summarizes

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By the end of this lesson, students should be able to:

 Define budgeting  Describe the main types of budgets

Explain the major challenges of preparing a budget

Define the different types of reports used in fund accounting.  List and describe the basic parts of a financial statement

Universities use a variety of techniques to monitor the budget. Some of the methods used are unique to higher education while most are common with any business model. Financial administrators should be familiar with the best practices to ensure sound financial management. The basics of a budgeting are to take existing income and predicted income and write down what will be spent according to priority on an annual basis. Budgeting at the university is both simple yet complex. There is a lot of internal political pressure placed on the budgeting process. Higher education has not had enough funding to accuse the industry of gross mismanagement. There are plenty of examples of waste but the affect of the higher education industry far outweighs the amount of investment. Any good budget should include a fair amount of planning so that our figures are based on well-studied possibilities rather than hopes. When building a budget the CFO will use multiple years and multiple techniques to present the overall financial picture to those charged with fiscal responsibility. No matter how many different ways a budget can be derived most are slight alterations of the previous year. This has been the most effective way universities have prepared budgets over time. To build a budget those who are the practitioners have to be both creative and scientists. The creative nature of budgeting has to do with the ability to anticipate the unexpected. There should be a close relationship between planning and budgeting. Planning is a marriage between art and science. In the end, planning cannot overcome the fact that it is impossible to significantly reduce uncertainty.

1. Operating- the core budget that uses unrestricted funds for departmental and

instructional support. 2. Capital- a separate budget used to track the renovation of facilities and the construction

of new facilities. 3. Restricted- another budget used to track federal and state grants, endowment, gift

income and external aid.

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4. Auxiliary Enterprise- budgeted money that is derived from programs that pay their way such as bookstores, food service, residential, sports and other events.

5. Hospital Operations- budgets for universities that operate training programs for degrees leading to medical specialties.

6. Service Center- budgets that track transfers from within the university for services such as phone, printing and maintenance work.

The leadership style of the president and/or the type of university will determine the process for creating the budget. Generally, last year’s figures are the starting point and then changes in the goals and additions to staffing are incorporated. State institutions typically take longer to complete the budget cycle as there are many bureaucratic involved in setting the final numbers. Once the larger aggregate amounts are known departments are asked to prepare a budget and meet with the CFO who can fit the requests into the overall available resources. Along the way there are many opportunities for political pressures and tactics to influence the final outcome. It is rare to find a university that practices a true “bottom-up” budgeting process. Most of the decisions are “top-down”. The economy affects the budget process and has been cyclical in nature through the years. During lean times the general public tends to return to college; however, prices have raised so much in the latter years which may change that cycle. Federal and State policy can have a profound impact on a budget as changes can bring-in more money or reduce available funding. Other factors that influence budgeting are changing regulatory pressures, a shift in demographics and a shift in the mission of the university. All of these together help to explain why budgeting is both an art and a science.

1. Incremental- takes the previous year’s budget and adds or deletes small amounts for the

next year. 2. Formula- applies formulas to one or more of the calculations used to build the budget. 3. Program- divides money among various departments centered on a program. 4. Zero-Base- starts at zero every year and each department must justify its existence and

level of funding. 5. Performance- uses or identifies desired outcome measures to fund a department the

next year. 6. Incentive- uses proposals to provide funding up-front based on what is anticipated to

happen. 7. Cost Center- views each department as a stand-alone enterprise.

Fund accounting attempts to provide a comprehensive picture of the health of a university. Although it is impossible to clearly show every transaction fund accounting can provide a snapshot of the overall financial picture. There are various types of accounts in a good budget. The accounting equation measures the balanced relationship between assets, liabilities, and net worth. All universities have either cash or cash equivalents and capital assets. Further, universities have liabilities of those who owe it money from outside the institution or debts owed from within. When these liabilities are reflected with the assets of the university it is possible to figure the net worth of the institution.

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The financial manager should track restricted and unrestricted funds to ensure the best possible financial picture of the university. Non-profit groups like higher education receive gifts that are usually restricted in their use by the donor. Where the funds are held is important to determine how the money is spent. If the university does not manage the funds itself then it simply acts as an agent of the gift. Those funds that are held by the institution are either expendable or nonexpendable. Expendable funds should be used for the intended purpose and the level of expenditure is dictated by the gift. Nonexpendable funds such as endowment cannot be spent but the income produced can be used. Some donors restrict the use of the income. Other income may be used as loans to students and annuities are monies that will come to the university at the end of a certain period of time and/or death of the individual. These different types of funds are difficult to manage and the university should have written policies to ensure the proper use of the money. There are some basic accounting rules that are used in higher education. Accrual basis of accounting spends money as it is received and is recorded as the money goes out. Interfund accounting seeks to maintain a self-balance within accounts in the university. Sometimes cash is spent from one fund that was intended to come from a different fund. Maintaining a balance and record of these transactions is interfund accounting. Any basic accounting system will have a chart of accounts. This is the way a university can determine where money is spent. The account listing is usually alphabetical and numeric. This type of system will enable financial managers to find particular expenditures quickly. Most financial statements have four main parts:

1. Balance sheet- contains the assets, liabilities, and fund balances at a given point in time. 2. Statement of changes in fund balances- summarizes the activity within each group of

funds for specified period of time. 3. Statement of current fund revenues, expenditures, and other changes- provides more

details of changes to current funds that are reflected in the statement of changes in fund balances.

4. Footnotes- provide a way for the financial officer to write notes that explain unusual or unique occurrences in financial transactions. This way a more complete understanding of what has taken place can be achieved.

College income is mostly obvious and should be detailed enough to give the board of trustees a sense of what it costs to operate the institution. Expenditures should be carefully treated to ensure a true reflection of costs. Spending on maintenance is excluded from current expenditures. How the university reports changes to capital stock is important. These changes reflect any additions to the physical plant less the depreciation. Current expenditures are added to current spending of capital stock to show a clear cost of the yearly operations. The university should display assets and liabilities at the end of a year to show the college’s wealth. Smaller universities struggle to balance their budgets every year and it is difficult to predict the future financial environment. The two overarching concerns are the management of cash flow from business operations and management of the investment portfolio. The university should strive to manage both types of cash flow in such a way that stability can be achieved in the long- run.