The Basics of Budgeting

1. The Basics of Budgeting ELPA 9451

2. Role of Budget Manager • Fiscal Management • Decision maker • Follower of institutional policy • Listening Post • First line of defense for institution problems • Overseer of complex information systems • Go-between from staff to leadership

3. Role of Budget Manager • Resource Gatherer • Fund-raiser • External relations to outside vendors • Identification of revenue sources • Problem Solver • Tough answers to tough problems • Gathers support for budget decisions

4. Purposes of a Budget • Putting Business Strategies into Operation • Reflects the plans, priorities, goals, and aspirations of the unit. • Sometimes the goal is to meet costs • Allocating Resources • Needs – an essential element of unit to meet institutional expectations • Wants – Something desired by the unit

5. Purposes of a Budget • Providing Incentives • Ideally incentives are produced to encourage sound fiscal management • Giving Control • Centralized – central budgeting authority reviews all expenditures that exceed $X • Decentralized – Each units budget manager is held accountable • Responsibility Centered Management

6. Purposes of a Budget • Providing Means of Communication • Means of providing information to outside observers • Accountability measures to state, boards, public, etc.

7. Types of Budgets • Operating Budget • Core budget for an institution • Reflects all income from all sources • Shaped by rules and policies • Based on the fiscal year • University of Missouri budget calendar

8. Types of Budgets • Capital Budgets • Investments that go beyond the current fiscal year • Physical plant, new construction, major equipment • Repair and renovation • Often bonds are sold to finance capital improvements

9. Budget Models • Incremental Budgets • Assumptions: • Both needs and costs vary only slightly from year to year • Budget from previous year accurately reflects the expenditures of the units • Units receive the same percentage increases based on previous years budget • No strategic examination of the expenditure patterns

10. Budget Models • Redistribution • A unit gets a general budget increase, but budget manager redistributes dollars within all lines of the budget • Allows the manager to more accurately adjust money towards areas that need it • More complex and time consuming

11. Budget Models • Zero-Based Budgets • Each item in the budget must be justified • No assumptions about the budgeting process • Allows careful review • Time consuming (inefficient?)

12. Budget Models • Formula Based Budgeting • Mathematical formulas are used to allocate resources • Based on deliverables (credits, students, etc.) • Often used by states to allocate funds to institutions

13. Budget Models • Responsibility Centered Management • Each organization within an institutions is responsible for their own revenues and costs • Self-sufficient units • Provides incentives and flexibility to meet changing priorities • Encourages competition between units

14. Question Q: Which budgeting models are consistent with the UM System’s allocation principles? • Incremental Budgeting • Redistribution Budgeting • Zero-Based Budgeting • Formula Based Budgeting • Resource Centered Management Budgeting

15. Common Issues • Understanding the Organization • Important to learn about not just your own unit, but the institution as a whole • Understand internal processes and policies • Who knows the answers to problems you may face? • Understand your “Inheritance” • What were the norms in your unit? • Fully understand all accounts under your care • Critical issues that must be addressed

16. Common Issues • Assessing Capabilities • What can your colleagues do? Not do? • What can you do effectively? Not do effectively? • Anticipate Problems and Solutions • Budgetary Reviews • Understanding the history of past budgets • Identify Chronic and one-time problems • Manage Change • Consensus of colleagues to implement changes

17. Common Pitfalls Overestimating revenues Postponing a problem Failing to ask for help Failing to identify hidden costs Failing to plan for the end Failing to identity multiyear consequences Failing to understand implications for others Assuming the good times will continue

18. Budget Cuts Questions to ask when facing budget cuts: • How much time is available to implement cuts? • How reliable is information available? • What is the risk tolerance within the institution?

19. Strategies for Budget Cuts • Freeze • Generally, in terms of hiring of staff and faculty or of major purchases • Often an interim step as decision makers think long-term • Across-the-Board Cuts • Easiest strategy to implement • Equitable, but not strategic

20. Strategies for Budget Cuts • Targeted Reductions • Strategic reductions in specific line items or units • Good data needed to implement • Restructuring • Combine programs, new technology, new fiscal structures • Riskier strategy

21. Group Discussion Question • Choose a unit on campus and select a strategic goal to achieve. • Using Conneely’s “Five Steps to a Financially Strategic Plan” (p. 55) identify for each step: • the decisions to be made • the information needed • other important aspects