CACUBO Winter Workshop, February 19, 2014. What is budgeting and why is it important? Academic...

CACUBO Winter Workshop, February 19, 2014

BudgetingCamy Broeker

Associate Vice ChancellorFinance

IUPUI


Agenda for Session

What is budgeting and why is it important? Academic planning Budget development Primary architectures of budgeting Major sources of revenues Major components of expenditures Forecasting and ownership Capital budgets – integration with operational

budgets Budget cuts


What are Budgets?

Plans: expectations of deliverables expressed in financial terms› Allocation of Resources - Revenues spent to achieve

specific purpose Commitments:

› Enrollments› Research funds› Services› Faculty/Employees › Capital – Systems, Buildings, Equipment

Controls › Mechanisms to authorize revenues and expenditures


What are Budgets?

Budgets are fiduciary enablers: assurances to boards of trustees and/orstate authorities that revenues and expenditures will be kept in balance

Performance measurement› Expected deliverables – academic or

administrative


Academic Planning

More diverse faculty› Sometimes different faculty for emerging

academic field More diverse student body More facilities or upgraded facilities Increased reputation and quality


Academic Planning

Plans should become strategic› Could be constrained by resources› Prioritization will be important

Plans can influence revenues› Shift to focus on research› Quality initiative can decrease enrollment

Reallocation of expenditure budgets to achieve academic priorities


Academic Planning

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


Budget Development

Operating budgets› Forecast of revenues and expenses› For an operating period – typically 1 year› Authorizes spending› Basis for performance measurements

Capital budgets› Major outlays› Longer timeframes


Budget Models

Incremental Budgeting› Annual awarding of increments to prior

year budget› Presupposition that the priorities remain

the same› Adjustments should be made to refine to

ensure prioritization


Budget Models

Zero-based Budgeting› Start at $0 and build up based on needs› The overall package of all activities

represents the budget› Requires priority ranking of the activities› Puts everything up for grabs› Zero-based budgeting is rare in practice› It assumes courage to implement

fundamental changes


Budget Development

Begins with estimating annual revenues

Identifying spending priorities› Examine programs funded in prior years› Propose increases (decreases) for

upcoming year Ends with balancing expenditures to

expected revenues


Budget Development - Revenues

Tuition Revenue› Enrollments

Freshmen Upper Class (Retention and Transfers)

› Setting tuition price Undergraduate rates tend to be set at

institutional level Public schools:

have state restraints have instate and out of state student considerations might have caps on increases


Budget Development – Revenues

Student fees other than tuition› Special fees related to a program› Fees directly associated with a class, i.e.

lab fees› At many schools these fees are controlled

by the school› Can be directly allocated to the

program/school› Are significant at many institutions



Gifts › Include to the extent gifts provide support

to operations› Capital campaigns – less predictable› Have to match restricted gifts with uses› Some gifts are controlled by specific

schools, departments and even faculty members Requires coordination between multiple

people



Endowment› Contingent on restrictions, realized

endowment returns and earnings can be available for budget support

› Endowment spending rate usually established and monitored by institution

› Schools might have policy on appropriate use for operations



Investment Income› Generated from short and long term investments› Modeling the cash flow is important – think about what

has recently happened with the economy Research Dollars

› Indirect cost revenue› Freeing up of unrestricted dollars› Budgets are done at proposal stage

Other› Sales and services

Conferences and seminars (plus expenditures) Clinical income (internal or private practice plans)

› Rents


Budget Development - Revenues

Auxiliary Enterprise Revenues› Look and feel of for profit› Gross sales revenues should cover total

operating costs› Net operating income should cover debt

service› Campus (cash) subsidies should be budgeted› Indirect subsidies should be understood

Like facilities, utilities, administrative costs› Financial structure is complex and should be

enhanced with strong financial reporting


Budget Development - Expenditures

Salaries› Develop policies for annual adjustments› Turnover savings can be available for

other uses› Position control › Policies related to use of salary savings

and vacant positions Benefits

› Not always easy to forecast› Multiple ways of handling the charges


Budget Development - Expenditures

Financial Aid Materials, Services and Supplies

› Items such as paper, toner and software› Internal sales usually a contra expense (inc)› Cost of goods sold (auxiliaries)

Travel Capital Equipment

› Should capital outlays be budgeted?› Depreciation should be budgeted for

auxiliaries


Other Budgeting Issues

What should be budgeted? Only operating (current funds)?

Should net income be budgeted? What about use of cash – non base

budget dollars? Should revenue not intended to be

used be budgeted? Should the budget balance?


Ownership of Budget Variances

Governing boards should own variances

Role of:› President› Provost› CFO

Delegation to Deans and Directors Who owns surpluses and deficits Excessive negative variances over time


Budget Forecasting

Budget to actual variances with estimated projections through fiscal year

How often?› Depends on the revenue sources

Tuition and Fees known after first month Other sources can be variable

› Minimum of quarterly› Monthly at end of fiscal year

Review for internal controls and decision making with leadership


Capital Budgets

Require long planning lead times Implemented over multiple budget

cycles Capital budgets should include:

› Equipment› Enterprise Software› Renovations› New Facilities› Infrastructure


Budget Architecture

Three budget designs› Centralized unrestricted budgeting› All funds budgeting› Revenue responsibility budgeting


Budget Architecture Centralized unrestricted budgeting

› Central owns unrestricted revenues › Goal is to divide these revenues appropriately

among the expenditure budgets of the units› Central estimates and identifies

Revenues Expenditure inflation factors Priorities

› Discussions are exclusively on expenditures› Negotiation is the behavioral modality› Restricted endowment and gifts are off the

table


Budget Architecture

All-funds Budgeting› Central owns unrestricted revenues› Designated and restricted gifts are on the

table with unrestricted revenues› Deans strive to maximize their share of the

pie› Provosts requests are against the same

incremental resources› Administrative fees can play a role in

funding some activities


Budget Architecture

Revenue Responsibility Budgeting› Based on local ownership of revenues

Tuition earned by unit stays in unit Research recoveries stay in unit where generated

› Local ownership of expenses Facility expenses Administrative services

› Deans develop feasible revenue and expenditure budgets

Central can still play roll in establishing guidelines and priorities


Budget Architecture Revenue Responsibility Budgeting, cont

› Budget variances stay in the unit, whether positive or negative Positive: allows for large multi-year projects at

unit level Negative: school’s must develop recovery

plans when deficits occur› Pressures are put on keeping down

administrative fees› Deans become very powerful› Forces the issue of fiscal responsibility to the

school/department level


Budget Cuts

Fiscal year beginning cuts Mid year cuts Base budget vs. cash Possibilities

› Salaries Slow down in hiring Freezes Reduction in force

› Travel› Identification of non-mandatory services› Other deferrals


BudgetingQuestions

CACUBO Winter Workshop, February 19, 2014. What is budgeting and why is it important? Academic...

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