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? • 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? BUDGET Fund Natural Classification Function

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 designatedmoney? • 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?

Budgeting Basics