Budgeting By Lisette T. Jacobson, MPA, MA, PHR
University of Kansas School of Medicine - Wichita
2011 Kansas Public Health Association Fall Conference
Importance of a budget and its functions Legal requirements, budget content, and structure Elements of a budget Types of budgets Types of budget format
◦ Line-item◦ Program-based◦ Performance-based
Budget analysis◦ Variance◦ Percent change (including Annual Compound Growth Rate)◦ Budget shares
Today’s Agenda
A spending plan based on expected revenue and the setting of priorities for the quantity and quality of services to be provided (Ulbrich, 2003)
Development of budget depends on:◦ A revenue plan – includes forecast of revenues available
from existing sources and proposed changes to the revenue system
◦ Expenditures – forecasts and requests from departments for continuing funding and new projects
◦ A procedure for dealing with gaps between revenues and expenditures (e.g. how best to use a surplus or address a deficit)
What is a budget?
Budgeting – to allocate resources Accounting – to assemble, analyze, classify, and
record data affecting an organization’s financial position
Financial reporting – to make accounting data available to users in a timely format
Auditing – to ensure accounting and financial reporting elements are operating properly
Fiscal year – the 12-month period of time after which we determine financial position and results
Terminology
The Balance Sheet/Statement of Net Assets◦ Shows elements of a “snapshot” of resources (for example, as
of the last day, 12/31, of FY11) Assets - what is owned (e.g., cash, receivables, fixed assets) Liabilities – what is owed to outsiders (e.g., payables, debt) Equity – what is owned without claim
The Flow Statement◦ A “flow” statement is needed to show all financial activity
during the reporting period (e.g., Jan. 1 to Dec. 31): Statement of Revenues, Expenditures, and Changes in Fund
Balance (e.g., surplus or deficit) In government, may also be referred to as “Statement of Activities” In business, is referred to as “Income Statement”
How is a budget different from a financial statement?
Plan – sets out a design with price tags
Economics – influences economic behavior
Decision process – requires choices
Behavior – (stressful) goal-directed behavior
Contract – involves mutual obligations
Culture – taps into organizational preferences
Politics – expressions of power
What is a budget?
Four primary functions (as defined by the Government Finance Officers Association (GFOA) Distinguished Budget
Presentation Awards Program criteria, www.gfoa.org) ◦ A policy document
◦ A financial plan
◦ An operations guide
◦ A communications device
Functions of the Budget
Policy document - ◦ Requires an executive budget summary; long-term financial
policies and priority issues for upcoming fiscal year; definition of a balanced budget; budget message should describe changes in priorities, issues facing the organization, and actions taken
Financial plan –◦ Requires a summary (an overview of all funds, revenues, and
expenditures); each fund specifies revenues and expenditures; projected changes in fund balance; debt policy; basis of accounting and budgeting; description of each major fund; and capital expenditures (must be a separate section)
Functions of the Budget (cont’d)
Operations guide -◦ Requires description of each department’s function and service;
includes departmental performance indicators and how well these line up against their goals and accomplishments over prior, current, and upcoming years; includes org. chart and schedule of personnel
Communications device -◦ Requires overview of the budget process and amendment
procedures; includes letter of transmittal; illustrates complex financial and statistical information in charts, graphs, and tables; executive summary includes major budgetary resources, issues, and trends; includes a glossary of specific terminology, statistical data regarding demographics of the organization/community, current state of economy, education, local history, etc.
Functions of the Budget (cont’d)
The GFOA Distinguished Budget Presentation Award has been awarded to:
◦ Sedgwick County – each year over the last 26 years◦ City of Wichita – each year over the last 22 years◦ Wichita Public Schools (USD 259) – each year over the
last 16 years
What is the point of all this?
Who received this award?
So, now that we know why becoming familiar with the budgeting process is important, what all does a budget entail and how do we analyze it?
A budget document must conform to the law Some state governments require specific financial
information in the budget and may provide forms on which local budgets are to be filled out
Requirements included in state laws have served mainly as a minimum for budget documents
Once local governments have complied with state law, they are free to set up more sophisticated budget systems if they wish
Legal Requirements
Letter of transmittal or a budget message Table of contents Introduction Summary tables showing the balance of revenues
and expenditures for each fund A detailed section on expenditures for each fund A detailed section on projected revenues A section on capital outlays and debt Supporting material
Overall Budget Content and Structure
Revenues – who pays Expenditures – who benefits Result –
◦ Balance: yearly revenues equal expenditures◦ Deficit: yearly shortfall of revenues to expenditures◦ Debt: cumulative deficits covered by borrowing◦ Surplus: yearly excess of revenues
Budget Elements
Annual operating budget◦ Yearly plan for regular and recurring expenditures
(consumption)
Capital budget◦ The first year of a plan for non-recurring outlays
providing benefits for several years (investment)
Unified budget
Types of Budgets
Line-item budget
Program-based budget
Performance-based budget
Types of Budget Format
A budget format where departmental expenditures are grouped according to the items that will be purchased, with one item or group of items on each line
Allows for the comparison of items’ cost to the cost of similar items purchased elsewhere, which helps determine whether a funding request was too high
Detailed line items have often given way to aggregated functional categories such as personnel services, supplies and materials, capital expenditures, internal services, etc.
Line-Item Budget
Health Department
Personnel Services $ 50,000Supplies $ 20,000Services $ 25,000Capital outlays $ 5,000Total $100,000
Focus: Category of spending
Line-Item Budget (cont’d)
Organizes budgetary information and allocates funds along program rather than departmental lines
Emphasizes quality and cost of services – focus is on program outputs/outcomes and maintenance
Is often accompanied by performance measures When program budgeting and performance
measures are linked this way, then a “work plan” is incorporated into the budget!
Program-based Budget
Program-based Budget (cont’d)
Health Department
Administration/leadership $ 10,000Preventive Health Services $ 25,000Family Health $ 60,000Health Education $ 5,000Total $100,000
Focus: Task to be accomplished
Includes performance goals and objectives Includes demand, workload, efficiency, and
outcome/impact measures for each program Provides a basis for comparing cost and quality of
services Provides a “running” check on whether programs
achieve their goals Uses performance measures Negotiates objectives using MBO philosophy Ties and ranks objectives to strategic plan Line managers may have more discretion
Performance-based Budget
Types of performance indicators
◦ Inputs (resources used): dollars, staffing, materials
◦ Demand for service: number of flu shots given
◦ Workload: number of nurses involved with giving flu shots
◦ Productivity: cost per flu shot, labor cost per flu shot
◦ Effectiveness (impact/outcome): fewer people admitted to hospital because of flu symptoms
Performance-based Budget (cont’d)
Health Department
Year 1 Year 2 Budget
Total cost $26,000 $37,000 $35,000
Number of shots 12,000 10,000 10,000
Unit cost/shot $2.17 $3.70 $3.50
Focus: Cost of performance
Performance-based Budget (cont’d)
“Budget format influences budget deliberations that influence budget allocations that, in turn, influence program outcomes” (Gloria A. Grizzle, 1986)
Expenditure (cost) analysis – metrics to use:
◦ Variance analysis
◦ Percent change analysis
◦ Budget shares analysis
Revenue analysis◦ May use similar types of metrics as in the expenditure
analysis
Budget Analysis
From service provision to cost of provision
From budget compliance to cost of service
Shift in Thinking
Variance Analysis
Variance analysis – assesses how much the actual utilization of funds varies from the budgeted amount → It tells you whether you are over or under budget!
Formula:
Actual Amount
Budgeted *100%
Attempts to answer the following questions:
◦ Is the difference consistent across time?
◦ Does the difference appear to be related to particular activities?
Percent change – assesses how much the budgeted amount varies from previous years → It tells you whether you have an upward or downward trend!
Formula:
Current Budget – Previous Budget
Previous Budget *100%
Percent Change Analysis
Can also be analyzed through calculation of the Annual Compound Growth Rate (ACGR)
Formula:Most recent time period divided byOldest time periodRaised to the power of (1/t)Minus 1Or(recent/oldest)(1/t) - 1
Where t is the time period or “book ends”
Percent Change (cont’d)
Compound Growth
Period 1 Period 3 Growth RateX $100 $120 9.54%*Y $210 $200 -2.41%Total $310 $320 1.60%
Formula: (recent/oldest)(1/t) – 1• With t = 2, then (120/100)(1/2)-1; then (1.2)(.5)-1; then
(1.0954)-1 = 0.0954; then 0.0954 times 100% = 9.5445% as the yearly growth rate
Percent Change (cont’d)
Budget shares – assesses how much of the budget is allocated to each cost center → It tells you what cost center “carves out” the largest or smallest piece of your total budget!
Formula:
Individual expenditure by program/division Total amount of expenditures
*100%
Budget Shares Analysis
To determine trends (upward or downward) Expenditures
◦ To determine whether we are over/under budget◦ To determine what takes up the largest/smallest piece of the
budget Used to forecast revenues Remember the 4 functions that budget documents serve:
◦ A policy document
◦ A financial plan
◦ An operations guide
◦ A communications device
Overview - Why Conduct an Expenditure and Revenue Analysis?
Questions?
Thank you!!