Robert Hurt, NACADA Emerging Leader

Even in periods of relative abundance, advising administrators and their staffs must pay careful attention to managing fiscal resources. This attention to detail is even more crucial in times like these when we must justify and compete for every dollar. From an accounting point of view, advising centers are most often treated as discretionary cost centers; that is, managers are held responsible for their costs since such centers typically do not generate revenue. Although advisors and students understand all too keenly the relationship between high-quality advising and student success, upper-level administrators may see advising as a discretionary item—rather than one that is “mission critical” for the institution. Yet, when advisors understand the role of budgeting, how to manage budgets carefully, ethically and creatively, and learn to “speak the language” of budgeting, we can preserve funding and serve students even in the “lean times.”

Budgets have at least four important purposes in virtually every organization.  They

• are a way to allocate resources;
• help communicate the mission, goals, and objectives throughout the organization;
• clarify organizational priorities; and
• can be used to evaluate performance.

Far more than a principal source of anxiety and frustration, the budget provides a “common language” to discuss what should happen and why it should happen; it also gives advisors a financial tool to look back and see how they did.

Understanding a few key terms can go a long way in helping advisors communicate with others regarding the budget; these terms include:

• Appropriation. The money received, typically at the start of the year, from someone higher on the organizational chart, such as a director, dean, or vice president.
• Encumbrance. A commitment of appropriated funds. Encumbrances are unique to government and not-for-profit (GNFP) accounting.  Effectively, they set aside funds for a specific purpose—they can be thought of as a “budget within a budget.”
• Expenditure. Contrary to the common meaning of the term (spending money), an expenditure in GNFP accounting arises when a liability is created—usually by receiving goods. Expenditures can be encumbered first, but may not be if they are regular and recurring (such as staff salaries).
• Cost variance. The difference between actual costs and budgeted costs is cost variance. Variances arise most commonly from one of two sources: financial factors and quantity factors. For example, an advising administrator may budget $500 for sending staff to a NACADA event, but actually spend $700 because (a) three staff members actually attend instead of the two budgeted (quantity factors) and / or (b) plane tickets may be more expensive than originally budgeted (financial factors).  Accountants and managers can use variance analysis to tease apart the impact each factor had on the overall budget variance and determine how to avoid cost variances in the future. Cost variances can be one element of an advising center’s balanced scorecard.
• Balanced scorecard. A technique for evaluating organizational performance that examines the organization from four perspectives: financial, customer, internal business process and innovation, and learning.

Activity-based budgeting and zero-based budgeting are useful techniques for connecting the budget to initiatives and plans within an advising center. Activity-based budgeting is an extension of activity-based costing, a technique for allocating costs based on the activities that create them. Activity-based budgeting (potentially more useful to advising centers) is a method for specifying what monies will be used for in the coming academic year. For example, instead of saying simply “We will allocate $10,000 for supplies,” activity-based budgeting would tie those supplies to specific activities:  “For summer orientation, we expect to serve 500 students.  Each student will need a CD of materials, each of which will cost about $1.00.  Thus, we should budget $500 for summer orientation supplies.”

Zero-based budgeting (ZBB) forces managers to look at proposed activities very critically, evaluating each activity based on its relationship with organization mission. The technique gets its name from its overall approach:  each budgeting cycle, every organizational unit starts with a base budget of zero. Each unit must justify its very existence by showing how it contributes to the organizational mission.  In ZBB, managers typically organize proposed activities in leveled “packets;” budget administrators fund packets based on resource availability and relationship of the activities in the packet to the organizational mission.  Communication skills are very important in ZBB, as the manager who makes the best argument often gets the best funding.

Advisors do not need degrees in accounting or finance to navigate the budgeting process and manage limited resources effectively.  Please consult the resources listed below for more information on the topics presented here.

Robert Hurt
California State Polytechnic University-Pomona
robert.hurt@gmail.com

Additional Resources

Brewer, P., R., Garrison, and E. Noreen. (2010). Introduction to managerial accounting. (5th ed).  McGraw-Hill / Irwin.

Copley, P. (2011). Essentials of accounting for governmental and not-for-profit organizations. (10th ed).  McGraw-Hill / Irwin.

Cunningham, L.  (1983). Not-for-profit budgeting. The Public Relations Journal, 39(5), 33.  

Gerdin, J.  (2004, September).  Activity-based variance analysis: New tools for cost management. Cost Management, 18(5), 38-48.

Hunt, S. & P. Klein. (2003, August). Budgets roll with the times. Optimize, 85-90.

Hurt, B.  (2004, Spring & Fall).  Using the balanced-scorecard approach for program assessment of faculty advising. NACADA Journal, 24(1,2), 124-127.

Kaplan, Robert S. & D.P Norton. (2005, July). The balanced scorecard: Measures that drive performance. Harvard Business Review, 83(7,8), 172-180.

Macintosh, Norman B.  (1980, May). Control of discretionary costs with ZBB: A second look.  Cost and Management, 54(3), 26.

Malpas-Sands, Clive, & Meyer-Piening, Arnulf. (1979, April). The zero based budget. Management Today, 76.

Sandison, D., S. C. Hansen, & R. G. Torok. (2003, March). Activity-based planning and budgeting: A new approach from CAM-I. Cost Management,17(2), 16-22.