Compiling the operating budget and estimating costs

Focus on income and expenditure

Historical budgeting practices have focused primarily on expenditure, with little regard to variations in income sources other than the operating grant. This practice is no longer appropriate. Budget units need to focus on both income and expenditure budgets.

Focusing on both sides of the financial equation allows expenditure patterns to be modified as changes in income occur.

Staff costs

When considering expenditure on staff costs consider carefully the source(s) of funding, don't assume all costs are recurrently funded.

Have a complete listing of all staff positions (including vacant positions that require funding) and include a list of the funding source (Recurrent, S, Q or E). Note which positions require subsidisation from another source (e.g. Fellowships); increment changes; and, any Enterprise Agreement increases currently in force. Remember the use of casual employees over and above fixed staffing structure.

Forecasting using prior year trends

Prior year trends are a good indicator of possible future expense patterns but beware of large variances. For example, if the travel budget was 50% higher last year than in the previous 2 years, can the variance be explained? Is the reason for the increase continuing in the current year and likely to continue in the next year? The same applies if expenditure in one category drops while rising in another category, is it miscoding or were the budgets set incorrectly?

Contingency

For such things as major equipment replacement, it may be appropriate to build in a contingency that will accumulate over several years and ease the impact on the budget in the replacement year.

This is a suitable approach for large cost items such as vehicles, computers and photocopiers. The period of accumulation will depend on the relative cost of the item to the overall budget.

Relationship between level at which budgets are set and usefulness of reporting

Income budgets (including the operating grant) should be broken down to the lowest reporting levels (eg: department, project grant); expenditure should be broken down on the same basis. If budgets are not loaded at the appropriate reporting level and at account level, reports generated from the ESP Financials system (regardless of type) will be of little use as there will be no meaningful budget information to compare against actual results. Users who are trying to manage their finances from such reports will have great difficultly in determining their performance against expectations, and even how much funding they have remaining for the year.

Budgeted surplus

Budget units should not be afraid to load a budget that shows an expected surplus for a year. Budgeted/planned surpluses are a realistic occurrence, particularly when an area might be setting funds aside over a number of budget years to fund a large expenditure item some time in the future. An example of this is setting funds aside for a rolling three-year equipment replacement cycle. A large carry forward might be utilised over a number of budget years thus resulting in an area budgeting for a surplus. There is little sense in setting a budget that indicates all income is to be expensed in the current year, when some of the income is to be legitimately carried forward over a number of years.

Carry forwards - calculation and effect on budget

Once the carry forward information is provided to budget units, areas can then update their budget to reflect the expected spending pattern against these funds in the current budget year. It is important to increase the expenditure budget to reflect what will be spent, it should not be adjusted/increased to reflect the total value of a carry forward surplus unless an area expects that all funds will be spent. Most carry forwards will be used over a number of years, and the budget should reflect this.

Adjusting budgets

Budgets can be flexible but should not be adjusted so as to make the budgets equal actual results. Budget units should not be concerned about showing variances against income or expenditure lines; such things can be explained and it is the analysis of variances and subsequent explanations that are important, not whether all variances are zero. In reality it is extremely rare to find an organisation where the original budget matches actual results perfectly.

Changes to budgets should be limited to movements between expenditure categories when changes in spending priorities are known, or to amend income figures if new income is earned or existing income streams do not eventuate.An example of when this might be performed is when an area increases budgeted expenditure to allow for the spending of a carry forward surplus.

Budgeted deficits

Areas should not budget for overall deficits (after carry forward) unless prior approval has been sought from the Vice-Chancellor to overspend in any one year. If a deficit budget is approved, areas will be required to have a plan in place that shows how the deficit will be recouped.