Expert answer:The Budget Process

Answer & Explanation:1-  What is a budget? What functions does it fulfill?2- What are the components of a line item budget? List. What are the advantages and disadvantages of a line item budget?3- What is the difference between direct services and indirect service in a budget? Explain and give examples.4- What is a PPB budget? What are the two parts of PPB budgeting? What are the components that are included for each program or department in a PPBS budget? What is its link to strategic planning?5- What is a ZBB budget? How does the budgeting process work with ZBB for a program or department? Does this increase or decrease the importance of politics in the budgeting process? Why or why not?m5c_budget.pdf
m5c_budget.pdf

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PLAN 524
Advanced Strategic Planning
Module 5C
The Budget:
An Organization’s Most
Important Planning Tool
PLAN 524: Advanced Strategic Planning
Dick Winchell, Ph.D., FAICP
eastern washington university
PLAN 524
 Most of us think of a budget as a listing of
projected costs and expenses.
 One simple form of budgeting it the “line item”
budget, which does list general categories and
dollar figures.
What is a Budget?
eastern washington university
PLAN 524
 In reality, a budget is a planning tool and a
planning document, perhaps the most
important one available, if it is used properly
throughout the organization.
 A budget is an especially important tool for
assessment and Strategic Planning!!!
What is a Budget?
eastern washington university
Eastern Washington University
PLAN 524
Dr. Dick Winchell
PLAN 524
Advanced Strategic Planning
Module 5C
 Aaron Wildavsky was one of the pioneers of
budgeting, an organizational theorist who
explored the nature and extent of the budget
within government and other organizations.
 Wildavsky give the following framework for
definitions and understanding the budget in
one of his “classic” books on budgeting in the
following slides.
What is a Budget?
eastern washington university
PLAN 524
 In the most literal sense, a budget is a document,
containing words and figures, which proposes
expenditures for certain items and purposes.
 The words describe items of expenditures
(salaries, equipment, travel) or purposes
(improving mental health, providing low-income
housing…
 And the figures (dollar amounts) are attached to
each item or purpose (Wildavsky, 1964, p.1).
What is a Budget?
eastern washington university
PLAN 524
 “Those who make a budget intend that there
will be a direct connection between what is
written in it” (categories of expenditures) and
what is expended (dollars), a connection
between “what is written (in the budget) and
future events” (p. 1).
 A budget is “intended behavior,” a “prediction”
(p. 1).
What is a Budget?
eastern washington university
Eastern Washington University
PLAN 524
Dr. Dick Winchell
PLAN 524
Advanced Strategic Planning
Module 5C
 If the requests for funds are granted, and if
they are spent in accordance with instructions,
and if the actions involved lead to the desired
consequences, then the purposes stated in the
document will be achieved (p. 1).
What is a Budget?
eastern washington university
PLAN 524
 The budget thus becomes a link between
financial resources and human behavior to
accomplish policy objectives (p. 1).
 Wildavsky suggests that the budget is essentially
a plan, or actually an experiment or guided set
of actions, so that: through observation (it is)
possible to determine the degree to which the
predictions postulated in the budget document
turn out to be correct (p. 1).
What is a Budget?
eastern washington university
PLAN 524
Wildavsky states:
 In the most general definition, budgeting is
concerned with the translation of financial
resources into human purposes (p. 1).
 A budget can be considered a series of goals with
a price tag attached.

With this definition, it becomes clear how the
budget is a most important tool for any
organization in strategic planning.
What is a Budget?
eastern washington university
Eastern Washington University
PLAN 524
Dr. Dick Winchell
PLAN 524
Advanced Strategic Planning
Module 5C
 Wildavsky points out that funds are always limited
within any organization, and the budget therefore
becomes a mechanism to determine which activities
are most important, so that those receive the most
funding.
 When the choices are coordinated so as to achieve
desired goals, a budget may be called a plan (p. 2).
 This is a more sophisticated approach to budgeting
than is often used, but essential to consider the
budget a plan, and for strategic planning.
What is a Budget?
eastern washington university
PLAN 524
 If a budget is used as a listing of priorities and
goals, the functions of an organization, where
money is expended becomes the
implementation framework.
 The budget tied to priorities and goals of
programs (Program Planning) and also linked
to performance of individuals (job description)
and outcomes (Performance Planning) the
Budget can be viewed as a Work Program.
What is a Budget?
eastern washington university
PLAN 524
 A budget can also be considered a Contract, in
that is a commitment to expend funds in a
specific way to accomplish organizational
activities.
 Strict rules define how funds are expended,
and controls must be in place to assure proper
expenditures, and proper procedures if
changes are made.
 These rules are addresses by an Audit.
What is a Budget?
eastern washington university
Eastern Washington University
PLAN 524
Dr. Dick Winchell
PLAN 524
Advanced Strategic Planning
Module 5C
 The most simple and least valuable type of
budgeting is the “line item budget”.
 A “Line Item Budget” looks like words that
describe it. There are lines listing funding
categories, and dollar figures to the right that
identify funds.
 All budgets carry out this “line item” purpose,
and this budget format is basic to all budgets.
The Line Item Budget
eastern washington university
PLAN 524
 There are general headings or categories used
to classify funding expenditures. These broad
categories may be broken down into more
detail, even down to individual expense items,
but all are classified into the following
categories, and generally appear in the order
listed, especially for any government or nonprofit organization.
Categories of the Line Item Budget
(and all budgets)
eastern washington university
PLAN 524
 Personnel – The staff and people who work for the
organization. These may be listed by individuals or job
titles for small organizations, or totals for larger
organization. Personnel costs listed in a budget
include:
Actual staff salaries for those who work directly within
the organization; and
 Fringe benefits that includes the total of each
employees “benefits” to include all expected expenses
related to insurance, retirement, vacation and sick
leave, FICA and other taxes, and other benefits.

Categories of the Line Item Budget
(and all budgets)
eastern washington university
Eastern Washington University
PLAN 524
Dr. Dick Winchell
PLAN 524
Advanced Strategic Planning
Module 5C
 Consultants – Another budget category is provided for
individuals hired through contracts to complete specific
work, but who do not work directly for the organization.
These individuals or activities are generally listed under
“contracts.” Organizations may not have staff expertise to
complete certain tasks, so consultants are used to complete
these needed activities. A consultant fee is based on the
anticipated hours worked, benefits, and expenses to the
consultant to be paid out of the contract, but the
organization pays a total contracted fee that is not generally
itemized once a contract is set. The consultant bills the
organization for completed activities.
Categories of the Line Item Budget
(and all budgets)
eastern washington university
PLAN 524
 Capital Expenses – Some organizations are responsible for
activities that involve major purchases of property,
buildings, equipment. These are classified as “capital”
expenses in the budget. Capital expenses are generally for
any object or expense that will be used for more than 3-5
years, and that cost over $5,000. It could include cars,
construction equipment, buildings owned by the
organization, etc.

Most government and non-profit budgets are separate capital
expenses from Operational Expenses (daily operations), and
create a separate budget for capital expenses.
Categories of the Line Item Budget
(and all budgets)
eastern washington university
PLAN 524
 Operations Expenses – The following items are all
considered part of the operational expenses for an
organization. That includes travel for personnel,
office space, equipment and supplies. These
categories identify all expenses associated with
the operation of the organization, government or
business. Desks, computers, phones and phone
bills, office space are all part of the operations
expenses.
Categories of the Line Item Budget
(and all budgets)
eastern washington university
Eastern Washington University
PLAN 524
Dr. Dick Winchell
PLAN 524
Advanced Strategic Planning
Module 5C
 Travel – Many organizations require travel as part
of the work expectations. Travel to and from work
for employees is not an eligible travel expense, but
all required travel from one place to another to
carry out work, or travel to conferences or
training, are travel expenses that should be
reimbursed. Travel expenses for the year
estimated in detail to create an accurate budget.
Categories of the Line Item Budget
(and all budgets)
eastern washington university
PLAN 524
 Office Space – All organizations need space to
operate, and the expenses for that space are
legitimate budget items. This and some other
expenses can be itemized and listed at “Direct
Costs” in budgets, or as we will see later, are
generally included as “Indirect Costs” that are
calculated for the organization as a percentage of
a total contract.
Categories of the Line Item Budget
(and all budgets)
eastern washington university
PLAN 524
 Equipment, Materials and Supplies – This
category includes all equipment and expenses
from computers, calculators and photocopy
machines, generally those items with more than
one year’s use. Materials and supplied include
pens, pencils and paper, and whatever
miscellaneous expenses are need for the
organization’s operations.
Categories of the Line Item Budget
(and all budgets)
eastern washington university
Eastern Washington University
PLAN 524
Dr. Dick Winchell
PLAN 524
Advanced Strategic Planning
Module 5C
 Total Direct Costs – The total of these expenses: payroll
(salaries and benefits), consultants, capital costs, travel,
equipment and supplies are identified as Direct Costs,
the costs that are needed to directly complete the work.

In addition, things like office space and equipment like desks
and computers, are often considered as part of the
organization’s activities (especially for grants), but the
organization may also have expenses of accountants,
attorneys, personnel and administrative staff, in addition to
space and equipment that serve the organization as a whole
and not just the grant. These are identified separately as
Indirect Costs.
Categories of the Line Item Budget
(and all budgets)
eastern washington university
PLAN 524
 Indirect Costs within organizations are those
organizational expenses needed for all activities,
but may not be separately identifiable for a
specific grant or program.
Categories of the Line Item Budget
(and all budgets)
eastern washington university
PLAN 524
 Indirect Cost Rate – Organizations, especially
those that are regularly carry out grants, complete
a complicated assessment of these expenses
calculated on a regular basis to establish an
Indirect Cost Rate, generally a percentage of the
total program, but sometimes a percentage of
salaries only.
Categories of the Line Item Budget
(and all budgets)
eastern washington university
Eastern Washington University
PLAN 524
Dr. Dick Winchell
PLAN 524
Advanced Strategic Planning
Module 5C
The total budget is generally represented as
direct expenses for the program (or grant):




Salaries
Consultants
Capital Expense (in a separate budget)
Operating Expenses


Travel
Equipment, Materials and Supplies
Categories of the Line Item Budget
(and all budgets)
eastern washington university
PLAN 524
 Plus the Indirect Costs (for office space, desks,
etc., as well as staff in personnel, accounting, and
administration for the program to work
effectively), calculated as a percentage of the total
operating budget (previous slide).
 The total operating budget plus the Indirect Costs
are added together to form the final or Total Costs
expected for an organization, a program, or a
grant.
Categories of the Line Item Budget
(and all budgets)
eastern washington university
PLAN 524
 The Line Item Budget provides a guide and work plan
that links activities in the categories with a budget
amount for that activity.
 A critical aspect of budgeting is control for those
activities, and if funding increases or decreases, then
that needs to be reflected in the next year’s budget.
 Creating a budget for next year becomes the
mechanism to plan and prioritize next year’s
activities.
Line Item Budgets for Expenses in the
Next Year
eastern washington university
Eastern Washington University
PLAN 524
Dr. Dick Winchell
PLAN 524
Advanced Strategic Planning
Module 5C
 We can identify three stages of the budget
cycle. The first is the preparation of the
budget, usually for the coming year. With a line
item budget this is done by looking at current
or estimated expenses, estimating new
revenues or funding, or reductions in funding,
and projecting those increases or decreases
across the budget.
Line Item Budget in Budget Cycles
eastern washington university
PLAN 524
 Once a budget is established, it becomes the
guide for the current year, and expenditures
must follow the budget. This is the
“operations” year of the budget.
 Following the operations year, there is a final
budget application, the program or
organizational audit, where expenditures are
checked to make sure they complied with the
budget.
Line Item Budget in Budget Cycles
eastern washington university
PLAN 524
At any given time there are three budget
processes within an organization:
I. The operation under a current budget (this year)
II. Planning and the creation of a new budget for the
coming year (one year in the future)
III. The audit of costs and expenses form the
previous year to make sure proper accounting
and expenditures were made, and to “close the
books” on that year’s activities.
Line Item Budget in Budget Cycles
eastern washington university
Eastern Washington University
PLAN 524
Dr. Dick Winchell
PLAN 524
Advanced Strategic Planning
Module 5C
 The line item budget offers the least
information in projecting expenses and setting
the budget from one year to the next.
 Generally, the expenses for each year are
organized by program or department within
larger organizations, and increases or
decreases are anticipated based on revenue
projections.
Line Item Budget in Budget Cycles
eastern washington university
PLAN 524
 If growth is expected, each department might
be asked to complete a budget that shows no
increases for the department and explain how
much work will be done.
 A second budget would be created for each
department to show 10% increase or decrease,
and again to explain increases or decreases in
work.
Line Item Budgeting
eastern washington university
PLAN 524
 Once these three budgets are made for each
program or department within the
organization, the directors might meet
together to discuss where are the priorities,
and submit a budget for all departments to the
CEO or the Board of Directors.
 That Board considers the options and
combinations with their priorities, and creates
a new budget with the changes for the coming
year.
Line Item Budgeting
eastern washington university
Eastern Washington University
PLAN 524
Dr. Dick Winchell
PLAN 524
Advanced Strategic Planning
Module 5C
 This Line Item Budgeting process is subject to
politics, both within the meeting with other
directors to create a “staff/administrative”
proposed budget, and in the final review and
determination.
 At both levels individuals may try to influence the
decision-making to benefit their programs and
priorities.
 Staff in the preparation of budget information can
also try to manipulate the process in their favor.
Line Item Budgeting
eastern washington university
Strengths
 Demonstrates categories
of expenses linked to
budget expenses
 Provides a limited linkage
of change for future
activities in response to
existing budget.
PLAN 524
Weaknesses
 Based on existing expenses and
“status quo” for the future.
 Doesn’t promote larger
changes or major assessment
of priorities linked to the
budget.
 Difficult to address major
growth opportunities or losses.
Strengths and Weaknesses of Line
Item Budgeting
eastern washington university
PLAN 524
 One key component of strategic planning is to
create a mission, goals and objectives. This can be
done for the organization as a whole, and for each
program and department within the organization.
 The assessment of budgets with regard to the
goals of each program state clearly the links
between the goals and budgets, and offers a
strong assessment of priorities.
 This is called Program Budgeting.
Program Budgeting
eastern washington university
Eastern Washington University
PLAN 524
Dr. Dick Winchell
PLAN 524
Advanced Strategic Planning
Module 5C
 Program Budgeting is simply the inclusions of
program goals, not just the name of each program,
along with the budget. That way it is clear what will
be accomplished with funds to that project, and
changes can be made to reflect the priorities of
those goals.
 Program Budgeting creates a stronger link to the
organization’s mission and goals by tying those
directly to budgeting.
 Changes in goals produce changes in the budget for
next year.
Program Budgeting
eastern washington university
PLAN 524
 Within the Strategic Plan for an organization, each
program should be identified, and in addition to its
overall Mission, Goals, Objectives, Tasks, and Work
Program, there should be a separate Mission, Goals,
Objectives, Tasks, and Work Program for each
Department or Program within the Organization.
 These Program Goals and the Work Program
including Outcomes can be used to identify and
prioritize programs within the organization’s
budget.
Project Budgeting and MBOR
eastern washington university
PLAN 524
 A good strategic plan not only identifies Goals and
Objectives, but also identifies performance outcomes
of the organization.
 Performance also includes the work of each individual
within the program or department. Performance
assessments can be used to establish a written
Performance Statement for each job within the
organization. Individual Performance can then also be
assessed on a regular basis.
 Both performance of the department and performance
of individuals can be linked to the budget process.
Performance Budgeting
eastern washington university
Eastern Washington University
PLAN 524
Dr. Dick Winchell
PLAN 524
Advanced Strategic Planning
Module 5C
 One of the best processes to incorporate
Strategic Planning within the organization is to
identify both program goals and performance
outcomes throughout the organization, and tie
budgeting to priorities of the organization and
performance of programs and staffs.
Program Performance Budgeting (PBG)
eastern washington university
PLAN 524
 PPBS (Program Performance Budgeting
Systems include Program Goals, listing of
Personnel, and Outcomes along with the
detailed budget for that program or
department.
 Priorities within the program and across the
organization can be linked to Performance and
priorities.
Program Performance Budgeting (PBG)
eastern washington university
PLAN 524
 Zero Based Budgeting (ZBB) was introduced in
the federal government in the 1960’s, with the
purpose to be able to make and respond to
change within the organization.
 ZBB functions in some ways as a line item
budget, but instead of starting with the
funding level of least year, each program and
department starts with …
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