a philosophical approach to budgeting

A PHILOSOPHICAL APPROACH TO BUDGETING

Sorrel R Paskin CMA

Presenter

Resource Associates Inc.Professional Services to Independent Schools737 Olive Way Suite 2405Seattle WA 98101(206) 453-4529

INTERGENERATIONAL EQUITY Maintain financial equilibrium Prepare a strategic financial plan and

update the plan annually to reflect changing circumstances

Annual budgets represent annual instantiations of the strategic financial plan

Analyze the specific cost drivers operating in your school

INTERGENERATIONAL EQUITY

Optimize faculty and administrative assignments to achieve optimal productivity to cost ratios

Analyze planned additions to plant and enhancements of program services to determine future budgetary impact

INTERGENERATIONAL EQUITY

Ensure that growth rates in tuition reflect the growth rates in total expenditures inclusive of reserves funding

FINANCIAL EQUILIBRIUM Annually, revenues equal or exceed

expenditures inclusive of total operating expense, reserves funding, transfers to plant and reinvestment in endowment

Year over year, the annual rate of growth in revenues equals or exceeds the annual rate of growth in total expenditures and reserves funding

FINANCIAL EQUILIBRIUM

The value of financial capital is preserved or enhanced

The value and functional adequacy of physical capital are preserved or enhanced

The value of human capital is preserved or enhanced

FINANCIAL EQUILIBRIUM

The quality of the curriculum, programs and services to students is preserved or enhanced


Annual budget reveals the priorities and goals of the school – the financial commitments made to faculty support and professional development; to financial aid to maintain goals of access and affordability; and institutional outreach and development


When viewed over a multi-year period, changes in allocations to the cost centers testifies to the school’s changing needs and the new priorities it develops to meet those needs

Undertaken within the context and prescriptions of the strategic financial plan and its accompanying financial model


The strategic financial plan and the included financial planning model covers the ensuing three to five years and prescribes the principal objectives to be achieved, the strategies sufficient to their accomplishment, and delineates the specific tasks and responsibility centers for their implementation


Each year included within the plan represents an “installment” of objectives, strategies and tasks that must be accomplished to ensure that the overall plan is achieved; in this way the annual budget is informed of its responsibilities with respect to implementing the strategic financial plan


Starting point for budgeting is forecasting the expenditures (inclusive of reserves funding) expected to be incurred in the fiscal year

Planned expenditures are developed from the “ground up”: academic departments and administrative offices forecast needs in priority order


Uses a variant of the zero-based approach to estimate costs

Provides a significant opportunity to evaluate programs and services to determine quality and cost efficiency instead of merely confirming past decisions


Asks: what resources will be required to accomplish our mission and achieve our priorities in the year to come?

Then asks: what resources can be made available to support people and programs next year?


Even if projected resources cannot support anticipated expenditures and reserves funding, the exercise has forced their identification, ranks them with respect to their importance, and in the case of those that must be deferred, “promises” their future realization


Only after prioritized expenditures and appropriate levels of transfers have been considered are the projected revenues recognized

Results in need for “negotiated compromise” to balance the budget


Financial planning for 2011-2012Expenditures and transfers:

Personnel costsSalaries and wagesBenefits expense

Instructional supplies and expenseAdministration and generalDevelopment and fund raisingOccupancyAuxiliary services


Interfund transfers:Transfers to plant – equipment

additionsTransfers to plant – PPRRSMTransfers to endowment --

reinvestment

Total Expenditures and transfers


Revenue and SupportTuition and fees revenueLess: financial aid and remissionNet tuition and feesInterest incomeEndowment investment income Net gains (losses) on endowment investment

returnOther programs fees revenueAnnual fund contributionsFoundation subventionsOther income (net of expense)


Net assets released from restriction(restricted gifts and endowment investment return for which the donors’ stipulations with respect to use have been satisfied)

Total revenue and support

Excess (deficiency) revenue and support overexpenditures and transfers


Fiscal equilibrium is present when, within a narrow range: The percentage of total revenue

allocable to each revenue center remains fixed over time, and

The percentage of total expenditures allocable to each cost center remains fixed over timeProvided that there are no material changes in operating patterns

SETTING THE TUITION PRICE Science not art; relies on the strategic

financial plan Examine the coverage ratios for the

previous five years Establish targets for the coverage ratio of

each component of the revenues stream Determine the target coverage ratio for

tuition revenue net of financial aid Price tuition accordingly

SETTING THE TUITION PRICE Ensure that the tuition price provides

for reserves funding including a stabilization reserve to mitigate fiscal distress in the event of a precipitate decline in enrollment Cost structure of a school is largely fixed,

not variable, and thus not subject to material alteration during the school year Faculty contracts cover the academic year

SETTING THE TUITION PRICE

Selling tuition increases Critical role of transparency and

accountability Communications with parents Disclosure of prior year operating results

and current year budget Explanation of factors driving the cost

structure of the school Public relations initiatives

SETTING THE TUITION PRICE Tuition as a reflection of value

received Financial aid achieves access and

affordability goals Absent material improvement in

family income, in the long run financial aid awards will increase 1% to 1-1/2% over the increase in the tuition price


Each student receives an “implicit scholarship” reflecting the fact that the tuition covers only a percentage of the cost of educating that student; the cost is subsidized by foundation subventions, investment income and other revenue streams

SETTING THE TUITION PRICE Role of perception of “entitlement” in

setting the tuition price In the American economy, price is a

reflection of value received Economic consequences of differential

rates of productivity growth Projections of future cost growth in

education, health care and other consumer expenditures


In future periods, households will need to allocate their total expenditures to the growing, disproportionate increases in education and health care

a philosophical approach to budgeting

Documents

financial aid

financial commitments

accompanying financial

zerobased approach

overall plan

annual rate of growth

growth rates

professional services