The Basics of BudgetingELPA 9451

1. Fiscal Management Decision maker Follower of institutional policy

2. Listening Post First line of defense for institution problems Overseer of complex information systems Go-between from staff to leadership

Role of Budget Manager

3. Resource Gatherer Fund-raiser External relations to outside vendors Identification of revenue sources

4. Problem Solver Tough answers to tough problems Gathers support for budget decisions

Role of Budget Manager

1. Putting Business Strategies into Operation Reflects the plans, priorities, goals, and

aspirations of the unit. Sometimes the goal is to meet costs

2. Allocating Resources Needs – an essential element of unit to meet

institutional expectations Wants – Something desired by the unit

Purposes of a Budget

3. Providing Incentives Ideally incentives are produced to

encourage sound fiscal management

4. Giving Control Centralized – central budgeting authority

reviews all expenditures that exceed $X Decentralized – Each units budget manager

is held accountable Responsibility Centered Management

Purposes of a Budget

5. Providing Means of Communication Means of providing information to outside

observers Accountability measures to state, boards,

public, etc.

Purposes of a Budget

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

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

Types of Budgets

• 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

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

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?)

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

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

Budget Models

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

Question

• 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

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

Common Issues

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

Common Pitfalls

Questions to ask when facing budget cuts:1. How much time is available to implement

cuts?

2. How reliable is information available?

3. What is the risk tolerance within the institution?

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

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

Strategies for Budget Cuts

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

Group Discussion Question