"What Is a Business Budget"
Business and Finance Budget Policies This document defines the overall approach and philosophy for budgeting and planning in Business and Finance, including common terminology, procedures and principles used in that process. It is through this strategy that priorities can be ranked across Business and Finance to maximize available resources and provide the appropriate level of service for the costs incurred. It is only through a mutual understanding of our strategic goals, that a plan can be defined to accomplish them. 1) Business Philosophy Business and Finance is committed to providing services and support to the Academic, Research and Public Service mission of the University. The services will be provided at a level commensurate with the level of resources that the University is willing to dedicate to that service. Service levels should be reviewed annually to validate the frequency, necessity and resources required. 2) Guiding Principles Each unit’s proposed business plan and budget must reflect the Associate Vice President’s (or equivalent) priorities and be consistent with the priorities and business plan of the Chief Financial Officer. The Office of Financial Analysis manages the process, establishes the timeline, and defines formats to allow consolidation and computation of priorities, operating issues, and financial impacts. Key components of the planning process include: Annual validation/course correction to meet ever changing external and internal demands. Bottom up and Top down review Preparation of a 12 month Operating Budget Review and update of the capital plans 3) Budgeting Approach Each cost center in Business and Finance has submitted documentation defining the services provided and resources required. (Each unit is responsible for maintaining the accuracy of this document over time.) Every unit is encouraged to take a long-term strategic approach to providing its services. This approach entails an annual review of the costs that must be incurred to provide valued services (regardless of past practices) at the most efficient (and understandable) cost. Once this level of service and funding is established, increments to the baseline are considered. Ideally this would involve the following approach: a) Defining the current and future level of services provided, the resources necessary to provide those services and rationale for major change. b) Evaluate current operations and identify issues and the gaps to providing future levels of service. c) Look internally for cost saving measures or the elimination of services that are no longer required. It is assumed that before any funding request comes forward that it has the approval of the Associate Vice President or Executive Director responsible for that unit. d) Look cross-organizationally for resource allocations and efficiencies. 1 4) Budgeting Policy and Terminology In Business and Finance, budgeting and planning are done on two distinct platforms: operations and capital. a) The Operating budget is a financial plan of current operations that encompasses both estimated revenues and expenditures for a specific period, normally a fiscal year. Critical components of the Operating Business Plan are defined below: i) A Baseline budget is defined as the steady state operating position of each unit. This reflects the resources required for a unit to provide the same level of service in the current year, before any new priorities or funding requests. Specifically included are full year salary, benefits, and other normal operating expenses, (including an allocation for capital expenses). Salary expenses in the baseline include open positions for the year (positions that have been open for one year should not included). Re-occurring overtime and other non base compensation costs are included. ii) The Final budget includes the baseline budget as well as any onetime modifications to the current year operating plan. These onetime adjustments may be additions or deductions from the revenues and expenses of the unit. The final budget reflects how we expect actual results to look at the conclusion of the budget period. iii) Forecast actual revenue and expenditures: This is the projection of the current year’s actual revenues and expenses through year-end based on current operating and environmental conditions. The forecast is based on actual revenues and expenses and therefore excludes open positions and encumbrances. iv) New Priorities pertain to any material change in service level from the current business activity. This change can be an increase or a decrease in service, and does not necessarily have funding implications. Major increases in costs to continue the current levels of service are technically not new priorities, but for the sake of simplicity should be brought forward in this category if they are significant. All new priorities should be brought forward, regardless of funding source. This helps communicate changes in business practice and service levels both horizontally and vertically within Business and Finance. No priority is considered approved unless the approval is communicated in writing (typically in the annual budget letter issued by Financial Analysis). This policy specifically prohibits the implementation of new priorities solely on the basis that the unit has funding capacity unless they are under the financial limits established below. All new priorities will require a sound business case before being considered. For example, justification for new priorities should answer the following questions: 2 (a) What are the benefits of this priority to the “customers”? (b) Can old programs be discontinued to shift resources internally to fund the priority? (c) What are the implications if the priority is not approved? All new priorities should be prioritized according to the following criteria: (d) Mandatory due to external regulations (e) Critical to improve service this year. (f) Important to operational efficiency, but not critical this year. v) The Operating Program Increment is the amount distributed to the Business and Finance units General Fund by the Provost. vi) Business and Finance Salary Program - The salary program for Business and Finance is intended to incorporate the following principles: 1) Regardless of the funding source of each unit, the salary program is intended to be consistent throughout each organization within Business and Finance. 2) It has traditionally been a priority for Business and Finance to allocate the Operating Program to the salary program within each organization. The actual allocation will be made on actual appointments at a point in time as extracted by Financial Analysis. 3) The funding of the salary program (for general fund units) includes an allocation for variable and fixed staff benefits. The variable expenses (FICA, Retirement, Staff Benefit Recharge) move with each change in salary. Non-variable benefits (Health Insurance, Dental, etc) change at a fixed point in time and are not incremented by changing salaries. vii) Position Control – Currently there is no position control budget in Business and Finance. Changes in positions and FTE’s must be approved by the Associate Vice President and communicated to Financial Analysis. viii) All funding commitments (from all sources) must be documented in writing. It is the responsibility of each unit to provide this documentation to/from Financial Analysis. Financial Analysis will assist in the verification and tracking of these commitments. Resources will not be available for undocumented commitments. ix) Commitments against fund balance – Operating Fund balances that are committed for future obligations are required to be documented so that they are easily distinguishable from amounts that are uncommitted. b) The Capital Budget outlines expenditures for major equipment, software (including upgrades), repairs, renovations, and construction. These items typically have values exceeding $5,000 and have a useful life of over two years. The typical link between the Capital budget and Operating budget is a component 3 of the Operating budget used to “pay” for these expenditures (a transfer to capital), which should be limited to depreciation expense for the current year. i) Capital Budgets should be separated from operations by being accounted for in the Plant Fund. (Departmental Equipment for Non-Auxiliary, and Plant Reserves for Auxiliary). ii) Capital Budgets require the following components: (1) Amount of anticipated actual expenditure. (2) Year of intended expenditure. (3) Useful life of the asset. iii) Capital Plans should include a minimum of 10 years for capital intensive units and 5 years for units with small equipment needs. iv) A unit that is not supported by recharges may transfer balances to departmental equipment fund with the only restriction being that it is used for items that are capital in nature. c) Business and Finance Budget Cycle August - Financial Analysis distributes the current year budget calendar to the cost centers (Directors & BAC). October – Meetings between the AVP’s and the CFO are held to review plans to meet the Budget Modeling Parameters for the next budget year. December o New Priorities and funding requests are due from each cost center o Preliminary updates on mandatory cost budgets are due o Meet with Directors to review and validate business cases o Business Operations Recharge, LTP/UIP and Staff Benefits Pool budgets are due to Financial Analysis January o Budget request to the Provost is due o Forecasts for remainder of Fiscal year are prepared by units o Financial Analysis publishes second quarter operating report April o Revisions to baseline, new Priorities and Salary program are completed o Commitments against forecast fund balance are submitted o Financial Analysis publishes third quarter operating report June o Regents approve budget o Monthly Operating budgets are completed o Financial Analysis issues Budget approval letters August o JE allocating General Fund budget is due to Financial Analysis. o Financial Analysis publishes annual operating, capital report and budget closure report. 4 5) Fiscal responsibilities and policies: a) Each unit within Business and Finance is responsible for tracking financial performance against their business plan, providing written explanation of major variances from budget and preparing forecasts periodically to reflect changes in operating environments. These explanations and forecasts are consolidated by Financial Analysis for the Executive VP and CFO for all Business and Finance units. b) Each unit is intended to be a self-sufficient operation. c) Each unit is accountable to the budget that they have brought forward, as documented in the Budget approval letter issued annually. (1) Each business manager is responsible to abide by the policies of Business and Finance, Standard Practice Guide, and Generally Accepted Accounting Principles. (2) Standard Practice Guide statement 500.1 covers Fiscal Responsibilities and can be reviewed at: http://spg.umich.edu/pdf/500.01.pdf (3) The University policy on Stewardship covers responsibility for Human, Physical, Information and Financial resources. This comprehensive policy document can be viewed at: http://www.umich.edu/~hraa/stewardship.htm d) Basic Fund accounting principles are required. The following are abbreviated definitions of funds typically used in Business and Finance: i) General Fund: Operations supported by state appropriations and tuition incurred in the primary mission of the University (Instruction, Research, and Public Service). Supporting services are also included (Academic Support, Institutional Support, Plant Operations, etc) ii) Designated Fund: Consists of funds internally designated, but otherwise unrestricted. These normally include external revenue sources and related expenses that enhance but are not directly associated with General Fund activity. (Continuing education, rec. sports, royalties, etc.). iii) Aux Fund: Service Center and Recharge Operations – Activities that support the mission of the University. (Copy machines, cafeterias, vending, transportation, parking, utilities, communications). iv) Dept Equipment Fund: Equipment purchases for non-Auxiliary units. v) Plant Reserve Fund: Capital Reserves for Auxiliary Units. http://www.umich.edu/~ofa/Budget/index.htm Updated: September 2008 5