Financial Control – Budget 101
Joyce
Financial Control - Budgets
Why do we establish budgets?
Particularly in a non-profit organization, where revenues are often fixed in a
narrow range, or established on an annual basis, budgets are an essential tool in
ensuring that deficits are not incurred. Budgets also help to coordinate the
organization’s activities and give each manager a specific set of financial
guidelines against which to manage. Budgets can help the manager to track how
the organization is doing against plan throughout the year.
However, budgets only allow us to plan and control the costs and revenues: we
still need other output measures to see how effectively the organization is in
achieving its goals. The budget is the basis of performance management: it is a
basic indicator of financial performance.
There are three basic types of budgets:
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the operating budget, with which we are primarily concerned on a
monthly basis, and which forms the basis for performance management;
the capital budget, which allows the organization to plan for larger
expenditures that may be needed for each department to meet its
objectives, either to expand operations or to replace current productive
capacity, and which must coordinate with the operating budget
the cash flow budget, which uses the information from the other two to
plan when the organization may need to borrow or invest cash on a
short-term or cyclical basis.
All organizations use some sort of operating budget in managing their operations,
and most use a simple capital budget, even if this is simply a list of large
expenditures. Note that such things as fixed assets that have a productive life of
more than one year are included in the capital budget.
Non-profit organizations may not do a formal cash flow projection budget,
but most do some informal planning for cash availability. Consider the example
of an organization that receives its government funding quarterly in arrears: it
must ensure that it has enough cash to pay employees and creditors until the
funding arrives. On the other hand, a non-profit with a regular revenue stream
such as rents or monthly contributions may have a more even inflow against
which to match its expenses and may not need to borrow or dip into reserves to
“even out” the cash flow over the year. [Remember that revenue is not
‘spendable’ until it is turned into cash.]
Financial Control – Budget 101
Joyce
The Budget Process
The budget should be established based on the strategic plan and the specific
goals established for the next year. There are several basic pieces of
information that can be very useful to each manager in preparing their budget:
 the strategic goals of the organization for the coming year (and for future
years, to a lesser extent),
 certain basic guidelines for the entire organization, such as inflation
guidelines, amounts to include for travel or training costs, overall salary
increase information, other basic cost information
 last year’s budget and year to date actual figures, and variance analysis.
Let’s look at each of these in more detail:
The strategic goals of the organization
An organization may plan to launch a new project or new projects. For
instance, a public library may add a young adult services department, a hospital
may establish a trauma unit, or a social service organization may be expanding
by opening a branch in Eastern Ontario. This may necessitate an entirely new
profit or cost center or program budget to be set up for the next year to plan for
the costs of the new project, and may also require changes in the budgets of
supporting departments.
There may also be overall growth objectives, particularly where there is
greater demand for the services the organization provides than are being
satisfied, and additional funding has been secured to increase the level of
services provided. Normally, this will affect the operations of many departments,
but normally not to the same extent.
Conversely, a former program or location may be discontinued, or activity
levels may be projected to decrease, either through decreased demand or to free
up funding to meet other organizational goals.
The key thing to remember is that budgets must consider the strategic
goals of the organization carefully: improper financial planning can threaten the
success of the organization in meeting those goals.
Basic budgeting guidelines for the organization
Budgeting is a process of estimation. It is usually more efficient for certain
assumptions and cost projections to be set by upper management or to be
researched by the finance department on behalf of all managers than it is for
each department to attempt to gather its own information independently. The
general level of inflation is one such assumption. Although on a line-item basis,
each department must consider the actual anticipated increases for the goods
and services it will purchase, an overall rate can be applied wherever there is no
Financial Control – Budget 101
Joyce
reason to expect higher or lower than average inflation in a price. It would be
extremely difficult and a waste of the company’s resources for each manager to
try to make her own estimate of overall inflation. Similarly, interest rates may be
forecast and provided to the organization.
More specific items are also often included in budget guidelines to help
managers estimate their budgets for the coming year. Examples include: a)
overall salary pool increases, since when the budget is established, we may not
know who will get a raise and how much, during the coming year, so often we set
a “pool” or average wage increase: some will get more, others less. (This of
course assumes that the increases are not ‘set’ by contract).
b) Projected unit costs for travel, such as reimbursement rates for mileage, and
c) Training, such as for company-offered or regularly schedule employee training
courses such as WHMIS training.
Other ‘mandated’ spending amounts may also be included in the guidelines, such
as employee service awards and social item costs.
Last Year’s Budget and Year to Date Actual, and Variance Analysis
An important analysis is to look at what was budgeted for last year and what
actually happened (hence the actual and variance analysis). By looking at the
reasons for over and under-spending so far for the current year, we can make
better estimates for next year’s budget. The variance analysis is critical to using
this basis: timing differences (i.e. buying earlier or later than budgeted) may
cause use to make large errors if we blindly use this year’s actual as a basis.
But, by using only last year’s budget, we ignore valuable information about actual
costs and usage this year that may be more indicative of the future, and we
perpetuate our budget errors of the past.
Steps in the Overall budget process:
Normally, each manager, based on the guidelines given, prepares a first
submission based on information she/he has. It is important that responsibility
for activities and departments is clearly assigned to ensure that things aren’t
missed or double-counted. Often too, the manager relies on the services of other
departments and counts on certain things being included in their budgets.
She/he should communicate will these managers to ensure that the items will be
in their budgets, and follow up later to ensure these were not cut. The basis of
the first budget submission is often year-to-date spending for the current year,
which the finance department “breaks down” into separate cost center budgets.
The budget submissions go through several levels of management review, and
the finance department normally “cumulates” all budgets at this stage for top
Financial Control – Budget 101
Joyce
management review (this brings the revenue and all costs together, and allows
for overall review of the financial plan of the organization).
During the review, items are challenged, the fit of different department’s plans
and budgets is considered, and the overall plan of the organization is examined
for soundness. Items may be cut or challenged on an item-by-item basis, and/or
a mandate may be handed back with the budget to cut a certain percentage of
costs. It is up to the individual manager to decide where (this is where more
discretionary items often get cut.) As you can see, it is very useful to retain the
first budget submission each year, as items may recur (saves much work in
analysis and setting up the submission if last year’s can be used as a base) and
items may have been cut from last year’s budget that will be applied for again
this year.
Specific Operating Budget Line items:
Let’s look at some of the “regular” line items you might encounter in a typical
library budget and approaches to dealing with them. It is likely you won’t have to
do much, or any, projection of revenues, but only costs, in a typical library (the
municipality will take care of collecting taxes for a public library, and may also
pay the library’s bills, the company may will take care of revenue projection for a
special library, and similarly, the university will budget revenues for an academic
library). The only revenue items you’ll likely be responsible for are fines, charges
for specific library services, grants applied for, and local fundraising (i.e. the
Friends of the Library).
1)
Salaries.
This is usually a major cost to a library. Unless you intend to increase
or decrease headcount, your salary cost will usually vary only with
wage increases, and with variations in part-time or casual help.
However, assuming that the current actual cost and last year’s budget
are an adequate basis for projecting next year’s budget can lead to
serious problems: because this is such a major line item, being wrong
here can lead to deficits very easily! For instance, delays in filling
positions lead to lower salary spending, or salaries of new hires midyear will only be reflected in the current number for part of the year.
Next year, you need a full year of salary for these employees.
Also, you may expect to retain your current headcount [key term: FTEs
stand for full-time equivalents, a way of counting headcount], but may
be losing a more senior and highly paid employee to retirement. When
you hire, you will do so at the current market rates: will you look for an
experienced employee? A less experienced one? Do you expect to
pay the same salary or a lower one? You may need to make an
adjustment. Also, where you expect staff turnover, particularly in key
positions and in a foreseeable timeframe (again, retirements is a good
Financial Control – Budget 101
Joyce
example), will you try to hire your new staff early in order to train with
the retiree? Or will you bring the retiree back on a part-time or casual
basis after retirement to transfer their knowledge to other employees?
Either way, you will incur a one-time salary cost.
Approaches: List your employees and their current salaries. Apply a
uniform, or pool, increase to recognize merit raises. Consider whether
or not you may have to pay more for new hires or to give larger raises
to keep up with market conditions. Consider any expected promotions:
do you intend to give a larger raise? Using actual lists of employees is
the best way to ensure you are considering all of the facts: however,
be careful to safeguard the privacy of this information. I have seen
more leaks of salary information through the budget process than any
other way – this information must be kept separate from other budget
support and provided only to upper management. (Remember that in
a small department, even providing only numbers can give out
information: an employee knows their own salary and can sometimes
subtract to guess what others make). Do you anticipate turnover? If
so, do you expect to pay more or less for replacement? Will there be
overlap in employees?
For part-time employees, use a similar approach to the above. For
casual or hourly (such as pages) estimate the number of hours per
month and the rate you will pay. If such employees normally get an
increment as they become more experienced, be sure to project who
might attain these milestones and build in the increase, even though
you may not be sure they will earn it.
2)
Employee benefits and training costs
This is an area where guidelines are usually given: the human
resources and finance staff often take the average cost of benefits for
the organization and provide a “loading” factor for departments to use
in developing their budgets, usually a percentage of base salaries
(since many though not all of the components are a function of salary,
i.e. unemployment and Canada pension). This factor is often greater
than 20% of base salary, depending on the benefit package offered by
the organization. Many benefits costs are much easier to budget and
manage across an organization and are therefore budgeted centrally.
(e.g. the cost of dental benefits, cost of life insurance, etc. where group
experience results in lower rates and the premium cost or usage may
vary per person)
However, there is often spending that is discretionary to each
department, such as training costs. Sometimes some minimum
amount is mandated, or human resources may bear the cost of “core”
training (i.e. on computer packages, time management, multicultural
awareness and similar company-wide skill sets) to ensure that some
Financial Control – Budget 101
Joyce
costs are allowed for, since department managers often will cut
corners here as being more discretionary than other spending
categories. Professional dues and conferences may also be included
in this category, since many libraries pay all or part of at least one
professional membership for their professional staff, and key staff may
be sponsored to attend conferences that are important to their function.
(Note that I prefer to budget training and development, as well as
professional costs, in their own category…..we could easily make the
case that these are really expenses of the employer and to the
organization’s benefit, rather than associated with individual
benefits…..)
3)
Materials – Books
Normally, this budget is fairly discretionary and based on last year’s
spending. However, to the extent that you carry periodicals, the
spending may be more fixed. If you have a large volume of
periodicals, there is a base cost to maintaining these and annual price
increases can be high. Try to find out from publisher reps any
specifics they are aware of, but since this information is not often
available at budget time, you must often base a projection on the
average increase over the past couple of year. The books budget is
more discretionary, and unfortunately is often decreased over the year
as periodicals and database costs exceed what was budgeted for
them. Bearing this in mind, you can see that if planned carefully, the
books budget can still be used as a “buffer” to ensure that overall,
materials spending does not exceed budget as a whole.
One of the challenges of maintaining this budget is timing: books are
not usually bought evenly over the year. Also – delays in receipt and
payment of bills can pose challenges. It is best to use an
“encumbrance” system to keep track of materials and services ordered
(i.e. the money is spent) although the bill may not yet be paid.
Another “wrinkle” with timing concerns cutoff around year-end: it
depends on the accounting rules of the organization whether you can
accrue materials ordered but not yet received, by year-end. If you
cannot, the charges will come against next year’s budget, and you will
have under-spent this year per the financial record (the ‘double
whammy’).
4)
Periodicals
To the extent that you carry paper periodicals, spending on this
materials category is usually more fixed on an annual basis, varying
only with price increases and dropping/adding periodicals
subscriptions. If you have a large volume of periodicals, there is a
base cost to maintaining these and annual price increases can be high.
Financial Control – Budget 101
Joyce
Try to find out from publisher reps any specifics they are aware of, but
since this information is not often available at budget time, you must
often base a projection on the average increase over the past couple
of year.
Periodicals subscriptions are usually paid once per year in advance, as
are database costs. Thus you may have very uneven spending over
the course of the year. It is very important to try to put the expenses
where they are likely to actually be paid for, or you will have variances
from budget each month and no idea where you really stand with
spending.
5)
Database Costs
This is a growing Cost category for libraries as more resources
become available in electronic form. A contract is normally signed for
each database, and in many cases, is not based on usage, but on the
number of concurrent users that may access it, or the population of
users who may potentially access it. This allows for easier budgeting,
as we do not have the uncertainty of costs based on usage.
We discussed some of the peculiarities of timing of once-a-year costs
above: database costs are normally high, so that a great deal of
distortion can result from not putting them in the month they belong:
however, they are few and large enough that these variances are easy
to track, in contrast to book purchases, which are many and small
dollars.
Internet access also costs money: ensure you have provided for it for
as many concurrent users as you have Internet-enabled terminals if
that is how you are purchasing. In some cases, you are either
allocated a portion of costs of the overall Internet access for an
organization (i.e. UWO or a municipality), or these costs are simply
budgeted by the IT department and not passed on or allocated to
subsidiary units.
6)
Computers and Peripheral Equipment and Maintenance (Category
of line-items)
In keeping with the increasing technology provided to patrons, libraries
must plan for the maintenance of equipment, both for staff use and for
public access. Usage and technological obsolescence both contribute
to the need to periodically replace workstations. These are normally
capital budget items and may be grant-funded, or funded out of regular
operations. A certain amount for repairs and replacements should be
budgeted each year, both to take care of breakdowns as these occur,
but also to replace equipment on a cycle: most libraries cannot afford
to replace all of their equipment within one or two years, although often
much of it was initially acquired at the same time, often with special
Financial Control – Budget 101
Joyce
grants. Note that this is the type of purchase that grants, foundations
and Friend of the Library are often willing to finance, so that a good
capital budget projection is useful in going after these funds.
Remember that new equipment may involve new software licenses,
unless you are replacing terminals and can use the same software, or
if you belong to a larger organization that licenses a base suite of
software for all members of the organization and does not pass any
incremental software licensing costs along to you. (You may still need
to purchase additional software licenses for other programs you
provide to your users).
Maintenance contracts can also be used to help smooth the cost of
maintaining the equipment by transferring some of the risk (the
maintenance company, like an insurance company, maintains a large
pool of equipment across many organizations, so spreads the costs
from those with many problems to those with fewer). However, this
spreading of risk comes at a cost: if you have no breakdowns, you will
still incur costs. There is also ongoing maintenance support, such as
help lines for library systems, to be considered. If the circulation
system goes down, the library can be paralyzed, so good support can
be vital and should be contracted for and budgeted. The contract can
provide a good basis for cost budgeting.
Web site support and design is becoming an important category for
some libraries, particularly since may offer access to their OPAC via
the web. All of the links, information and the software necessary to
support searches, as well as the security infrastructure must all be
maintained and money needs to be budgeted for this (much of it may
be employee time if the library has qualified employees, or it may be
done by outside contractors, for which budget needs to be set).
Internet access also costs money: ensure you have provided for it for
as many concurrent users as you have Internet-enabled terminals if
that is how you are purchasing. In some cases, you are either
allocated a portion of costs of the overall Internet access for an
organization (i.e. UWO or a municipality), or these costs are simply
budgeted by the IT department and not passed on or allocated to
subsidiary units.
7)
Building Costs Category (multiple line items)
This may include rent, depreciation or mortgage payments, utilities,
janitorial, repairs and maintenance, furniture and fixtures, etc. What is
included here will depend on the specific situation of the library: if
space is shared with other departments or related organizations, you
may not be responsible for estimating these costs in your budget. You
Financial Control – Budget 101
Joyce
may or may not be expected to pay towards them (e.g. a library as one
tenant department in a municipal building, a library such as the GRC at
FIMS….versus a single tenant library branch). When you are charged
a certain amount of money for ‘occupancy cost’, for instance an
allocation of the facilities and maintenance costs of a particular building
based on the proportion of square footage the library occupies, it is
often referred to as ‘overhead’.
8)
Supplies and miscellaneous….paper, paperclips, pens…..toner for
copiers, book labels and mending supplies….etc!
Financial Control – Budget 101
Joyce
BUDGETING 101: An approach to budgeting for newbies
GATHER basic tools
 The strategic plan
 Any backup detail from last year’s budget (you will rapidly be convinced to
keep a very detailed file for this year!!),
 The actual spending information for this past year along with any whys or
unusual circumstances that impacted our spending,
 Any contracts you are obligated to for the coming year
SET UP Cost Categories
 Set up major categories and start making short lists of the ‘things’ we need to
budget for (categories) and organizing ‘what we know’ about the past and the
expected future for each.
 Look at the detail of the invoices that have come across your desk or have
been charged to your budget. Have you noted these costs for this year if they
apply? Any additional things that cross your mind should be noted for
estimate later on
 Ask your staff what they might need for next year….look for capital or larger
operating items too. Do we need more shelving? To replace some chairs?
Computers? Carpeting? More staff hours? New software?
 Walk through your department and look at everything with ‘budget’ eyes….
Physical – for instance,
 A fax machine! Who is paying for that…and if us – where is the
contract for it?
 Telephones – who is paying for base line fees? Do we need any
new lines and if so how much will these cost (installation,
equipment and then annual cost).
 Look at what is in the supply cupboard, on people’s desks…
Mental - think through your processes
What do we do here? What is used or needed to provide these
services? Are all those things already noted in your ‘lists’?
 Projects – what new and special initiatives are being launched this year?
o What special new expenses come with these? New people? New
hours? Equipment?
o What operating expenses may go up as a result?….we often assume
that ‘oh, we have printers, photocopiers, paper’….and forget that if
we’re going to do a large volume of printing/reproducing for a project or
marketing initiative, we’ll be using our normal operating supplies and
will run out if we don’t budget for and buy, more.
Idea? To make sure we don’t forget to budget anything…..
Financial Control – Budget 101
Joyce
The NITTY-GRITTY: Actually crunching the numbers….

Ask lots of questions of other people –
o Are you budgeting for that (for shared expenses, or things
that you know cost money but aren’t coming out of your
budget) – you want to make sure someone else is still going
to pay for these and has planned appropriately. E.g.
photocopying in the GRC….we may have information Copy
Services needs to estimate revenues and costs….
o How did you estimate Y….how should I estimate X?

There are two parts to any estimate….
 How much of it will we need? Quantity
 What price will we likely have to pay per unit? Price
E.g. how many page hours for the year/month/week/day… and how
much will we pay per hour?

Keep DETAILED notes on how you made your estimates, where
you got the information you used in coming up with them and think
about setting up little Excel spreadsheets for key calculations
(‘cause you likely will have to redo them many times this year and
again next year! A little time taken now will save lots of time later)

Anticipate challenges and prepare your arguments…why do we
need more money for such and so this year? What projects are we
undertaking and how much do we need for these? Often, we look
at the regular operating expenses budgets differently than
projects….and so do our upper management/Board. Be prepared
to talk about any project or operating cost category and defend your
estimates….
Review:
Stop and think about it. Does this make sense? If a certain category is bigger or
smaller than last year, does this make sense? Go back and work on it again.
Review happens over and over again. You will also ‘perfect’ your arguments and
how you’ll present them to whomever has the power to give you money!
Good budgets mean maximizing the resources you’ll have to work with.
A good job on this means your ‘money guys’ start to trust that you know what
you’re talking about and makes subsequent budget cycles much easier. Yes….it
gets easier the more you do it!