the envelope system © dale r. geiger 20111. questions to consider does “the government”...

The Envelope SystemThe Envelope System

© Dale R. Geiger 2011 1

Questions to ConsiderQuestions to Consider

• Does “the Government” overspend its budget?

• Who decides how much to spend?

• How do managers make sure they don’t overspend?

© Dale R. Geiger 2011 2

Terminal Learning ObjectiveTerminal Learning Objective

• Task: Calculate Unobligated Balance • Condition: You are a cost advisor technician with

access to all PCAM course handouts, readings, and spreadsheet tools of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors.

• Standard: With at least 80% accuracy:• Describe steps in budgetary process• Explain budgetary terminology• Demonstrate the purchasing process • Explain “good financial management”

© Dale R. Geiger 2011 3

Financial Planning and ControlFinancial Planning and Control

• You have been hired as a budget consultant by the Simmons family• Gomer, Madge, Bert, Lacy and Maddie • Gomer’s monthly paycheck is estimatedestimated to be

$1000.

• How should they spend it?

© Dale R. Geiger 2011 4

The Envelope SystemThe Envelope System

• Predetermines amounts to be spent for various needs

• Sets money aside for specified purpose• Prohibits spending for other than intended

Purpose--can’t take money from one envelope and put in another

© Dale R. Geiger 2011 5

Proposing the BudgetProposing the Budget

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Regarding BudgetsRegarding Budgets

• The budget is legallegal and an accounting event. accounting event. What does this mean?

• Many entities proposepropose budgets • Who enactsenacts the budget?• Budgets authorize spending based on estimated

revenue • Where is the real money?• Can we plan to spend more than we expect to

receive?

© Dale R. Geiger 2011 7

Enacting the BudgetEnacting the Budget

© Dale R. Geiger 2011 8

The Budgetary EquationThe Budgetary Equation

Estimated Revenues

= Appropriations + Planned Change In Fund Balance

© Dale R. Geiger 2011 9

Recording the BudgetRecording the Budget

• If Estimated Revenues > Appropriations, Fund Balance will Increase

• If Appropriations > Estimated Revenues, Fund Balance will Decrease

© Dale R. Geiger 2011 10

Learning CheckLearning Check

• What is the first step in the budget process?• If estimated revenues are $50 and

appropriations are $55, what is the planned change in Fund Balance?

© Dale R. Geiger 2011 11

The Budgetary AccountsThe Budgetary Accounts

• Exist solely for the purpose of recording and tracking the budget• Budget = a legally binding spending plan

• Account Titles:• Estimated Revenue = Expected Income• Appropriations = Authorized Spending• Budgetary Fund Balance = Planned Change• Unreserved Fund Balance = Savings

© Dale R. Geiger 2011 12

Spending AuthoritySpending Authority

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Controlling the BudgetControlling the Budget

• Appropriations, Obligations Expenditures• Appropriations ensure that funds are spent as the

voting body intends • The obligation process ensures that appropriations

are not overspent

• Estimated Revenues Revenues• Estimated revenues give a basis of comparison for

actual revenues

© Dale R. Geiger 2011 14

Spending ProcessSpending Process

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Budgetary AccountingBudgetary Accounting

• Provides a control mechanism to prevent overspending funds

• Does proper budgetary accounting prevent deficits? Why or why not?• It DOES prevent overspending• It does NOT prevent revenue shortfalls• It does NOT prevent over-appropriating by the

legislative body

© Dale R. Geiger 2011 16

Learning CheckLearning Check

• What mechanisms exist to control expenditures?

• What is the step in the spending authorization process that releases funding quarter by quarter?

© Dale R. Geiger 2011 17

Gomer Makes a PurchaseGomer Makes a Purchase

• Signs up for 3-month trial membership to the Doughnut of the Month Club, $60• Remove $60 from Gomer’s envelope• Place in the “Obligated” envelope• Key Point: Ordering triggers an obligation

© Dale R. Geiger 2011 18

Gomer Makes a PurchaseGomer Makes a Purchase

• Receives first month’s shipment of Doughnuts with invoice for $25:• Remove $20 from the “Obligated” envelope

and replace in Gomer’s envelope• Remove $25 from Gomer’s envelope and place

in “Expenditures” envelope• Key Point: Receiving goods and services

triggers an expenditure

© Dale R. Geiger 2011 19

Tracking Gomer’s Unobligated BalanceTracking Gomer’s Unobligated Balance

• How much does Gomer have left to spend?• Assume his original appropriation was $100

Appropriations - OpenObligations

- ExpendituresUnobligated Balance

=

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Tracking Gomer’s Unobligated BalanceTracking Gomer’s Unobligated Balance

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Key PointsKey Points• Ordering goods or services triggers an obligationobligation Prevents over-expending of funds

• Receiving goods or services triggers an expenditureexpenditure Reverse obligation Record expenditure

• Salaries, wages and other recurring expenditures are not obligated, but may be committed

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Learning CheckLearning Check

• What is the equation to calculate unobligated balance?

• What is the event that triggers and expenditure?

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Good Financial ManagementGood Financial Management

• If Gomer’s budget is $100, what happens if he spends more than $100?

• What happens if he spends less?• What accounting mechanisms exist to

measure the quality of Gomer’s spending?

© Dale R. Geiger 2011 24

Practical ExercisesPractical Exercises

© Dale R. Geiger 2011 25

The Envelope System SpreadsheetThe Envelope System Spreadsheet

Enter estimated revenue and the appropriation for each

item. The spreadsheet calculates the planned

change in the Fund Balance.

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The Envelope System SpreadsheetThe Envelope System Spreadsheet

The Unobligated Balance tab shows the result of Gomer’s activity on the entire family’s unobligated balance

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The Envelope System SpreadsheetThe Envelope System Spreadsheet

To see only Gomer’s activity, enter only his info on the

“Create Budget” tab.

© Dale R. Geiger 201128

Practical ExercisesPractical Exercises

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