Refinements and improvements to the annual budget process
With the economic challenges facing many higher education institutions today, and the need to do more with less, budgeting is clearly a very critical agenda item. Addressing the problems associated with the budget process and getting people to work together toward common goals and outcomes is a top priority. And if budgeting is a financial application, why are 90% of the users not financial?
It is not uncommon for faculty and staff at an institution of higher education to view the budgeting process as something that is “imposed” by financial services. In order to improve this process, an interface for faculty and staff that would guide them through the budget process in a way that is both simple and very powerful should be developed and used. What would be helpful is the flexibility to budget the way they think about their areas of responsibility and allow them to budget in accordance with the institution’s strategic plan, including full disclosure and documentation of how and why they need what they are requesting in their budget.
In addition, it is not uncommon for the finance department to lack the staff or resources to manage all of the complex mechanical aspects of the budget process, as well as to provide timely analysis and decision support. Simply preparing budget templates, distributing them to faculty and staff, collecting these spreadsheets, verifying their accuracy, aggregating and consolidating the numbers, and preparing for budget review sessions is a cumbersome and manual process for finance staff. Instead, the budgeting system in place should alleviate most of these tedious tasks and allow finance staff to focus their time and attention on analyzing and supporting value-added decisions.
Budgeting for special projects and initiatives
Because the budgeting process requires the identification of expenditures for special initiatives or projects that may “cross over” various accounts or even departments, it can become very difficult to properly track these items in the budgeting process, and this presents opportunities for human error, especially when a budget for a project is not approved and someone, presumably a member of the finance department, must accurately “strip out” or remove all expenditures from all relevant accounts in the budgeting process and then reconsolidate the results.
Ideally, a budgeting system would allow for the easy creation of budgets for initiatives and special projects, facilitating an initiative-based budget review process. This type of system should allow faculty and staff to submit these initiatives and then the budget system automatically determines the impact on the account structure. Without this type of budget system, if an initiative is not approved, someone has to go back into each of the associated accounts and try to remember how much that account was allocated to that initiative that was canceled. This can lead to inaccuracies and there will be no audit trail.
Detailed budgeting for position control
For many institutions of higher education, it is not uncommon to find that more than forty percent (40%) of expenditures are related to personnel costs (salaries and benefits). However, salary and staffing planning are often disconnected from the rest of the budgeting process. This can lead to confusion, shuffling, and a lack of financial awareness and understanding on the part of department heads who actually manage faculty and staff.
To mitigate this problem, detailed budgeting for “line item control” should be implemented. Salaries and benefits are a special line item in the budget process. Therefore, the budget system should be able to meet half of the “position control” requirements – half of the budgeting.
The budget system should allow faculty and staff to plan for staffing down to the individual level and let the “system” manage additions, reductions, increases, FICA, benefits, and the like.
In addition, timely and accurate reporting is always a challenge, and faculty and staff rely heavily on the finance department for reports. Producing these reports can be time-consuming and error-prone, especially if you are using spreadsheets linked to Excel.
What is needed are monthly budget and management reports. A good system should have predefined report formats, specific reports, and fully customized reports that do not require the user to learn a new reporting environment. It should be user-friendly and simple to use while meeting the specific needs of the institution.
Budget the way they think
Because needs differ from institution to institution in the way people think and budget, this can be a complex issue. For example, the needs of the English department do not match the needs of the business department, which do not match the needs of the music department. Everyone has a unique way of looking at their financial needs. All of this is made more complex by the fact that the institution must also consider such diverse needs as housing, food services, athletics, facilities maintenance, alumni relations, admissions, and other non-academic departments.
Therefore, flexibility is needed to meet the challenges of diverse departmental needs so that each faculty or staff member involved in the budget process can budget as they see fit, but in a well-controlled environment.
Preparing multiple versions of the budget
Typically, budgets are and must be prepared without knowing exactly what actual student enrollment will be, what grants might be approved, or what gifts will be received. This is probably the most challenging part of the budget process. Therefore, the institution must prepare several versions of the budget and then choose a scenario that most closely approximates the reality of the school year when it begins.
What is needed is a budget system that can handle multiple scenarios/versions. For example, the college or university will want to budget for the worst case scenario, the best case scenario, and the most likely scenario. The system must allow for this, while making it easy for faculty and staff to submit the “final” budget, which can incorporate elements of all these different scenarios.
Management expects quick answers to practical questions such as “What is the impact if we reduce the tuition increase from 3.5% to 2.5%?” At first glance, this may seem like a relatively easy calculation to make. However, when you consider all the other budget items and variables that may be affected by this type of change, producing a result with real accuracy can be difficult and time consuming. Ideally, you want to be able to achieve the updated financial goals, as set by the institution’s president, without necessarily making significant changes to the accounts. Therefore, the budget process must allow for structured and practical simulation capabilities that will allow users to test assumptions about high-level strategies to determine their impact on the budget without spending a lot of time doing the calculations, while still making them accurate.
Therefore, there is a need for practical simulation capabilities that will allow finance departments to easily see the impact of changing key budget levers and identify ways to “close the gap” quickly.
Implement a budget workflow process
Often, the transaction review and approval process can be inconsistent across the organization. Because of this, the finance department has no way of knowing which budgets have actually been reviewed and operationally “cleaned up” by the deans and vice presidents and which have not. The result is uneven quality of submitted and consolidated budgets and ultimately rework.
For this reason, a budget workflow process must be implemented. Finance and administration departments must have a budget process that allows departmental budgets to be reviewed and approved by the organization’s chain of command. This process can significantly reduce the time it takes to get a “final” budget, allows for greater budget ownership, and significantly improves the quality of budget numbers.
Using a Budget Plan
Typically, faculty and staff want to have everything they need for a budget on one screen, but that’s really impossible with Excel. They have to look at multiple files and multiple tabs, which can be frustrating, confusing, and reworked.
Setting up a budget plan that lays out all the accounts to be budgeted in a way that is easy to digest and understand will produce a much better result. It should answer at a glance questions such as: what department am I budgeting for, what version of the budget are we working on, what accounts am I responsible for, what options do I have to create and allocate my budget numbers, what is my current budgeted headcount for the year, and what end goals am I being asked to achieve.
In summary, the budget process
As operating expenses continue to rise, the days of simply passing on those increases in the form of higher tuition can no longer be the norm. Students and their parents expect higher education leaders to find ways to do more with less, and to do so without compromising the student’s education and environment – this is the new normal. Budgeting and efficient resource allocation are at the heart of the response to this new normal, and must be a priority.
It is important to review the current budgeting process at institutions of higher education and compare those current processes to the concepts and budgeting system described in this article. If they are not using this type of budget system, the institution should consider forming a project team to identify, review, and sample software solutions available from companies that have developed and implemented innovative, practical, and incredibly powerful budget preparation software for higher education institutions that energizes a “culture of budget accountability” among users. Customized budgeting and planning applications for higher education institutions, replacing spreadsheet-based budgeting and providing maximum user flexibility and financial controls, are readily available from industry-specific software solution providers.
Ultimately, the goal of refining and improving the annual budgeting process at any institution of higher education would be to implement a budgeting system that allows for better communication, greater ownership of the numbers, and greater transparency, which would enable the institution to better manage its financial performance throughout the fiscal year. Once the budget is in place, it is necessary to monitor actual operating results against the budget on a monthly basis, with a variance analysis explaining the reasons for the differences; it should be recognized that adjustments may need to be made during the year to keep the overall actual operating results as close to the budget as possible to avoid shortfalls and deficit spending.