i387c managing information services and organizations

 

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Module 3. Unit 2: Fiscal Management - Planning and Managing Budgets

Objectives

  1. Students will be able to discuss the various types of budgets, and the relative advantages and disadvantages of each type.
  2. Students will be able to create a line-item budget, and extrapolate from it the various other types of budgets.

Peter Drucker instructs managers that fiscal planning and management are an application of "controls" to steer an organization. Managers of all types must understand appropriate use of "control" and "controls" to successfully participate in the management of delivery of services and products.

The synonyms for controls are measurement and information. The synonym for control is direction. Controls pertain to means, control to an end. Controls deal with facts, that is with events of the past. Control deals with expectations, that is with the future. Controls are analytical, concerned with what was and is. Control is normative and concerned with what ought to be. (Drucker, 1973, p. 494.)

The budget is one of the manager's most important tools. Carefully crafting a budget can be key to obtaining additional resources. There are three ways to improve the budgeting process to ensure sufficient control over expenditure of resources.

  1. Develop clear formal budget organization. Know who is responsible for the budget in each department.
  2. Set up financial accounts for each department. (Expenses and income that are traceable to specific staff members for more efficient control.)
  3. Plan well in advance and anticipate unexpected windfalls; or on the downside, emergencies that require reallocation of funds.

Because gaining resources is a very competitive process, the manager needs to be high in the administrative hierarchy, eloquent in articulating budget needs, and persistent in following thorough with questions or concerns from the budget granting agency.

As a planning document, the budget is a presentation of the organization's objectives in terms of specific programs to be carried out during a specified period of time -- usually one year. For libraries, focus is on the operating budget, and sometimes there is also a capital budget (for large items such as a renovation, or major equipment.) Following is a simple overview of major kinds of budgets.

I. Line Item Budget

Line item budgets are the most common type of budget and are often called incremental budgets, because typically just a small amount of funding is added each year. The advantages of a line item budget are:

  • Easy to prepare
  • Easy to understand
  • Easy to justify.

People understand that costs always go up! The big disadvantage is that there is no relationship between the budget request and objectives and priorities, and it is different to transfer from one line item to another. Finally, the line item budget negates change. It tends to project the past into the future. View http://www.iastate.edu/~vision2020/Phase2/proposal9.html and http://www.prm.nau.edu/prm426/sample_line_item_budget_format.htm for some examples of line item budgets. You can find others by doing a simple Google search.

II. Formula Budget

The formula budget is sometimes used in large library systems, and state or federal agencies. It uses predetermined standards for allocation of resources. Budget criteria are established and then applied across the board to all units within the system. For example:

  • an allowance for a basic collection (minimum 85,000 volumes)
  • an allowance pre Full-Time-Equivalent (FTE) student
  • an allowance per faculty member
  • an allowance per Master's field
  • an allowance per doctoral field

The type of budget is focused on input rather than activities. For example, one rather basic formula standard is that academic libraries should get at least 6% of the total university budget. For some examples of formula budgets see the formula used by the Surrey County Council (UK) primary and secondary school or the example given by Mr. Brian Wheeler's of Charlottesville, VA who is on the School Board.

III. Program Budget

Program budget is concerned with the organization's activities, as opposed to expenditures - goes hand-in-hand with strategic planning. Based on establishing costs of individual programs, so one can look at the total costs of a program and decide whether to continue, modify and delete. For examples, please see the Budgeting Handbook for Texas Counties.

The advantages of a program budget are:

  • easier to evaluate programs since costs are tied to results
  • priorities can be changed quickly
  • smaller more manageable budget units

IV. Performance Budgets

Performance budgets are similar to program budgets, but here the emphases is on costing out functions a la Taylor. How much should it cost to process a book ... from ordering the title to putting it on the shelf. All fixed costs are added in. Emphasis is on quantity not quality.

V. Planning, Programming, Budgeting Systems (PPBS)

PPBS is a form of planning a combination of program budgeting and performance budgeting. First, goals and measurable objectives are established. Then develop costs of achieving each of the objectives including alternate ways to achieve the objectives with cost benefit rations presented for each. (See page 373 in text.)

VI. Zero Based Budgeting

Focus on two basic questions

  1. Are current activities efficient and effective?
  2. Should current activities be eliminated or reduced to fund higher-priority new programs or to reduce the current budget?

With ZBB each unit of the budget must be justified, and placed in a hierarchy. Activities are broken into packages and funds are allocated by priority until all funds have been expended, and the cut off point is reached.

This process requires the identification of goals and objectives, the reason for the activity, consequences of not implementing the package, detailed measurement of performance and costs of the activity. Ranking decision packages focuses decisions about the most important activities in each unit of the organization. After each unit identifies its priorities, the priorities of all units are amalgamated into one pool in light of the decision package's importance to the total organization.

Basically, ZBB is not concerned with the past, but with what should be done in the future. By forcing staff to identify areas of greater and lesser importance, it emphasizes standing among all units of the organization. ZBB can be threatening to staff - the fact that each program starts in the lineup at zero base every year.

The advantages of ZBB are:

  • combines planning, budgeting, and decision making into one process;
  • more involvement by staff can be good for morale;
  • may save money;
  • conducive to change;
  • easier to justify budget.

The disadvantages of ZBB are:

  • threatening
  • time consuming
  • requires more paperwork
  • requires extensive training in the techniques
  • prioritizing process can be highly political.

VII. Allocation Revision Accountability Systems (ADAP)

ADAP combines aspects of PPBS and ZBB. Normally, the organization or unit submits three budgets

  1. Budget increase
  2. Modest increase
  3. Budget below which organization cannot function.

Administrators are asked to identify whole programs that could be eliminated.

==> Continue to Module 4

 

Assignment

Read Stueart, p.364-379, Budgeting Techniques and Evans, 431-478, Fiscal Management. Readings available in Course Materials
Assignment (Group) Using the Vision, Goals and Objectives plan that your team prepared for the Planning Unit
  • Create a Line Item Budget
  • From the Line Item Budget develop a Program Budget based on the costs of individual activities
  • From the Program Budget develop a Zero Based Budget. Form for Decision Based Package to complete ZBB.
Post Submit the Team report in Word format to the Assignment Section of Bb to the assignment entitled Budget Document. Save the file using the following naming format group#-budgets.doc
Due June 26 11:30pm <== new due date
Value 20 points
thanks to patrick williams for template design
 
Last update 24 june 2006