, VPs make changes Deans/dept. heads make changes
Priority Setting Centrally driven School driven
Annual Giving/Fundraising Central effort Coordinated centrally, achieved in schools
Faculty/Staff Positions Managed centrally Managed at dean’s level
Faculty/Staff Vacancy Savings Reverts centrally Retained by dean/department head
Year-end Surplus/Deficit Reverts centrally Retained by dean/department head
F&A/Local Funds Managed centrally Managed at dean’s level
The
Budget
Cycle
Operating Budget Cycle
The operating budget cycle runs from the beginning of the
initial research phase and analysis through the completion
of the audited financial statements. Once the audited
financial statements have been completed an analysis is
typically completed to determine the accuracy of the
original budget projections.
Timeline: Typically 12- 24 months, although the timeline
can be longer for public institutions.
Capital Budget Cycle
Capital budget cycles are typically longer than the
operating budget cycle due to the types of projects
covered by these budgets. This budget cycle begins with
the conception of the capital project and runs until the
final product is placed into service.
Timeline: It is customary for capital budgets to span
multiple years (2 – 6 years).
Factors
Affecting
the
Budget
Process
• Institutional Character
– Mission/Goals
– Access
– Research/Teaching
• Stakeholder Involvement
– Board of Trustees
– Donors
– Government (State, Federal, Local)
– Legislators
– Students and Families
• Process Transparency
– Bureaucratic /Democratic
– Who is on the “Team”
• Decision Making Authority
– Centralized/Decentralized
• Trends
– Economic
– Demographic
Critical
Steps in
the
Budget
Process
• Close-Out and Analysis of Prior Year
– How did we end up? What does that
mean for next year?
– What went well? What went wrong?
– Changes in the future?
• Future Year Planning
– Developing Budget Assumptions
• Revenue Drivers
• Expense Drivers
– Communicating Budget Guidelines
– Preparing the Budget Submission
– Budget Review and Approval
• Budget Implementation
Research
Definitions
Two types of research funding:
Sponsored research (external funds;
deliverables)
Non-sponsored research (gifts and
internal funds)
Two types of research costs:
Direct Costs – identified specifically
with a particular sponsored project,
relatively easily with a high degree of
accuracy.
Facilities and Administrative (F&A)
Costs (indirect or overhead costs) –
incurred for common/joint objectives,
not identified readily and specifically;
OMB A-21 says you must have a
negotiated F&A Rate to recover
indirect costs. 23
F&A (Indirect Cost) Rate
F&A Costs
Organized Research Base
– F&A Costs: Indirect Costs Related to Research • Facilities Costs: Capital and Equipment, Operations and
Maintenance Costs, Interest on Debt, Depreciation
• Administrative Costs
– Organized Research Base: Total Direct Research Expenses • Some Costs are NOT allowed including equipment and capital
expenditures, space rental costs, student benefits, etc.
UMass Amherst FY11 Rate = 58%
RISD FY13 Rate = 45%
F&A Revenue Distribution
• Varies by Institution
– Centralized: All F&A Revenue is retained centrally AND indirect costs are born centrally
– Decentralized: All F&A Revenue is distributed to research departments AND all indirect costs are allocated to research departments
– Hybrid: A portion of the F&A Revenue is distributed to research departments and a portion is retained centrally to cover indirect costs funded centrally
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