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?

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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?

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Enacting the BudgetEnacting the Budget

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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

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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

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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

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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

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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?

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Practical ExercisesPractical Exercises

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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.

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Practical ExercisesPractical Exercises

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