Effective Budgeting for Libraries

1. Effective Budgetingfor Libraries Lori Anne Oja Executive Director Health Science Information Consortium of Toronto

2. Objectives • Provide background information on the vocabulary of budgets. • Basics of budgeting, forecasting and reporting. • Review some techniques for documenting budget activities for operational and planning purposes. • Become familiar with standard elements of an operational budget and learn ways to expand critical data into planning tools.

3. Table of Contents • Introduction • Budget basics • Creating the budget • Stewarding the plan • Budget forecasts

4. Introduction - Basics

5. The Budget • Document captures 3 things: • Expected costs • Anticipated revenues • And the difference between the two. • Clarify program priorities. • Communicate funding requirements. • Monitor and control expenditure. • Delegate spending authority. • Check on financial health and performance.

6. Library finance documents • Income statement • Statement of profit and loss • The budget forecasts the income statement • Final budget at year end • Used as interim reporting • Balance Sheet • A statement of financial position • Assets vs liabilities • Budget

7. Types of budgets A plan expressed in dollars. • Operating • Program • Capital • Cash Types of budgeting • Zero based budgeting • Traditional

8. Cash budgets • Operating and capital budgets are the result. • Cash budget is the process. • Your operating budget can be laid out as a cashflow budget. • When budgets are balanced and cash available is tight, a cashflow budget helps you have the right schedule of inflows and outflows.

9. Cash flow

11. Types of accounting Cash • Under the cash basis of accounting...Revenues are reported on the income statement in the period in which the cash is received from customers. • Expenses are reported on the income statement when the cash is paid out. Accrual • Under the accrual basis of accounting...Revenues are reported on the income statement when they are earned—which often occurs before the cash is received from the customers. • Expenses are reported on the income statement in the period when they occur or when they expire—which is often in a period different from when the payment is made.

12. Cash vs. accrual - exercise Imagine you perform the following transactions in a month of business: • Sent out an invoice for $5,000 for a Research project completed this month • Paid $75 in fees for a bill you received last month • Received a bill for $1,000 in web developer fees for work done this month • Received $1,000 from a client for a Company Report that was invoiced last month What would be the profit/surplus for the month if you used Cash? Accrual?

13. Cash vs. accrual - exercise • The effect on cash flow • Using the cash basis method, the profit for this month would be $925 ($1,000 in income minus $75 in fees). • Using the accrual method, the profit for this month would be $4,000 ($5,000 in income minus $1,000 in developer fees).

14. Creating your budget

15. Your budget tells a story… • Puts your operating plan into dollars • Deals with the future • States your intentions • How you will achieve your objectives? Strategic plan New program Schedule

16. Preparing for the process • Understand your financial goals for the year. • What are the links to the strategic plan? • Longer term programs or commitments • Improving operational efficiency • Building reserve for a capital project • Building nest eggs • Gather data • Use current quarterly reports. How is spending trending? • Gather support for projections: • Salary trends • Subscriptions cost trends • Expectations for funding

17. Tracking trends History can have “predictive value.” Your past financial position can predict what might happen in future. • Need a minimum 3 years of data for any meaningful predictions. • Most organizations financials remain relatively stable. But there are changes that could affect financial results: • New leadership • More or fewer staff members • Service or program changes • Technology • External factors (e.g. public policy, economy) • Trend analysis is not definitive, but it does provide a factual picture of what your organization has been able to achieve that can inform you decisions.

18. Let’s consider The organization’s revenue forecast is higher than its 2017 actuals. Is that a reasonable assumption? What if the Library CEO wanted an additional fundraising event and was hoping to raise $20,000. Would that be a good idea?

19. Creating the budget – how to start • From revenues • More conservative, work within capacity. • From expenses • Consider mandate first, know what you need to deliver. • Good for new projects, programs. • Easy to blue sky and spend money you don’t have. • Last year’s results • A pretty realistic look – must look at actuals/income statement. • Edit for new activities or cancelations. • New requirements. • Growth or reduction.

20. Things to consider • How much risk? Can you run a deficit? • How resources will be allocated? • How they will be funded? • Can you have a surplus?

22. Types of expenses • Fixed expenses (FE): payments like rent that will happen in a regularly scheduled cadence. • Variable expenses (VE): expenses, like labor costs, that may change in a given time period. • Accrued expense (AE): an incurred expense that hasn’t been paid yet. • Operational expenses (OE): business expenditures not directly associated with deliver of services—for example, marketing costs, supplies, travel, etc.

23. Typical Library Expenditures • Fixed • Facility costs (i.e. Utilities) • Insurance • Data/Voice services • Debt service • Variable • Library Materials • Staffing • Programming • Technology

24. Types of revenues • Transfers • Grants • Donations • Interest • Rate charges • ILL • Hourly service charges

25. To charge or not charge? Considerations for fee for service: • Where does your funding come from? • Don’t “double dip”. • Establish a credible service level. • How will you spend the money? • Extra revenue is no good if you don’t use it. • You often need to show that money is being “re-invested appropriately” (e.g. training, new resources).

26. Types of fees

27. Pros and Cons

28. Putting it together

29. Detailing budget The level of detail in your budget is up to, however: • If you have salaried employees, you need to include lines that are specific to staff costs. • If you receive formal revenue through grants for capital purchases then you need a specific revenue line for that grant. • Categorize as much as possible for yourself, but simplify reporting with subtotals.

30. Connecting the dots • Certain revenue and expense lines should relate to each other. • Know what lines should correspond. • Your revenue generation plans must be supported by adequate expenditures. • Donation targets…………….Campaign costs (or expenses) • Special events ………………….Expense budgets • Fee for service programs………..Staffing and supplies • Free programming …………….. General operating

31. Stewarding the plan

32. Budget reports Make sure there is enough detail to tell the story. • What did you plan? • How are you doing against that plan? • For major variances, you need a verbal or written explanation.

33. When and what to monitor • If the plan and result are the same, nothing to discuss. • The larger the variance the more scrutiny. • Focus discussions on what is important by using the variances. • Should be quarterly, but schedule depends on complexity of plan.

34. Question If your actuals = your budget, you are doing a great job? Y or N Not necessarily…. If you stick to the plan and miss an opportunity.. If you strayed to solve a problem….

35. Revising the budget • Can you change your budget mid-stream? YES however: • DON’T change the board approved budget. • DO add a column to your mid year report called “Projected actuals”or “Revised forecast”. The budget is a policy document, but sticking to it no matter what is not always the best approach.

36. Budget Forecasting

37. Why forecast? What is the difference between a budget and a forecast? A forecast: • Identifies risk areas ahead of time. • Helps determine future funding needs. • Make more confident strategic decisions.

38. People expenses Sally has been hired as a new librarian. Consider her costs are:

39. Cost of Sally Forecasted over 5 years … Sally costs almost $340,000!

40. Consider subscriptions • If you have $10,000 subscription. • It increases 5% every year… $75,000 in costs year 1 is over $83,000 in year 5. How do you plan for this?

41. In summary….. • There are multiple types of budgets, but most commonly used is the Operational budget. • Your budget needs to tell a story and support your strategic goals and annual activities. • Detail your budget based on your needs. • Monitoring your budget regularly will help understand variances and account for any unplanned expenditures. • Trends and forecasts are necessary to fully understand your spending patterns and revenue needs.