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BUDGETING ANU

Budgeting @ ANU

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BUDGETING ANU

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    1. BUDGETING @ ANU June 2008

    2. Budgeting @ ANU – this course covers: What is budgeting? Compiling the Operating Budget and Estimating Costs Nature of University Income/Revenue (allocation) Expenditure Other Budget Class Codes The Budgeting and Planning Cycle at ANU Budget Timetable Budget Preparation – Other Things to consider How the Operating Grant is allocated in the University Ledger Usefulness of reports

    3. What is Budgeting? In simple terms, budgeting involves looking at the income or revenue that you expect to receive and at the expense that you expect to incur in order to conduct your activities.

    4. Compiling the Operating budget and Estimating Costs Focus on Income AND Expenditure Historical budgeting practices have focused primarily on expenditure, with little regard to variations in income sources other than the operating grant. This practice is no longer appropriate. Budget Units need to focus on both income and expenditure budgets. Focusing on both sides of the financial equation allows expenditure patterns to be modified as changes in income occur.

    5. Compiling the Operating Budget and Estimating Costs Contd. Example: An area might be relying on a particular income source to fund the purchase of equipment. After the initial budgets are set, subsequent information might reveal the income will not be forthcoming and as such will not be available to fund the equipment purchase. If the income budget was not being monitored, and people are only looking at the expenditure budget (assuming no changes are entered in the system) there is potential for areas to spend money they do not have. Similarly, if additional income is earned over original estimates then expenditure budgets could be increased. Again, if the income is not being monitored this might not be picked up.

    6. Compiling the Operating Budget and Estimating Costs Contd. Take care to examine all possible categories of income and expenditure. It is imperative that budgets are developed to reflect, as closely as possible, the anticipated financial activities of the Budget Units for the upcoming year. All known factors should be taken into account. Where details are unknown or realistically not expected to differ much from preceding years, the current year results can be used as a guide. The basis for formulating the budget for each revenue or expense line needs to be clearly set out to prevent duplication.

    7. Compiling the Operating Budget and Estimating Costs Contd. Nature of University Income/Revenue (allocation) University income falls into broad categories of: - Assistance to Students (Higher Education Loan Program (HELP) and HECS) - Grants for Higher Education Assistance (Commonwealth Grants Scheme – CGS) - Student Fees (Domestic Tuition Fees and International Student Fees) - Investment Income - Project Funding – Research/Consultancy Income - Other (including Trading Activities)   Income can be classified as ‘recurrent’ or ‘non-recurrent’.

    8. Compiling the Operating Budget and Estimating Costs Contd. The Recurrent Operating Budget The University’s recurrent operating budget is primarily funded from the Commonwealth Department of Education, Employment and Workplace Relations through the payment of various grants. The grants are made under the Higher Education Support Act (HESA) 2003 and comprises various components including the Higher Education Loan Program, Commonwealth Grants Scheme and National Institutes Funding.   About 20 per cent of funding received by the University under HESA is won through national competitive grant schemes, including the Institutional Grants Scheme (IGS), Research Training Scheme (RTS) and Research Infrastructure Block Grant (RIBG).   Other elements of the University’s recurrent revenue base include investment income, central overhead contributions from full fee paying students and rents received from commercial tenancies.

    9. Compiling the Operating Budget and Estimating Costs Contd. Institutional Grants Scheme (IGS)   The broad purpose of the Institutional Grants Scheme is to maintain and strengthen Australia's knowledge base and research capabilities. The IGS was first allocated in 2002 and is based on performance, comprising : -         research income (weighted 60%) -         Commonwealth-funded research student load (weighted 30%) -         Research publications (weighted 10%) Research Infrastructure Block Grant (RIBG) The Research Infrastructure Block Grant is a component of the Higher Education Program which is used to support research and research training activities. Allocation of RIBG is also formula-driven with allocations reflecting the relative success of each institution (and constituent areas) in attracting competitive research funds.

    10. Compiling the Operating Budget and Estimating Costs Contd. International (ISF) and Domestic (DTF) Tuition Fees Net fee distributions will comprise Gross Fees less the following deductions: Overhead Deductions – The Overhead rate for 2008 is $4,931 per EFTSL. These rates are indexed every year, based on the average increase in ISF and DTF rates for the year. Capital Deductions – This deduction is calculated as 15% of the Gross Tuition Fee. Of the total deduction, 80% is transferred to the Budget Unit’s C Fund (CxxISF) and available to fund maintenance and other agreed capital works. The remaining 20% is allocated to Facilities & Services to fund statutory and preventative maintenance.

    11. Compiling the Operating Budget and Estimating Costs Contd. How funding is allocated to Budget Units   The allocation of the University’s recurrent income is managed by the Vice-Chancellor through a formal annual budget process. The Vice-Chancellor’s desire is to move to a more performance-based model for budget allocations away from the historically-based model that has been used in the past. The first step in this process began in 2008 with CGS and HECS income being allocated based on projected student load, and RTS income being allocated based on a two year average of actual student load; previously RTS was distributed on target student load.

    12. Compiling the Operating Budget and Estimating Costs Contd. Some general tips to consider when reviewing or considering your income/revenue:   -   Revenue should be reflected at the GST Exclusive value, as GST collected is not revenue to the University but payable to the Australian Taxation Office.   -     Revenue is aligned with Budget Classes, and budgets can be set at Budget Class or Account Code level.  

    13. Compiling the Operating Budget and Estimating Costs Contd. Current Budget Class Revenue Categories – just in case you need to know .. BC10 Student Fees – Only Net Student Fee Distributions BC11 Other Income – includes Grant Income, Sales of Goods & Services, Other revenues from students. BC12 Internal Sales – Income credited via the 89xx Account Code series BC13 Transfer from Other – Funds transferred from other areas, be careful with internal budget unit transfers to ensure income across the Budget Unit is not overstated (use Account 7021) BC14 Internal Allocations – Funds transferred from University Reserves BC15 Operating Grant BC16 Investment Income

    14. Compiling the Operating Budget and Estimating Costs Contd. Expenditure Full costs involved in running the Budget Unit need to be identified by the Budget Unit Manager. Management of the activity provides knowledge of what costs are incurred to operate on an ongoing basis, and so reliance is placed on the Budget Unit Management for this information. Managers need to be mindful that budgeted expenditure should not exceed budgeted income, unless there is sufficient cash carried forward from the previous year to absorb current year deficits. Budget deficits will need approval from the Vice-Chancellor One method of budgeting is to cost the intended future year operations in current year terms, and then apply a forecast CPI increase to arrive at estimated costs for the future year. In the absence of firm operational objectives for the coming year, the projected annual result for the current year should be used as the base for estimation, as long as it is predicting a surplus.

    15. Compiling the Operating Budget and Estimating Costs Contd. Nature of Expenditure When reported internally, University Recurrent Expenditure is summarised into the following classifications: Salaries and related costs Equipment – capital Equipment – non-capital Scholars Expenses Other Expenses Travel, Field and Survey Expendable Research Materials Contingency

    16. Compiling the Operating Budget and Estimating Costs Contd. Some general tips to consider when reviewing or considering your expenditure: Salaries represent the most significant expenditure line item and care should be taken in calculating the staff budget. Consideration of any restructuring, replacement of staff on extended leave and use of casual staff should be incorporated as should increments and any enterprise bargaining increases. When considering expenditure on staff costs consider carefully the source(s) of funding, don’t assume all are costs are recurrently funded. Have a complete listing of all staff positions (including vacant positions that require funding) and include a list of the funding source (Recurrent, S, Q or E). Note which positions require subsidisation from another source (e.g. Fellowships); increment changes; and, any Enterprise Agreement increases currently in force. Remember the use of casual employees over and above fixed staffing structure.

    17. Compiling the Operating Budget and Estimating Costs Contd. More general tips .. Salary on-costs can be material and should always be considered: Superannuation 17% Workers Compensation 1.3% Payroll Tax 6.85% Annual Leave Loading 1.34% Long Service Leave Levy 1.5% The full details of ANU salary on-costs are published on the Human Resources Website at: http://info.anu.edu.au/hr/Salaries_and_Conditions/__HR_Practitioners_at_ANU/Salary_Oncosts/2008.asp

    18. Compiling the Operating Budget and Estimating Costs Contd. More general tips .. All planned or current capital sales or purchases including any contractual commitments need to be considered, including the cash flows associated with these arrangements. This may include the trade-in and purchase of motor vehicles or photocopiers, or the construction of structures. The University (through Facilities & Services) has contracts in place for gas, electricity, cleaning, security, waste, recycling, water & sewerage etc. Usage of these services needs to be considered, as well as any forecast increases in the costs of these services. Network Service Charges and any expected increases in these need to be considered. DOI provides information about expected increases during the budget period each year.

    19. Compiling the Operating Budget and Estimating Costs Contd. Current Budget Class Expenditure Categories – in case you need to know .. BC01 Salaries and Salary on-costs BC02 Equipment Capital BC03 Scholars Expenses BC04 Other Expenses BC05 Travel Field & Survey Expenses BC06 Equipment Non-capital BC07 Expendable Research Materials BC08 Transfers to Other BC09 Contingency

    20. Compiling the Operating Budget and Estimating Costs Contd. Other Budget Class Codes In addition to Revenue and Expense Codes, there are two other Budget Class Codes: BC19 Current Year Operating Result BC20 Prior Year Cash Result (Only available for R fund) These codes are primarily used by Finance & Business Services.

    21. The Budgeting and Planning Cycle at ANU   A well-prepared budget reflects the University’s management strategies for ensuring financial viability on a cost centre basis. The annual process begins around August with the Vice-Chancellor meeting individually with Budget Unit delegates (Deans, Directors etc) to discuss funding requirements for the coming year.   While the funding negotiations are underway many Budget Units have already commenced examining operational requirements for the following year and are making high-level expenditure estimates. It is also common for these preliminary estimates to be used to support future year funding requests.   Budget Units should have budgets finalised by November with only the Operating Grant allocations to be confirmed. Once Council have approved the final Operating Grant allocations, Budget Units can then finalise their initial budget.

    22. The Budgeting and Planning Cycle at ANU The Finance & Business Services Division (F&BS) is responsible for the budget review and reporting cycle. While local area Budget Units finalise their budgets, F&BS undertakes a final analysis of the central income budget and other central expenditure allocations in preparation for entering into the financial system. Loading of Budgets in the Financial System When detailed budgets are finalised Budget Units are required to prepare budget journals to load their estimates into the budget ledger within ESP Financials. The process of uploading the budgets is managed by F&BS. This central co-ordination is required so as to make sure operating grant figures in the budget journals match approved allocations. The central review also assists in balancing the University’s income budget against all expenditure allocations at the local budget unit level.

    23. Budget Timetable The 2008 Budget Setting Timetable last year was the following … 2009 Budget dates will be advised later this year .. Late September to Early October VC’s individual Budget Unit Meetings Mid-November Submission of preliminary budget summary report template to F&BS Late November Budget Plenary Meetings with VC Early December Final Budget advice sheets issued Mid-December “Working” Budget Review 1 Mid-January “Working” Budget Review 2 “Working” Budget scenario inactivated in ESP Financials Annual Budgets loaded in ESP Financials (R) Mid-March Whole of Life Budgets loaded in ESP Financials (S&Q) Late March “Initial” Budget Scenario inactivated in ESP Financials Budget is monitored throughout the year …. For last year’s budget web page refer to: http://info.anu.edu.au/fbs/Finance_Functions/__2008_Budget/index.asp

    24. Budget Preparation – other things to consider Carry forward of prior year surpluses or deficits The carry forward of prior year surpluses or deficits must be considered in the preparation of the budget. Surpluses are an important funding source for Budget Units and can generally be allocated within an area at the discretion of the delegate. Deficits are also bought forward, and it is equally important that delegates have a plan to recoup deficits from subsequent budget allocations. Deficits and surpluses will be retained within the budget class, BC20, not at the account level.   Recurrent carry forward information is generally not available until mid-February each year; after all year-end cash journal entries are processed for annual financial statement purposes. Once the period for these journals close, F&BS analyse the ledger to determine each Budget Unit’s carry forward figure (basically YTD income less YTD expenditure +/- carry forward from previous year – does not include the effect of encumbrances, examines cash movement only) and then proceeds to process the necessary journal entries to record the funds in the University’s ledger. S and Q fund cash balances roll forward automatically and are reflected in the “life-to-date” balance.

    25. Budget Preparation – other things to consider Forecasting using prior year trends Prior year trends are a good indicator of possible future expense patterns but beware of large variances. For example, if the travel budget was 50% higher last year than in the previous 2 years, can the variance be explained? Is the reason for the increase continuing in the current year and likely to continue in the next year? The same applies if expenditure in one category drops while rising in another category, is it miscoding or were the budgets set incorrectly? Contingency For such things as major equipment replacement, it may be appropriate to build in a contingency that will accumulate over several years and ease the impact on the budget in the replacement year.   This is a suitable approach for large cost items such as vehicles, computers and photocopiers. The period of accumulation will depend on the relative cost of the item to the overall budget.

    26. Budget Preparation – other things to consider Budgeted Surplus Budget Units should not be concerned about loading a budget that shows an expected surplus for a year. Budgeted/planned surpluses are a realistic occurrence, particularly when an area might be setting funds aside over a number of budget years to fund a large expenditure item some time in the future. An example of this is setting funds aside for a rolling three-year equipment replacement cycle. A large carry forward might be utilised over a number of budget years thus resulting in an area budgeting for a surplus. There is little sense in setting a budget that indicates all income is to be expensed in the current year, when some of the income is to be legitimately carried forward over a number of years. For example, as a sinking fund for asset replacement.   It is important to accurately reflect the likely end of year result and annual net expenditure levels as local area budgets are referenced when F&BS is assessing the overall cash flow requirements of the University.

    27. Budget Preparation – other things to consider Carry forwards – calculation and effect on budget Once the carry forward information is provided to budget units, areas can then update their budget to reflect the expected spending pattern against these funds in the current budget year. It is important to increase the expenditure budget to reflect what will be spent; it should not be adjusted/increased to reflect the total value of a carry forward surplus unless an area expects that all funds will be spent. Most carry forwards will be used over a number of years, and the budget should reflect this.

    28. Budget Preparation – other things to consider Adjusting Budgets Budgets can be flexible but should not be adjusted so as to make the budgets equal actual results. Budget Units should not be concerned about showing variances against income or expenditure lines; such things can be explained and it is the analysis of variances and subsequent explanations that are important, not whether all variances are zero. In reality it is extremely rare to find an organisation where the original budget matches actual results perfectly.   Changes to budgets should be limited to movements between expenditure categories when changes in spending priorities are known, or to amend income figures if new income is earned or existing income streams do not eventuate. An example of when this might be performed is when an area increases budgeted expenditure to allow for the spending of a carry forward surplus, or if a new grant, income has been awarded and expenditure will commence in the current year. Budgets are normally static, not dynamic. Variances from actuals to budget are explained.

    29. Budget Preparation – other things to consider Budgeted Deficits Areas should not budget for overall deficits (after carry forward) unless prior approval has been sought from the Vice-Chancellor to overspend in any one year. If a deficit budget is approved, areas will be required to have a plan in place that shows how the deficit will be recouped.

    30. Budget Preparation – other things to consider How the Operating Grant is allocated in the University ledger The operating grant allocated to each Budget Unit is transferred to individual ledgers using the budget class account ‘BC15’ (Operating Grant). This account can be viewed as the link between the University’s recurrent income budget and the local area income budgets. BC15 must balance back to zero across the University’s ledger. The above concept can be broadly illustrated as follows: Central University Income Budget CR R19xxx 9xxx $200,000,000 DR R19xxx BC15 $200,000,000 Total Local Area Budgets CR Rxxxxx BC15 $200,000,000 CR Rxxxxx 9xxx $10,000,000 DR Rxxxxx 5xxx $210,000,000 The BC15 account balances offset each other and come back to zero.

    31. Budget Preparation – other things to consider How the Operating Grant is allocated in the University ledger Contd… Once the allocations are made to budget units, they will generally not vary. (NB: the Vice-Chancellor sometimes makes subsequent additions to the budget and they can either be one offs or ongoing in nature). Any variations between actual recurrent income and budgeted central recurrent income are not passed on to Budget Units. Instead, there is a balancing mechanism in the budget (a contingency) that will generally absorb actual income surpluses or deficits. The Vice-Chancellor controls this budget item.  

    32. Usefulness of Reports All reports produced from the ESP Financials system contain information that is in the system at the time the reports are run. The usefulness of reports containing budget information depends on how budgets are entered and updated.   It is therefore important to enter accurate and meaningful information into the budget ledger. If inaccurate or unachievable figures are entered then the reports produced will be ineffective in highlighting variances or identifying budget trends as well as supplying a misleading picture of the budget unit.   Each budget unit has a different level of reporting requirement. Some budget units need to report down to a project level whereas other areas need only report down to the department level. The budgets entered into the system need to reflect these differences. If the project level of reporting is required then budgets (both income and expenditure) must be allocated down to the project level.

    33. Usefulness of Reports Contd… Each budget unit must devolve its budget to their specific reporting level, that is, either at the budget unit, department or project level. Meaningful and accurate budgets will result in meaningful and useful reports.

    34. Finance Training @ ANU Further Training Finance & Business Services also run the following courses: Budgeting @ ANU Expenditure & Contracts @ ANU These are run for specific groups of staff in colleges or schools – please contact Mardi Savill (Mardi.Savill@anu.edu.au or x55587) for more information or to make a booking. Finance & Business Services Business Solutions Office can also provide training on ESP Financials. Further Information can be found at: http://info.anu.edu.au/fbs/Training_and_Support/__Courses_and_Seminars/index.asp

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