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  • 1. Business and Finance Business Plan and Budget Policies October 1, 2001 This document defines the overall approach and philosophy for budgeting and planning in Business and Finance, including common terminology, procedures and principles used in that process. It is through this strategy that initiatives can be prioritized and resources maximized to provide the appropriate level of service for the costs incurred. It is only through a mutual understanding of our strategic goals, that a plan can be defined to accomplish them. 1) Business Plan Philosophy Business and Finance is committed to providing services and support to the Academic, Research and Public Service mission of the University. The services will be provided at a level commensurate with the level of resources that the University is willing to dedicate to that service. These services will be reviewed annually to validate the necessity and resources required. 2) Guiding Principles Each unit’s proposed business plan and budget must reflect the Associate Vice President’s (or equivalent) priorities and be consistent with the priorities and business plan of the Chief Financial Officer. Key components of the planning process include: • Annual validation/course correction to meet ever changing external and internal demands. • Bottom up and Top down review • The Office of Financial Analysis manages the process, establishes the timeline, and defines formats to allow consolidation and computation of initiatives, issues, and financial impacts. • Annual update of capital plan along with a 12 month operating budget. 3) Budgeting Approach In 1999 each cost center in Business and Finance submitted documentation defining the services provided and resources required. (Each unit is responsible for maintaining the accuracy of this document over time.) Business and Finance encourages each unit to take a long-term strategic approach to providing its services. This approach entails a review of the costs to provide valued services (regardless of past practices) at the most efficient (and understandable) cost. Once this level of service and funding is established, increments to the baseline are considered. Ideally this would involve the following approach: a) Defining the current and future level of service provided, the resources necessary to provide those services and rationale for major change. b) Evaluate current operations and identify issues and the gaps to providing future levels of service. c) Look internally for cost cutting measures or the elimination of services that are no longer required. It is assumed that before any funding request comes forward that it has the approval of the Associate Vice President or Executive Director responsible for that unit. d) Look cross-organizationally for resource allocations and efficiencies. 4) Budgeting Policy and Terminology In Business and Finance, budgeting and planning are done on two distinct platforms: operations and capital. a) The Operating budget is a financial plan of current operations that encompasses both estimated revenues and expenditures for a specific period, normally a fiscal year. Critical components of the Operating Business Plan are defined below: 1
  • 2. i) A Baseline budget is defined as the steady state operating position of each unit. This reflects the resources required for a unit to provide the same level of service in the current year, before any future new initiatives or funding requests. Specifically included are full year salary, benefits, and other normal operating expenses, (including an allocation for capital expenses). Salary expenses in the baseline include open positions for the year (position that have been open for one year are not included). Re-occurring overtime is included. ii) Projected actual revenue and expenditures: This is the projection of the current year’s actual revenues and expenses through year-end. This is based on actual revenues and expenses and therefore excludes open positions and encumbrances. iii) New Initiatives pertain to any material change in service level from the current business activity. This change can be an increase or a decrease in service, and does not necessarily have funding implications. Major increases in costs to continue the current levels of service are technically not new initiatives, but for the sake of simplicity should be brought forward in this category if they are significant. • All new initiatives should be brought forward, regardless of funding source. This helps communication of initiatives both horizontally and vertically within Business and Finance. No initiative is considered approved unless communicated in writing from Financial Analysis (see item vii). This policy specifically prohibits the implementation of new initiatives solely on the basis that the unit has funding capacity. • As a general rule, the minimum funding request brought forward should be $5,000 for re- occurring needs, and $10,000 for one-time requests. • All new initiatives will require a sound business case before being considered. For example, justification for new initiatives should answer the following questions: (a) What are the benefits of this initiative to the “customers”? (b) Can old programs be discontinued to shift resources internally to fund the initiative? (c) What are the implications if the initiative is not approved? • All new initiatives should be prioritized according to the following criteria: (d) Mandatory due to external regulations (e) Critical to improve service this year. (f) Important to operational efficiency, but not critical this year. iv) The Operating Program Increment that is distributed to General Fund units by the Provost will dictate the salary program that each unit must adhere to within Business and Finance. v) Business and Finance Salary Program - The salary program for Business and Finance is intended to incorporate the following principles: 1) Regardless of the funding source of each unit, the salary program is intended to be consistent throughout each organization within Business and Finance. 2
  • 3. 2) It has traditionally been a priority for Business and Finance to allocate the Operating Program to the salary program within each organization. The actual allocation will be made on actual appointments at a point in time as extracted by Financial Analysis. The target date for this extract is May 1. 3) The funding of the salary program (for general fund units) includes an allocation for variable staff benefits. These variable expenses (FICA, Retirement, Staff Benefit Recharge) move with each change in salary. Non-variable benefits (Health Insurance, Dental, etc) would be considered contractual cost increases and requested by each unit as a funding request with the new initiatives. Funding for Non-Salary items are not included as part of the salary program. If these are extra-ordinary in nature, they should be brought forward as a funding request with the new initiatives. vi) Position Control – Currently there is no position control budget in Business and Finance. Changes in positions and FTE’s must be approved by the Associate Vice President and communicated to Financial Analysis. vii) All funding commitments (from all sources) must be documented in writing. It is the responsibility of each unit to provide this documentation to/from Financial Analysis. Financial Analysis will assist in the verification and tracking of these commitments. Resources will not be available for undocumented commitments. viii)Commitments against fund balance – Operating Fund balances are required to be broken down between the amounts that are committed for future obligations, and that amounts that are uncommitted. This breakdown allows the CFO to validate flexibility for one-time funding in emergency situations. b) The Capital Budget outlines expenditures for major equipment, software (including upgrades), repairs, renovations, and construction. These items are over $5,000 and have a useful life of over two years. The typical link between the Capital budget and Operating budget is a component of the Operating budget used to “pay” for these expenditures (a transfer to capital), which should be limited to depreciation expense for the current year. i) Capital Budgets should be separated from operations by being accounted for in the Plant Fund. (Departmental Equipment for Non-Auxiliary, and Plant Reserves for Auxiliary). ii) Capital Budgets require the following components for recharge units: (1) Amount of anticipated actual expenditure. (2) Year of intended expenditure. (3) Useful life of the asset. iii) Capital Plans should include a minimum of 3 years for planning purposes. iv) A unit that is not supported by recharges may transfer balances to departmental equipment fund with the only restriction being that it is used for items that are capital in nature. c) Timeframe for Business and Finance Business Plans • September 21: Financial Analysis notifies cost centers (Directors & BAC) of timeframe for current years business plans • November 1 (from units to Financial Analysis) o New initiatives and funding requests are due from each cost center 3
  • 4. o Budget to actual variance explanations for prior year. o Status of previous year initiatives. • December o Business Operations Recharge allocations due to Financial Analysis o Budget discussions between AVP’s and Robert Kasdin describing progress of prior years initiatives and new initiatives. • Feb 1 (due from units to Financial Analysis) o Revisions to baseline o Projections for current fiscal year, o Commitments against fund balance o Capital Plans as necessary • April 1 –Budget request to the Provost from Financial Analysis • May – Preliminary budget status memo’s sent to units from Financial Analysis. • July 20 – Regents approve budget and Financial Analysis distributes General Fund Cost Center Sheets. • Aug 1 – General Fund budget allocated to chartcoms due to Financial Analysis and then to the Provost. 5) Fiscal responsibilities and policies: a) Each unit within Business and Finance is responsible for tracking financial performance against their plan, and reporting variances to Financial Analysis. Each unit is intended to be a self- sufficient operation. b) Each cost center is required to be accountable to the business plan that they have brought forward each year, as documented in the Business Plan approval letter from Financial Analysis. c) Each business manager is responsible to abide by the policies of Business and Finance, Standard Practice Guide, and Generally Accepted Accounting Principles. Below are specific Business and Finance policy issues that have been discussed in the Business and Finance Forums: (1) Units are encouraged to use alternatives to leasing University vehicles where appropriate. The intention is to use these assets efficiently, and aid in easing the parking crunch on campus. (2) Units are requested to limit the use of University funded home personal computers. Support for these items by systems staff is typically more extensive than office desktops and should be limited. (3) It is the responsibility of each unit to have all recharge rates approved by the Office of Financial Analysis. See website for specific policies concerning recharge units and their applicable rates. (www.umich.edu/~ofa/recharges) (4) Pcard compliance is required. No split purchases to keep the purchase under $5,000 are allowed and Pcard statements must be reconciled within two weeks. (5) Investment Income should not be relied upon as a recurring funding source for operations. (6) Computer purchases/replacements are the responsibility of each unit. (7) All units should use 7.5% as the standard percentage of non-salary expenses attributable to an employee. This allowance is intended to include everything to put an employee at their desk and is typically used as a proxy when transferring people between organizations. This allocation includes telephone, training, computer (1 year depreciation), printer, paper and supplies. Expenses of a programmatic nature unique to a position should be accounted for separately. 4
  • 5. d) Basic Fund accounting principles are required. The following are abbreviated definitions of funds typically used in Business and Finance: i) General Fund: Operations supported by state appropriations and tuition incurred in the primary mission of the University (Instruction, Research, and Public Service). Supporting services are also included (Academic Support, Institutional Support, Plant Operations, etc) ii) Designated Fund: Consists of funds internally designated, but otherwise unrestricted. These normally include external revenue sources and related expenses that enhance but are not directly associated with General Fund activity. (Continuing education, rec. sports, royalties, etc.). iii) Aux Fund: Service Center and Rebilling Operations – Activities that support the mission of the University. (Copy machines, cafeterias, vending, transportation, parking, utilities, communications). iv) Dept Equipment Fund: Equipment purchases for non-Auxiliary units. v) Plant Reserve Fund: Capital Reserves for Auxiliary Units. Additions or modifications to these policies should be directed to the Office of Financial Analysis for update and distribution. The most recent version of this policy will be made available at http://www.umich.edu/~ofa after your comments are incorporated. Please send feedback to Tony Burger (tburger@umich.edu) or Greg Tewksbury (gtewks@umich.edu ). Distribution list: Executive Lead Team (RAK senior staff) Business and Finance Forum Group Budget Administrators Council EvpcfoBusinessPlan and Budget Policies.doc (approved via email and comments as of 10/1/2001) Presented to Business and Finance Forum March 7, 2002. 05.09.02 5