The Envelope System
Principles of Cost Analysis and
Management
© Dale R. Geiger 2011
1
Questions to Consider
• Does “the Government” overspend its
budget?
• Who decides how much to spend?
• How do managers make sure they don’t
overspend?
© Dale R. Geiger 2011
2
Terminal Learning Objective
• Task: Calculate Unobligated Balance
• Condition: You are a cost advisor technician with
access to all PCAM course handouts, readings, and
spreadsheet tools of Operational Environment
(OE)/Contemporary Operational Environment (COE)
variables and actors.
• Standard: With at least 80% accuracy:
•
•
•
•
Describe steps in budgetary process
Explain budgetary terminology
Demonstrate the purchasing process
Explain “good financial management”
© Dale R. Geiger 2011
3
Financial Planning and Control
• You have been hired as a budget consultant
by the Simmons family
• Gomer, Madge, Bert, Lacy and Maddie
• Gomer’s monthly paycheck is estimated to be
$1000.
• How should they spend it?
© Dale R. Geiger 2011
4
The Envelope System
• Predetermines amounts to be spent for
various needs
• Sets money aside for specified purpose
• Prohibits spending for other than intended
Purpose--can’t take money from one envelope
and put in another
© Dale R. Geiger 2011
5
Proposing the Budget
Proposals:
Gomer’s
Madge’s
Kids’
Budget Items:
Rent
500
500
500
1000
1000
1000
Groceries
Gomer
Madge
Kids
Savings
Total
© Dale R. Geiger 2011
6
Regarding Budgets
• The budget is legal and an accounting event. What
does this mean?
• Many entities propose budgets
• Who enacts the budget?
• Budgets authorize spending based on estimated
revenue
• Where is the real money?
• Can we plan to spend more than we expect to
receive?
© Dale R. Geiger 2011
7
Enacting the Budget
Budget Items:
Amount:
Rent
Groceries
Gomer
Madge
Kids
Savings
Total
1000
© Dale R. Geiger 2011
8
The Budgetary Equation
Estimated = Appropriations + Planned Change
Revenues
In Fund Balance
© Dale R. Geiger 2011
9
Recording the Budget
Estimated
= Appropriations
Revenue
1000
+
Planned Change
in Fund Balance
• If Estimated Revenues > Appropriations, Fund
Balance will Increase
• If Appropriations > Estimated Revenues, Fund
Balance will Decrease
© Dale R. Geiger 2011
10
Learning Check
• What is the first step in the budget process?
• If estimated revenues are $50 and
appropriations are $55, what is the planned
change in Fund Balance?
© Dale R. Geiger 2011
11
The Budgetary Accounts
• Exist solely for the purpose of recording and
tracking the budget
• Budget = a legally binding spending plan
• Account Titles:
•
•
•
•
Estimated Revenue = Expected Income
Appropriations = Authorized Spending
Budgetary Fund Balance = Planned Change
Unreserved Fund Balance = Savings
© Dale R. Geiger 2011
12
Spending Authority
Appropriation
Apportionment
Allotment
(Congress)
(OMB)
(HQDA)
Q1
Army
Q2
Q3
Major Command
Functional Area
Funded Program
Q4
© Dale R. Geiger 2011
13
Controlling the Budget
• Appropriations, Obligations  Expenditures
• Appropriations ensure that funds are spent as the
voting body intends
• The obligation process ensures that appropriations
are not overspent
• Estimated Revenues  Revenues
• Estimated revenues give a basis of comparison for
actual revenues
© Dale R. Geiger 2011
14
Spending Process
Commitment
Obligation
Expenditure
© Dale R. Geiger 2011
Liability
Payment
15
Budgetary Accounting
• Provides a control mechanism to prevent
overspending funds
• Does proper budgetary accounting prevent
deficits? Why or why not?
• It DOES prevent overspending
• It does NOT prevent revenue shortfalls
• It does NOT prevent over-appropriating by the
legislative body
© Dale R. Geiger 2011
16
Learning Check
• What mechanisms exist to control
expenditures?
• What is the step in the spending authorization
process that releases funding quarter by
quarter?
© Dale R. Geiger 2011
17
Gomer Makes a Purchase
• Signs up for 3-month trial membership to
the Doughnut of the Month Club, $60
• Remove $60 from Gomer’s envelope
• Place in the “Obligated” envelope
• Key Point: Ordering triggers an obligation
© Dale R. Geiger 2011
18
Gomer Makes a Purchase
• Receives first month’s shipment of
Doughnuts with invoice for $25:
• Remove $20 from the “Obligated” envelope
and replace in Gomer’s envelope
• Remove $25 from Gomer’s envelope and place
in “Expenditures” envelope
• Key Point: Receiving goods and services
triggers an expenditure
© Dale R. Geiger 2011
19
Tracking Gomer’s Unobligated Balance
• How much does Gomer have left to spend?
• Assume his original appropriation was $100
Unobligated
Open
= Appropriations - Expenditures
Balance
Obligations
© Dale R. Geiger 2011
20
Tracking Gomer’s Unobligated Balance
Description
Obligations Expenditures Unobligated
(-)
(-)
Balance
Gomer’s
appropriation
Balance
Orders donuts
Balance
Receives donuts
Balance
+100
0
+60
60
40
40
© Dale R. Geiger 2011
100
-60
0
-20
Invoice for donuts
Balance
0
40
+20
0
60
+25
-25
25
35
21
Key Points
• Ordering goods or services triggers an
obligation
 Prevents over-expending of funds
• Receiving goods or services triggers an
expenditure
 Reverse obligation
 Record expenditure
• Salaries, wages and other recurring
expenditures are not obligated, but may be
committed
© Dale R. Geiger 2011
22
Learning Check
• What is the equation to calculate unobligated
balance?
• What is the event that triggers and
expenditure?
© Dale R. Geiger 2011
23
Good Financial Management
• If Gomer’s budget is $100, what happens if he
spends more than $100?
• What happens if he spends less?
• What accounting mechanisms exist to
measure the quality of Gomer’s spending?
© Dale R. Geiger 2011
24
Practical Exercises
© Dale R. Geiger 2011
25
The Envelope System Spreadsheet
Enter estimated revenue and
the appropriation for each
item. The spreadsheet
calculates the planned
change in the Fund Balance.
© Dale R. Geiger 2011
26
The Envelope System Spreadsheet
The Unobligated Balance tab shows the result of Gomer’s
activity on the entire family’s unobligated balance
© Dale R. Geiger 2011
27
The Envelope System Spreadsheet
To see only Gomer’s activity,
enter only his info on the
“Create Budget” tab.
28
© Dale R. Geiger 2011
Practical Exercises
© Dale R. Geiger 2011
29