Budgets and budgeting are an area of competence that is essential for every manager to possess. The budget process is a planning process. Two basic questions concern any manager in preparing budgets:
What is the right level of expenditure to request?How can that level of budgeting be justified and defended?
Budget Calendar. Most organizations have a budget calendar often based on either a calendar year or a fiscal year (e.g., July 1 to June 30). For academic institutions, the budget is usually developed in the fall, discussed and integrated at increasingly higher levels in the winter, and adopted in the spring or early summer. Corporations differ; many establish a fiscal year beginning with months other than January or July. A cyclical business, for example, wants to complete a cycle within a fiscal year before beginning the next one.
Budgeting is increasingly a continuous or year-round task and in many organizations, you are working with several different budgets at the same time:
Developing next year's (and sometimes another 3-5 year forward projected budget),Managing the current year budget, and
Analyzing the results of the prior year's performance compared to the budget.
Budget terminology you should know:
Line-item budget -- The budget is a series of "lines," each of which represents a different item of expenditure or revenue. One line may be for professional salaries (sometimes referred to as "exempt" because they are exempt from certain federal laws governing payment of overtime); another line may be for non-professional personnel; another may be for equipment or materials. Other lines are for various categories of the operating budget -- supplies, telephone, travel, etc. Even when a more complex budgeting technique is used, the "line item" budget usually exists.
Program budget -- The proposed expenses of the organization are listed (the "lines") and then analyzed by the functions in which they are used. A program budget sets for the proposed expenditures as they relate to each function. The advantage of this kind of budget is that one can see what the money is being used for.
For a library, an example of a program budget would be the following:
|
Expense Category |
Make Collection Available |
Current Awareness |
Reference Services |
Online Searching |
Total |
|
Personnel |
$20,000 |
$5,000 |
$10,000 |
$10,000 |
$45,000 |
|
Materials |
25,000 |
-- |
5,000 |
-- |
30,000 |
|
Supplies |
1,000 |
200 |
400 |
400 |
2,000 |
|
Telephone |
-- |
-- |
1,000 |
1,000 |
2,000 |
|
Services |
-- |
-- |
5,000 |
4,000 |
9,000 |
|
Total |
$46,000 |
$5,200 |
$21,400 |
$15,400 |
$88,000 |
If we omitted the four columns in between and just showed the first and the last, we would have a line-item budget.
Three useful economic concepts are:
Sunk Costs - Something that has already been spent. The importance of the concept is that what has already been spent is irrelevant to current decision making. Just because an organization purchased a costly item that hasn't proved very worthwhile does not mean it will be any more useful if additional monies are spent on it.
Opportunity Costs - Those costs involved in the opportunities foregone by the pursuit of a different alternative. Ex. assume you have a choice to either upgrade your current equipment or to sell it and purchase new. If you choose the first option, there is an opportunity cost connected to the price for which you could have sold it. When examining the two alternatives from a financial perspective, it is important to take the opportunity cost into consideration. The opportunity cost is the return expected to be earned on an alternative investment, given the same level of risk.
Net Present Value - (Discounted Cash Flow (DCF) Valuation)In most major decisions, there are effects over time. Net present value allows one to make dollars received or expended in different years commensurate with each other. To calculate net present value, you need to consider the time at which money will be spent (or received) and then the money spent (or received) at that time in terms of today's dollars. See articles in the business journals on topic of valuation or consult a financial accounting textbook for more "how to" information.
Revised 2/17/99.