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
A PHILOSOPHICAL APPROACH TO BUDGETING
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
A PHILOSOPHICAL APPROACH TO BUDGETING
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
A PHILOSOPHICAL APPROACH TO BUDGETING
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
A PHILOSOPHICAL APPROACH TO BUDGETING
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
A PHILOSOPHICAL APPROACH TO BUDGETING
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
A PHILOSOPHICAL APPROACH TO BUDGETING
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
A PHILOSOPHICAL APPROACH TO BUDGETING
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?
A PHILOSOPHICAL APPROACH TO BUDGETING
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
A PHILOSOPHICAL APPROACH TO BUDGETING
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
A PHILOSOPHICAL APPROACH TO BUDGETING
Financial planning for 2011-2012Expenditures and transfers:
Personnel costsSalaries and wagesBenefits expense
Instructional supplies and expenseAdministration and generalDevelopment and fund raisingOccupancyAuxiliary services
A PHILOSOPHICAL APPROACH TO BUDGETING
Interfund transfers:Transfers to plant – equipment
additionsTransfers to plant – PPRRSMTransfers to endowment --
reinvestment
Total Expenditures and transfers
A PHILOSOPHICAL APPROACH TO BUDGETING
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)
A PHILOSOPHICAL APPROACH TO BUDGETING
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
A PHILOSOPHICAL APPROACH TO BUDGETING
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
SETTING 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
SETTING THE TUITION PRICE
In future periods, households will need to allocate their total expenditures to the growing, disproportionate increases in education and health care