Accounting for Governmental & Nonprofit Entities JACQUELINE L. RECK SUZANNE L. LOWENSOHN Accounting for Governmental & Nonprofit Entities 17/e Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Budgeting and Performance Measurement H A P T E R 12 Budgeting and Performance Measurement

Learning Objectives 12-1 Explain the objectives of budgeting in the public sector. 12-2 Explain the differences among various budgeting approaches. 12-3 Describe the budgeting process for a state or local government, including the procedures involved in preparing specific types of budgets. 1

Learning Objectives 12-4 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting. 12-5 Describe managerial tools used to improve performance. 12-6 Describe the budget and cost issues in grant accounting. 1

Budgeting in Governments Budgeting in government is not just a prudent management practice, it’s the law!

Budgeting in Government Budgeting in government can be seen as A prioritization of program and service goals An expression of political values A plan of financial operation A way to facilitate compliance with laws A way to communicate performance effectiveness

Views of Budgets in Government Compliance with laws Annual budget adopted by every governmental unit Accounting system should provide basis for budgetary control Budgetary comparison information should be presented Communicate performance effectiveness Develop performance plan Report on performance results Establish outcome measures

GFOA’s Distinguished Budget Presentation Award The areas of budget documents reviewed for this award include Introduction and Overview Financial Structure, Policy and Process Financial Summaries Capital and Debt Departmental Information Document-wide Criteria

Line Item or Object of Expenditure Budgeting Budgeting Process Line Item or Object of Expenditure Budgeting Incremental Budgeting Starting point is current year budget Line items are budgeted by making adjustments to current budget amounts Focus is on prior year spending, not accomplishments Zero Based Budgeting Starting point is zero Each item and budget amount must be justified each year Time intensive and may lead to skepticism when marginal programs continue to be funded

Performance Budgeting Budgeting Process Performance Budgeting Input of resources is related to efficient output of services Financial management tool and not a subfield of accounting

Budgeting Process Program Budgeting Format discloses the full costs of programs or functions without regard to the number of organizational units that might be involved in performing the various aspects of the program or functions Addresses fundamental policy questions about whether the government or not-for-profit is better off operating certain programs.

Entrepreneurial Budgeting Budgeting Process Entrepreneurial Budgeting Budgeting is the responsibility of the highest level person in the government, most often the chief executive officer Budgeting for outcomes articulates government-wide goals, such as “improve community safety” or “improve environmental health,” and all departments or units cast their budget requests in terms of advancing those goals

Budgeting Process The governmental budgeting process is guided by a budgeting calendar, which helps ensure that deadlines are met. A budget officer is designated, usually from the central administrative office. Budgets for ongoing or new programs are prepared by departmental administrators. Departmental budgets are reviewed and approved by central administration before being submitted to the legislature.

Conflict in the Budget Process Chief Executive Mediates the Many Budget Conflicts that Occur (see illustration 12-3)

Budgeting Governmental Revenues Although the focus so far has been on budgeting appropriations, there must be a source of funding for any budgeted appropriations. According to GASB, revenues “means increases in (sources of) fund financial resources other than from interfund transfers and debt issue proceeds.” Subject to legal requirements and approval by the legislature, revenue policy is determined by the administration, and a revenues budget is prepared by the budget officer.

Budgeting Capital Expenditures Expenditures for long-lived assets are treated in the appropriations process in the same manner as are expenditures for salaries, wages, benefits, materials, supplies, and services to be consumed during the accounting period. Effective financial management requires the plans for any one year to be consistent with intermediate- and long-range plans.

Budgeting Cash Receipts Excess idle cash leaves potential interest earnings on the table Shortage of cash may lead to bad credit ratings, labor problems, or difficulties providing services.

Budgeting Cash Flows Budgeting cash flows allows for planning of temporary external financing, such as tax anticipation notes. It may also involve plans to accelerate cash flows through techniques such as early billing, cash discounts for early payments, and late fees.

Budgeting Cash Disbursements Cash disbursement budgets are prepared for every unit of the organization. Finding ways to minimize or decelerate payments is a part of cash management. Effective cash planning and control suggests that all cash be put under control of the treasurer of the government.

Service Efforts and Accomplishments (SEA) Measures of Service Efforts Input Measures Amount of financial and nonfinancial resources Measures of Service Accomplishments Output Measures Quantity measures Outcome Measures Results of services provided Measures that relate Service Efforts to Accomplishments Efficiency Measures Efforts to outputs Efforts to outcomes

Reporting Performance Information GASB offers 16 suggested criteria within 3 categories for reporting on service efforts and accomplishments. Category I: The External Report on Performance Information Category II: What Performance Information to Report Category III: Communication of Performance Information

Managerial Tools to Improve Performance Total Quality Management Customer Relationship Management Activity-Based Costing Balanced Scorecard

Total Quality Management (TQM) TQM links customer (taxpayer and other resource provider) satisfaction to improvements in the operating systems and processes used to provide goods and services. The objective of TQM is not necessarily to reduce cost but to increase “value for the dollar.”

Customer Relationship Management (CRM) CRM systems create an integrated view of a customer to coordinate services from all channels of the organization with the intent to improve the long-term relationship the organization has with its customer. Examples some governments are using include obtaining licenses and making tax payments through a government Web site.

Activity-based Costing (ABC) ABC essentially attempts to determine the cost of specific process-related activities, the “drivers” of those costs (e.g., labor-hours, machine-hours, or units of material), and the consumption of cost drivers in producing outputs of goods or services. Emphasis is placed on tracing the specific activities performed to specific outputs of goods or services rather than on allocating average costs to units of output as is done in conventional cost accounting systems.

Balanced Scorecard A balanced scorecard is an integrated set of performance targets, both financial and nonfinancial, that are derived from an organization’s strategies about how to achieve its goals. Financial Customer Processes Learning and Growth

Looking Forward Chapter 12 took an in-depth look at budgeting and performance measurement. The objectives of budgeting in the public sector were identified, along with budgeting approaches and the budgeting process. Performance measuring and reporting were described. Chapter 13, where we will look at accounting for not- for-profit organizations, is the first chapter in Part 3 – Accounting and Financial Reporting for Not-For-Profit Organizations and the Federal Government.