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?
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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”
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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
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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
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Recording the BudgetRecording the Budget
• If Estimated Revenues > Appropriations, Fund Balance will Increase
• If Appropriations > Estimated Revenues, Fund Balance will Decrease
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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?
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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?
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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
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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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