i HIM NHIIHIIHH I p l I I 102 953 THS A PROPOSED PNANCIAL BLDGET ”OR SE‘VENTH'DAY ADV‘r ENTFST EDLCATEONAL INSTITLLTT’CNS Thesis for 9916 Degree cf M. A. .‘vflCFHCAN STATE COLLEGE .L A 7/" !‘- -. Ruuem l\. £50310 £938 “b . . }.mw¢f:.x,§ 1.5 w. .I ..Q .. cl. tr. « .. _. y . . .. .rnA 0“ 1.5.. 1.4:. ‘.. D..>.n , . I. h A ’u «if; O ‘3‘ . ’ an 4 .. .. fl~ ‘3 J vs . . . a... ~o.a..\u _ . v‘ 7. A PROPOSED FINANCIAL BUDGET FOR SEVENTH-DAY ADVEKTIST EDUCATIONAL lKSTITUTIONS A Thesis Submitted to the Faculty of HICHIGAN STATE CJLLEGE in partial fulfillment of the requirements for the degree of Master of Arts by Robert Kenneth Boyd Approved by Department of Economics 1938 PREFACE The Seventh-day Adventist denomination operates six senior colleges, six junior colleges, and 35 academies throughout North America. Similar institutions are Operated on other continents as well. Virtually all these schools are boarding institutions. They receive no public aid, and only a small share of their operating funds are received from denominational organizations. Of necessity, they are very nearly self-sustaining. The managing boards of these schools have therefore had a delicate problem of directing financial affairs. On the one hand, charges must be kept within the range of the parents' incomes, for they find the burden of board, room, and tuition a heavy one to bear throughout the high school and college years. On the other hand, a satisfactory school and housing program must be maintained, largely on direct operating revenues. As a result, industries have been introduced to assist the parents in their problem. But the conduct of industries, while adding to the enrollment of these schools, can hardly be said to ease the burden of management. The reverse might well be true, for when industries are operated on a part-time basis, with young, inexperienced help, the problem of balancing income and outgo is greatly aggravated. The solution of the problem, it seems to the writer, lies in planning. Budgeting, of course, should be the organized method of ii tilt}. -26 iii forming and conducting these plans. However, the problem.just outlined requires a different form of budgeting than any new in use in Seventh- day Adventist schools. Present budgeting has to do with expense and income. The completed budget tells the prospective profit or loss. It says nothing about what the cash receipts and payments will amount to, what the outstanding accounts receivable will total, or what the debts of the institution will be at the end of the year. Yet it is essential that this be known, because of the wide discrepancy existing between cash receipts and income on the one hand, and cash disbursements and expense on the other. The total of student charges is income, but receipts are much lower, due to student labor being applied to the accounts. Similarly, egpense includes labor and depreciation, items which do not ordinarily require a cash expenditure. The expense and income budget, then, cannot be used in planning receipts and expenditures. Nevertheless, this is exactly what the average individual is most interested in knowing. Many times the writer has presented an unbalanced budget to a board, only to have a member ask the question, "Does this mean that your liabilities will increase during the year by t (naming the budgeted loss)?" While the answer was obviously a negative one, the writer knew full well that his questioner really wanted to know, "How will your liabilities stand at the close of the budgeted year?" He could only hope that the question would not be asked openly, for he was as ignorant as others regarding the answer. No budget of receipts and expenditures or purchases and collections had been.made. Furthermore, no plan for such a budget existed, and the formulation of such a plan presented many problems. iv It is to the solution of these problems and the presen- tation of this plan that this treatise is dedicated. It is not intended to do away with profit and loss budgeting, but it is intended to supplement the accepted budgeting practice by developing a Balance Sheet budget as well. In formulating a plan for financial budgeting, study was first given to the literature dealing with the subject. Certain definite principles*then became the basis for building a specific plan which would meet the peculiar circumstances present in the system of education under observation. The plan itself is presented by means of an illustrative problem, which, it is felt, is typical of Seventh-day Adventist educational institutions. Attention is first given to the budgeting of purchases and the credit maturities thereon. Then the methods of determining probable cash receipts from all sources are outlined. This presentation is followed by a discussion of the complete disbursements program, involving not only the purchases but also the expenditures for salaries, commissions, and mileage. The loans program then is easily determined by integrating the two cash budgets. The treatise closes by outlining how a complete month-by-month budget of the Balance Sheet may be made, and by stating some principles upon which the completed financial budget may be appraised as an instrument of working policy. The numerical figures used in the illustration are, of necessity, fictitious, but they nevertheless parallel closely actual conditions. The writer believes that his ten years' experience in * The most complete statement of principles was found in the writings at J. O. McKinsey and Prior Sinclair, their works being listed in the bibliography. three schools, together with his constant reference to financial statements and records, insures the reasonableness of the example. No attempt to gather data from.sources outside the author's immediate experience was made except as it related to the collection of student accounts. The writer corresponded with the managers of all Seventh-day Adventist colleges in North America in an endeavor to ascertain what efforts had been made and what practices were followed in forecasting cash collections from students. The replies indicated that these efforts were confined to the student budget plan, and the appraisal that is given of this plan is the result of this correspondence and of personal interviews. The writer wishes to thank those office managers who coOperated in outlining their student account collection policies. He is also indebted to Mr. H. P. Bloum, auditor of the Lake Union Conference of Seventh-day Adventists, for having examined critically the plan in its entirety, though the author assumes full responsi- bility for what has been written. Finally, appreciation is especially due those men in the department of economics of Michigan State College who have cOOperated so faithfully in the solution of the problem. Professor C. R. Upham assisted greatly in procuring available literature on the subject, while the counsel of Professors E. A. Gee and H. wyngarden in the preparation of the manuscript indebts the author to each of them. R. K. B. TABLE OF CONTENTS PREFACE . . . . . . . . . . . . . . . . . . . . . . I. THE NEED AKD PURPOSE CF FINALCIAL BUDGETING . . . . The proper concept of budgeting . . . . . . . . The need for financial budgeting . . . . . . . . The purpose of financial budgeting . . . . . . . II. GENERAL CONSIDERATIOES OF THE PROBLEM . . . . . . . Definition of terms . . . . . . . . . . . . . . Principal financial factors . . . . . . . . . . When should the financial budget be prepared? . Who should prepare the budget? . . . . . . . . . Guiding factors in the preparation of the budget Ehat fiscal periods should be used? . . . . . . Assumed policies of subsequent illustrations . . III. BUDGETING THE PURCHASES REQUIREFEUTS . . . . . . . Objectives in budgeting purchases requirements . Planning the monthly purchases . . . . . . . . . The budgeting and control of repairs . . . . . . The budgeting and control of equipment purchases Control of purchases . . . . . . . . . . . . . . Planning the credit maturities . . . . . . . . . Ecod shop . . . . . . . . . . . . . . . . . . The recapitulation . . . . . . . . . . . . . vi PAGE ii 10 ll 12 13 14 17 18 18 22 24 26 27 28 30 TABLE or CONTENTS (Cont’d) IV. BUDGETING CASH RECEIPTS . . . . . . . . . . . . Budgeting student receipts . . . . . . . . . By student budgets . . . . . . . . . . . By past collections . . . . . . . . . . . Old accounts . . . . . . . . . . . . . . Student aid . . . . . . . . . . . . . . . Budgeting receipts from commercial industries Print shop . . . . . . . . . . . . . . . VIOOdShOpooooo00000000000 Budgeting receipts from miscellaneous departmental sales . . . . . . . . . . . . . . . . Culinary . . . . . . . . . . . . . . . . Bookstore . . . . . . . . . . . . . . . . Farm . . . . . . . . . . . . . . . . . . Budgeting operating and capital donations . Recapitulation of the cash receipts program V. PLABN HG THE FINANCING PROGRAM . . . . . . . . Determining the disbursement requirements . Salary . . . . . . . . . . . . . . . . . Mileage . . . . . . . . . . . . . . . . . Student advances . . . . . . . . . . . . Commissions . . . . . . . . . . . . . . . Recapitulation of the cash disbursements . . Determining the loan requirements . . . . . Control of the cash budget . . . . . . . . . PAGE 32 32 32 34 37 37 38 38 38 41 41 41 41 42 42 45 45 45 46 47 47 48 5O 50 TABLE OF CONTEKTS (Cont'd) CEAPTER VI. BUDGETING TEE BI .NCE SHEET . . . . . . . Budgeting supplies inventories . . . . weed shop . . . . . . . . . . . . . Farm . . . . . . . . . . . . . . . Other inventories . . . . . . . . . Recapitulation . . . . . . . . . . Budgeting accounts receivable . . . . Current . . . . . . . . . . . . . . Old accounts . . . . . . . . . . . Firms . . . . . . . . . . . . . . . The budgeted balance sheet . . . . . . Balance sheet control . . . . . . . . VII. RE-COHSIDERIKG THE FINANCIAL BUDGE . . . Considerations in adopting a budget . The necessity of long-range budgeting Revising the budget . . . . . . . . . Using the budget for control . . . . . BIBLIOGTLAPHYQOOOO00.00000...o. viii 54 56 57 57 57 57 59 59 60 64 66 67 68 68 7O 72 LIST OF FORMS FORM PAGE I. DISTRIBUTION OF DEPARTREETAL PURCHASES BY FISCAL PERIODS . . . . . . . . . . . . . . . . . . . . 19 II. REPAIR COST AND ESTIRATE SHEET . . . . . . . . . . 23 III. BUDGET OF ESTIrATED EQUIPHENT EXPELDITURES . . . . 25 IV. PURCHASES COETROL SEEET . . . . . . . . . . . . . . 26 V. ANALYSIS OF CREDIT EATURITIES . . . . . . . . . . . 29 VI. SCHEDULE OF PAYLENTS FOR PURCEASE , BY FISCAL PERIODS 31 VII. PERCENTAGE OF CASE COLLECTIONS TO STUDENT CHARGES . 35 VIII.CUEULATIVE GRAPE OF SALES AND COLLECTIONS . . . . . 39 IX. ESTIMATE OF EOETHLY CASH RECEIPTS FROM ALL SOURCES 43 X. ESTIKATE OF EONTFLY CASH DISBURSELERTS . . . . . . 49 XI. CASH BUDGET SUELARY ALD LOAN REQUIREMENTS . . . . . 51 XII. CASH BUDGET CONTROL SHEET . . . . . . . . . . . . . 52 XIII.STUDEET CONTROLLING ACCOUNT CONTROL SHEE . . . . . 59 ix Chapter I TEE EEED AND PURPOSE OF FIEAKCIAL BUDGETIFG The Proper Concept of Budgeting In too many instances, budgeting is regarded as a formality. The practice is looked upon as an evidence of progressive management of business, but is followed more as a result of custom than from a realization of the great assistance it can be in the conduct of a business. This is not unnatural. Unless the manager reminds himself constantly of its real objectives, the practice may quickly degenerate into a system by which certain forecasts are made. Even in its degenerated form budgeting is probably worth its cost in time and effort, but immensely greater benefits will accrue from a proper concept of the term. In essence, it is an attempt to provide the same direction to a business that is possessed by a small merchant who regulates his purchases of any item by his esti- mates of probably sales, or who plans to use the receipts from certain sources to pay specific obligations. The procedure becomes written and formal chiefly because of the complexities introduced by the increased size of the business and the inability of managers to give their personal attention and direction to all of its details. The purpose of budgeting, then, is to plan, direct, control. Professor J. O. McKinsey has stated it most tersely in the expression, "compre- hensive planning".(l) Thus, true budgeting is primarily planning, and only second- arily forecasting. It is highly important that this conception of the (I) EcKinsey, J. 0., Budgetary Control, p. 3. 2. term.be constantly before the consciousness of the management, if the plan is to be efficient and is to be spared from mere formality. The difference is largely one of attitude, but it is fundamental as it relates to the solution of the problems of a business. In one instance, the budget becomes a planned attempt to correct certain undesirable tendencies, a course to be followed and a goal to be reached. In the other, it becomes a prophecy by the author of the budget, forming the basis of many "interesting comparisons" but only incidentally influencing the management of the business. The Need for Financial Budgeting Once the idea of budgeting becomes identical with planning, little justification is necessary for extending the practice into the financial Operations of an institution. On the contrary, it is the only logical procedure. It is hardly less vital to a business that its Operations be properly financed than that its program of purchases and sales be properly coordinated and administered. ”Finan- cial planning is the essence of financial administration. ‘Without such planning the success of a business is a matter of accident. Many businesses, especially small ones, fail to plan ahead with reference to their finances and to this fact many of the business failures are due.”(2) ”The forecast activities of the entire organization are summarized in the financial budget. Production, sales, management-- every department in the organization--is dependent upon a proper planning for the money which it needs in order to do its work on schedule time so that all departments may work together. If finances (2) McKinsey, J. 0., op. cit., p. 295. 3. fall short, some department may be handicapped, and that will hamper the entire organization."(3) Having been lead to the adoption of a financial budget by the very logic of the idea itself, there remain several very definite reasons why financial planning is especially necessary in the Seventh- day Adventist system.of higher education. For the most part this educational system is made up of boarding colleges and academies, which are guided in their program by the philosophy that the training of the hand ranks equally in importance with the scholastic and religious training which they offer. Not only has this manual education been fostered by the offering of vocational education, but also by permitting students to perform virtually all the necessary labor about each institution. This includes the cleaning and care of the classrooms and dormitories, and all the work in connection with the school culinary, laundry, farm or other essentially domestic departments. The firing of boilers and maintenance work is also done by students where possible. Virtually every dormitory student, even though his financial resources make it unnecessary for him to work, is expected to perform some labor for the institution. For this the student is paid a regular hourly wage, which is credited to his school exPense account. The amount of labor that can be furnished by the institution itself is limited, and is frequently inadequate to supply the demand for work on the part of those students who must work out a consid- erable share of their school expenses. As a result many institutions have organized one or more commercial industries. These supply increased work opportunities, and the marketing of the product in (3) Rogers, Della Mae, "Development of the Modern Business Budget", The Journal of Accountancy, March 1932, p. 203. 4. the commercial world brings cash into the institution for the labor performed. These two sources of income, namely, students and industries, constitute approximately 95 percent of the operating income of the institutions, as is shown by the following tabulation: -*-*-*- Operating Donations of Seventh-day Adventist Educational Institutions in North America. 1936--1937 Total Opergting Total Operating % Donations Income Donations to Total 6 Senior colleges $2,399,430.46 884,474.38 3.3 6 Junior colleges 931,733.17 48,942.49 5.3 35 Academies £855,136.15 94,742.63 £22. 47 Schools 4,686,299.78 228,159.50 4.9 * Includes inter-department transfers. These transfers (probably less than 10 percent of the total income), however, represent goods and services which might have been marketed commercially had the institution not consumed them. -*-*-*- It thus becomes obvious that these institutions obtain less than five percent of their operating income from outside sources. This constitutes a delicate problem.of financing, for the uncertainties of two types of businesses--educational and industrial-~are combined into one problem. The management must meet this combination of problems at registration time, when it must choose how much labor it can use profitably on the one hand, and how'much cash will be needed from students on the other. The management is usually under the temptation and pressure to commit itself to more work than it can use profitably. While the commitments may not be definite (47 Conard, Claude, Financial Summaries of Educational Institu- tions in North America--1936 to 1937, annual auditor's report issued by General Conference of Seventh-day AdVGIltiStS, p. 10 5. contracts and the school may absolve itself of legal obligation to carry them out, yet the practical difficulties of breaking up an individual's school program.make careful planning of student admis- sions an absolute essential. An error may mean that the institution will have to provide unprofitable labor or carry excessive accounts receivable. Either alternative will have a disastrous effect on the financial position of the institution. A.great deal of planning is also required by virtue of the seasonal aspects of Operating a school. Cash receipts from students are largely confined to nine months of the year. Where summer schools are held, the receipts are smoothed out some, but even in this case the student receipts fall far short of the winter months. The expenditures, however, continue to be heavy throughout the summer. Intensive promotion work, attended by heavy traveling expense, will be carried on. It is during the summer, too, that major repairs and alterations are undertaken. Moreover, at the close of the vacation it becomes necessary to build up an inventory of supplies and merchan- dise to an operating basis for the school year. The Operation of industries increases the problem of financing. The products manufactured are frequently of a highly seasonal character--products which may be marketed over a compar- atively short time, but which must be manufactured over a period of months. Investment in materials, together with the inability to realize immediate cash on the labor performed, may tie up the institution's funds for months before the merchandise is sold and collections have been made. Finally, careful financial planning is made necessary because the institutions rarely operate at a profit. Losses are 6. frequent. That these losses do not result in a commensurate increase in liabilities is true principally because the depreciation expense of buildings and equipment does not require an immediate outlay of cash. Nevertheless, these losses do serve to narrow very materially the cash margins on which each institution must operate. Financial planning, then, apart from being a desirable practice in the Seventh-day Adventist educational system.on its own merits, is an essential of successful management for the following reasons: 1. Extreme care is necessary if too liberal commitments for labor are to be avoided in admitting students. 2. Student receipts are largely confined to nine months of the year, while heavy expenditures are required through- out the entire year. 3. The industries, by their seasonal character, may tie up funds for several months. 4. Low or negative profits result in a narrowed cash margin. The Purpose of Financial Budgeting The type of budgeting here outlined does not have to do ‘with the estimating of the profit or loss of an institution or its departments. Its purpose is not to set up a prospective Profit and Loss Statement. The budgeting of profit and loss, which will be referred to hereafter as the operating budget, is an accepted practice in Seventh—day Adventist schools. Neither is the plan here offered to replace this practice. Rather is it to supplement the operating budget in order to facilitate more complete planning of institutional affairs. The purpose of the financial budget will be to set up a prospective Balance Sheet. It will therefore sustain the same relation- 7. ship to the Operating budget as the Balance Sheet does to the Profit and Loss Statement. Its purpose is to enable the management to 1131}. the institutions's position with reference to the Balance Sheet accounts. The month-by-month balances of such vital accounts as cash, accounts receivable, supplies inventories, and accounts payable will be set up, and the manager will know that any undesirable deviation from the plan will cripple future operations unless immediate adjustment is made. He will also be fortified against making too Optimistic expenditures at seasons when funds are apparently plentiful but when future needs have not been adequately appraised. The nature of financial budgeting requires that it be the product of careful judgment to a much greater degree than is the Operating budget. Some of the reliable ratios as that sustained by labor or purchases to sales are lacking in financial budgeting. And such ratios as may be developed are more sensitive to both internal and external factors, and are therefore less reliable. In spite of this, however, the budgeting can be done with sufficient accuracy as to form a valuable tool for management. Deviations from the financial budget are often more quickly discerned than are those Of the operating budget. At the same time, remedial measures can frequently be centered more readily on the distressed condition without adversely affecting other factors. While it may be less accurate, the financial budget does possess fully as great potenti- alities for effective management as does its companion budget. 8. Chapter II GENERAL CONSIDERATIONS OF THE PROBLEM Definition of Terms Accounting terminology is not standardized. In order that there may be no confusion Of thought with reference to the terms that will be used hereafter, it is desirable to outline the sense in which some accounting terms will be employed. The financial budget, as already indicated, is a Balance Sheet forecast. It is primarily concerned with the actual receipt and expenditure Of cash, or the temporary delay Of such cash move- ments in the form.of accounts receivable and accounts payable. The gperating budget has also been defined as the forecast of the Profit and Loss Statement, of sales (or income) and expense. These budgets are widely used in Seventh-day Adventist educational institutions, and the subsequent discussion Of the financial budget will be based on the assumption that the Operating budget has already been constructed. Receipts and expenditures refer to the actual receiving and paying out of cash. Purchases will have reference to goods or services acquired from.outside the institution. It should be understood that cash is not necessarily an immediate part Of the transaction. If reference is made to a cash purchase, it will be designated as such. Otherwise, it will be understood that all purchases are to be recorded through entry in a Purchases Journal, the actual payment therefor to be made at a subsequent date. 9. Departmental transfers will be understood to cover sales from one department to another, thus differentiating between purchases without the institution and purchases within. Student charges and sales will be used tO designate sales to students and firms, respectively. Unless reference is made to cash sales, it will be understood that the sales are made on a credit basis. Inasmuch as the term notes payable is used throughout the denomination to designate long-term borrowings, any short-term financing will be referred to as loans. Principal Financial Factors The primary problem of financial budgeting is the prOper timing Of sales and the collections therefrom on the one hand, and the timing of purchases and the payment therefor on the other, with a supplementary loans program to care for peak requirements. 'Ulti- mately, it becomes a question of cash receipts and expenditures. In the schools under consideration, the principal sources of cash receipts are from.students, firms and miscellaneous cash sales. Student receipts may be on current or Old accounts, and may include money received from student aid funds. In addition to these Operating receipts, the supporting denominational organization grants a regular Operating subsidy. It is also the recommended procedure that all capital improvements, involving additions to present equipment (except for laboratory equipment and library books), shall be provided for through capital donations. The itemized procedure for budgeting these receipts will be given in Chapter IV. The disbursements must cover such items as teaching salaries, 10. advances to students, and the vast program.of purchases of depart- mental supplies as well as heating, lighting, repairs and miscel- laneous overhead expense. Where salesmen are employed, commissions will have to be paid. Finally, equipment replacements and additions must be provided for. The procedure for timing these purchases will be outlined in Chapter III, while the entire disbursements program will be integrated with the receipts program.in Chapter V. When Should the Financial Budget Be Prepared? It becomes quite impossible to determine what collections from sales will be or what expenditures for purchases will amount to until the sales or purchases are first known. It is therefore clear that the financial budget must be prepared after the operating budget. As M. A. Copeland has stated, "If the financial or cash budget is to be called a departmental budget, it is clearly the last of the departmental budgets to be made up".(1) On the other hand, it does not necessarily follow that the financial budget should be far removed from the Operating budget. It is but a part Of one integrated attempt to plan the future course of the business, and should be regarded as such if it is to accomplish its purpose. The financial budget may point out some necessary revisions Of the operating budget, and so should be developed in connection with the latter. . But the matter of the time for making the budget (operating and financial) has a larger and more important aspect. When, with reference to the year budgeted, should the budget be made up? The (l) COpeland, Morris A.,F“Seasonal Problems in Financial Admin- istration", The Journal Of Political Economy, Dec. 1920, p. 801. ll. answer cannot be made absolute, but must be stated in terms Of principles. However, it would seem.that the question is largely answered when it is considered that budgeting and planning are not to be divorced. They are synonymous concepts. The budget, then, should develop with, not independently from, the growth Of plans. In some instances it may be advisable to plan further ahead than is the present practice, but recommendations in this respect are beyond the scope of this treatise. Naturally, the development Of the budget on this basis will require frequent revisions. But the budget will be more effective in that it will provide a.more careful estimate of what the results of proposed plans may be, and revisions may be made accordingly. These plans should become definite, however, by the time the fiscal year opens (usually about June 1) and the budget goes into effect. This, of course, should not preclude later revisions; for as unexpected circumstances arise which necessitate a change Of plans, so the budget should be brought into harmony with those circumstances. A revision will be particularly desirable at the Opening of school, when enrollment data become more definite. Who Should Prepare the Budget? Fully as important as the time Of preparation Of the budget is the problem.of who shall prepare it. But consistency would make it expedient that the question be answered in terms of principles already enunciated. The ones making the plans should also make the budget. This should include the management in particular and the board of trustees in a secondary role. In this connection McKinsey says: "It is the opinion of 12. the author that though the controller and his staff may be able to prepare accurate estimates, it is not desirable for this task to be performed by them. One of the important resuIts Of budgetary control is the benefit derived by the executives in its installation and Operation. If the major part of the work is performed by a central agency such as the controller, those who should benefit most from the budgetary program lose the Opportunity of gaining this advantage."(2) This is not to say that the accountant cannot be of valuable assistance in formulating the budget, but it should not be, primarily, his task. He is chiefly concerned neither with the making or the execution of plans; while if the ones who must execute the budget formulate it, they will assume greater responsibility in adhering to it as a plan. To permit the accountant to become responsible for the budget is a long step toward allowing it to degrade into a forecast, primarily, rather than remain a EEEE' The forecast may be accurate enough, but the budget will have lost one of its most important uses as a tool of management. The executives have had little or no part in its formulation, and they fail to recognize it as a goal to reach. Guiding Factors in the Preparation of the Budget The budget should be prepared in the light Of three guiding factors: first, the general changes in plans or policies; second, general business conditions; and, third, accounting records of past Operations. The first Of these factors will be determined by the management and board of trustees, while the second can be determined only through Observation or the reports of business forecasting services. (2) McKinsey, J. 0., Budggtary Control, p. 36. 13. A prOper concept of the purpose of budgeting will aid in the proper use of the third of these factors. The accounting records can be used either as an accurate basis of forecasting, or to reveal basic conditions which need correcting--with the budget constituting the remedial plan. The latter use is the ideal one, and makes the most efficient use of accounting as an instrument of management. It must be borne in mind, however, that to correct past tendencies will require positive and constant effort. Undesirable trends are probably not the result of carelessness as much as they are Of strong forces which will be difficult to counteract, so such budgeted changes in trends should be faced realistically. The accounting records should also provide this needed realism. Fhat Fiscal Periods Should Be Used? Seventh—day Adventist educational institutions generally have 28-day months throughout the school year, and at the close of each a complete financial statement is made up. While some of the larger institutions may continue this practice through the vacation period, many of the smaller ones regard the summer period as one month and issue a financial statement only at its close. The small amount Of business embracing this period Of time would probably make a change of policy inadvisable. On the other hand, in view of the heavy purchases for repairs and improvements and other heavy expenditures occurring during the summer, the entire financial budget might be jeopardized by permitting one-third of the year to pass by without a check-up. Such a check-up should be possible without requiring complete financial statements. The method of accomplishing this will be pointed out in later chapters. l4. Assumed Policies of Subsequent Illustrations Inasmuch as the later chapters will outline minutely the details of a financial budgeting plan, it is essential that the Operating policies of our hypothetical school be stated. It will be assumed that the budget is for a boarding academy, having roughly three-fourths of its enrollment residing in the dormitories. The use of a college illustration would involve additional accounts but no essentially different principles would be introduced, so it will be unnecessary to give separate examples applicable to them. It will be assumed that students shall be required to pay a guarantee deposit and entrance fee upon their admission. The former is not credited to the student until the final month he is in school each year. The latter item amounts to five dollars per student, two of which are to be used for library books, while the balance, being for various student services, goes into the school's Operating fund. A two dollar laboratory fee per semester is charged each member of a laboratory science class, the proceeds from.which are used for new equipment. Statements are issued each 28 days, on which a two percent cash discount on all regular monthly charges less labor credits is allowed if paid within ten days after the date Of the statement. The school departments are broadly classified into three groups: Instructional, Homes, and Industrial. The academy and music departments make up the instructional group; the culinary, dormitories, and laundry departments, the homes group; and the book- store, farm, print shop, and wood shop, the industrial group. Only direct purchases are charged to the above accounts. Overhead purchases such as coal, electricity, repairs, insurance, etc. are charged to 15. overhead accounts, and are later allocated to the above departments. However, this is done through the Operating budget, and the financial budget will be concerned only with the purchases--not the distribution. Therefore, these overhead accounts will be listed separately in the budget of purchases. Similarly, it will not be necessary to break up student charges into tuition, room rent, and board. This has already been done in the operating budget, and it is the total of these charges which becomes of financial concern. The school begins the year--and plans to close it--with no current liabilities to firms. Except for the print shop and wood shop, the terms are largely net 30 days, with a fraction of the purchases being for cash. The terms on both purchases and sales for the print shop are 23 ten, net 30 days, while the wood shop has terms of 2% E. O. M., net 30 days on its purchases and sales. It is often possible to obtain advanced datings on the larger purchases for the wood shOp. Freight on car-load deliveries is cash on arrival of the car. The wood shop sales are handled through salesmen, who receive their commission on the fifteenth of the month following the payment of the account by the customer. The wood shop operates lightly in the early fall, but begins capacity operations in late October or early November, continuing through May. A seasonal product is marketed from the last of February until the first of June. The print shOp enjoys a rather uniform operation throughout the entire year, with the late spring months supplying a larger business than normal. It will be the policy of the institution to make its own repairs and alterations as well as ordinary replacements of equipment, 16. but improvements and additions to equipment are to be supplied through funds supplied by the supporting organization. This organ- ization also pays the school a regular Operating subsidy at the close of each calendar month. Employees are largely housed in institutional houses. They are paid each two weeks, but from the last two weeks' salary is deducted rent and other charges. Payment must await issuance of statements, so the balance is therefore shown on the Balance Sheet as a liability, but is immediately due. Employees driving cars for the school have two cents per mile held in a mileage reserve account, to be withdrawn when the car is replaced. This review of the major policies and circumstances existing in the hypothetical school will permit an intelligent approach to the succeeding illustrations. There yet remains a wide variation of assumptions which might be made with reference to details, but it is believed that these will become sufficiently clear from the context so that further amplification at this time will be unnecessary. 17. Chapter III BUDGETING THE PURCHASES REQUIREEENTS Objectives in Budgeting Purchases Requirements As they relate to financial budgeting, purchasing plans must be made with the ultimate payment for the merchandise as the primary consideration. The manager must knOW'hOW'muCh money is going to be required to meet maturing obligations. To knOW‘thiB, it is necessary that the operating budget of supply needs be broken down into monthly requirements, and that these purchases be further analyzed as to credit maturities. While the operating budget will provide information as to the supply needs of each department, these figures cannot be accepted at face value in every instance. For example, the culinary department receives a sizeable share of its food products from.the farm, while the print shop supplies the printing needs of several departments. In other words, the departmental transfers and purchases will have to be segregated. The accounting records should readily reveal what past ratios of departmental transfers to purchases have been for each department. If separate accounts of the two have not been maintained, they undoubtedly have been entered through different journals and can be easily segregated by reference thereto. These ratios would probably be an accurate basis for determining future requirements unless some changes of policy are contemplated. The timing of the purchases, if the objectives of financial budgeting are to be realized, must obviously be done by more accurate 18. methods than by merely spreading the purchases evenly over all the fiscal periods. An attempt must be made to plan the purchases according to the months in which they will actually occur. This will necessarily require much careful thought. While such prediction is subject to a wide margin of error, yet many of these errors will counteract one another and the estimate as a whole should prove to be sufficiently accurate as a reliable course of action. Fortunately, purchases usually follow rather closely the pattern of previous years, so the accounting records may be relied upon quite heavily in making these plans. Determination of credit maturities will require the same detailed analysis as the monthly purchasing program. Not all purchases have the same terms, and there may result a consequent reduction in the correlation existing between the purchasing and financing programs. Therefore, the benefits of a most accurately planned purchasing policy might easily be neutralized by not giving this element in the budgetary procedure the careful consideration it deserves. Planning the Monthly Purchases A tabulation of the budgeted monthly purchases, by depart- ments, is given in Form I. This outline of purchases is quite typical of Seventh-day Adventist educational institutions, and an examination of it will quickly demonstrate that reasonable accuracy in the timing of purchases is not difficult to achieve. The first column of Form I shows the estimated purchases of each department for the year. As has already been eXplained the operating budget forms the basis for this estimate, but due allowance is made for departmental transfers. For instance, it is assumed the 19. 53.23th $30.3 HS Show moose» 63.23.35 :30 .Ho oouwoe wfig mopeOHonH .1. 50930.33 fine no name. mutton noveoaonH _.. g ewe emem nOeH OHON meow ONNH meow mOmH eOOm Oee meHH mom ~OO.OH _ eHeeoa Oh one OO» w flange ensue he on» Om 00m 00» w 000 vnoSmwdwm... OO» 8» 33H .moO .. OH OH OH OH OH on OH OH OH Ohm OOe w OeH OO¢.HW ehHeeome oH oH oH mH mH mH mH mH mH hH mH oH OmH .Hoe e .Hoet eH ”H «H nH «H ”H «H ”H «H OH OH OH eeH eoHpoeeoeeemh on O OH em on eNH eeoteeoH** mNH Ohm ooH mew OOO oeeoeeeeH. Oe OH OH Oe OOH aHeeem_esAm. we me me Oh Oh Oe we OO Om Oe oe oe OOe aeHoHeeoOHmt OON OOn Owe OO» Owe OON OOO.~ Hooehe ON OH e O O» O o o O» oH OH m OmH r.oteeHoeee<.. 83 8e 83 OOO 83 O8 OON OON OON w OON w OOm W OON OON w OOH Om OOO.a meow eoee OON mmH me he he he he he me me he OOH OOH.H meow anaemtt OmH OO Om ON ON ON ON ON me Oh Oh we OOO sheet he on one ONO otoeenoomt mm mm Om ateeeeqh Om me me OmH eoHeoeHatoet OON Owe Ohm Owe Oem Ohm Oem Oem Om» mNH he ONH OOe.m aheeHHeO* OH oH ON ON he eHeeatt OH a a a o a a e OH « a he a o a a a he a aaeeeeet* He wee «a tee em to: em pee on see m use m eon s poz OH peO NH mom Hm Hoe Om nee hoes tea uomdSoé .n: -uuweHeoa eoHtom toe eooeeeeem eoeoeHeemreeeeaHpem mQOHmmE down—”m Mm mmaombm daaamdmmn mo ZOHBDmHMBmHQ H Emom 20. culinary department will get one-half its supplies from the farm in the form of milk, eggs, fruit, and vegetables. Therefore the ' culinary figure of $2,800 represents only 50 percent of the operating budget estimate for supplies. Administration supplies would like- wise need adjusting as a result of having much of the printing done locally. Other adjustments of this nature will depend on individual circumstances. Accuracy also requires that an adjustment of a different character be made with reference to some of the figures in the operating budget before they are used in the financial budget. Telephone expenditures, for example, will very likely be greater than the expense budget allows, due to the charging of toll calls to student accounts. These calls do not enter into the telephone expense of the institution, but they do require a cash disbursement. The same correction would be necessary if there were electricity charges to students or employees, or if fuel were sold to cottage residents. The remaining columns of Form I show the probable monthly distribution of purchases. As already indicated, it may seem.in- advisable to issue complete statements of the summer operations at regular 28-day intervals, but it is essential that frequent check- ups of the financial budget be made. For this reason the summer has been divided into three periods, the first two closing with the calendar month, and the last closing with the vacation. These periods are arbitrarily chosen for purposes of illustration only. The division into such periods as will prove most practical is recommended, so long as the principle of frequent check-ups is maintained. The school year proper is divided into the regular 21. accounting periods of four weeks each with the exception of the last period, which closes on May 31, the close of the fiscal year. The distribution of the purchases throughout the year is not a difficult task as it relates to the instructional and homes purchases. With the exception of the culinary department, the same general pattern is followed in all the departments. The purchases usually consist of supplies which will carry throughout the year, possibly requiring some replenishment during the year. Past exper- ience will indicate when the mid-year purchases usually occur, but the bulk of the buying will come at the Opening of the school year. Culinary requirements will be lighter in the summer, but will tend to be rather uniform throughout the school year after the inventory has been brought up to full operating level in September. Industrial purchases will vary with seasonal requirements. Farm buying will be highest during the planting and harvesting seasons, but should be low during the winter months so long as the department produces its own feeds. The print shop purchases will tend to be uniform, except for certain peak periods such as the printing of large quantities of school annuals and advertising matter during the late spring months. The buying program of mechanical industries, such as a wood shop, injects considerable uncertainty into the problem of planning the monthly purchases. This arises from the necessity of buying certain materials in large shipments. Possibly the segre- gation of major and minor purchases will facilitate the budgeting problem.by revealing that the minor purchases follow a rather uniform pattern (similar to the top row of figures in Form I, opposite "wood Shop"). The timing of major purchases, such as lumber and paint 22. (see lower row of figures, Form I, opposite "hood Shop"L can then be accurately accomplished by giving careful thought to the pro- duction program. With the exception of repairs, the overhead purchases are regulated by the nature of the item. Administration supply purchases are usually heavy at the beginning of each semester, with postage expense occurring at regular intervals throughout the year. Elec- tricity is a monthly item, with seasonal variations. The due dates for interest and insurance premiums can be definitely ascertained by reference to notes, loan plans, and insurance policies. Similar considerations would direct in the timing of the remaining items in the list of overhead accounts. The Budgetingwand Control of Repairs Separate treatment has been reserved for repairs because it has been found to be one of the greatest barriers in the way of accurate budgeting. This is probably due to an inadequate appraisal of repair needs in general and to an inadequate estimate of repair costs in particular. The first involves more careful foresight as to what repair jobs will be undertaken, and the second demands a more careful budgeting of the costs entering into these jobs. This is essentially a weakness in the administration of the operating budget, but a failure in the administration of operating plans is bound to have an adverse effect on the financial budget as well. The situation therefore demands that estimates be prepared with greater care, and that these estimates be followed up with proper methods of control which will be easy to administer. This can be done advantageously by the use of Form II, which provides for an 23. FORM II (1) REPAIR COST AND ESTIMATE SHEET REPAIR' ORDER COST SHEET Description Authorized Repair Order No. Started To Cost $ Location Completed Charge Acct. C H A R G E 8 Labor Dept. Transf. Invoices Date Ref. Item. Estim. Actual Estim. Actual Estim. Actual Total -*-*-*- itemized estimate of costs and their comparison with the actual. The form also keeps the labor, invoice, and departmental charges separate, which facilitates the preparation and administration of the financial budget. The cost data can most conveniently be entered on this sheet through the medium of a simple cost system. The Repair Order Cost Sheets can be kept in a separate ledger, controlled by a Repair Order Control account in the general ledger. Provision is made for regular ledger notations on the cost sheet, and the individual transactions can thus be posted to the proper cost sheet, while the totals are debited to the controlling account. When the repair job is completed, the prOper account may be charged, and the Repair Order Control account can be credited with the total cost. The cost sheet can then be removed from the ledger and filed where it can be used as a reference source for estimating future repair jobs. Once the repairs have been given the detailed estimates just outlined, it will not be difficult to determine when the purchases (1) Lake, John R., Jr.,_fiEudgetary Control of Capital Expendi- tures", The American Accountant, Sept. 1933, p. 272, (An adaptation). 24. will occur inasmuch as the repair work is quite definitely under the control of the management. The distribution can be made on Form I accordingly. In the illustrative distribution all major repairs have been budgeted for the summer, but provision is made throughout the school year for purchases arising from breakage and miscellaneous causes. The item.marked "Capital Improvement" represents the amount of improvement in the valuation of a building resulting from.putting the repaired section in better condition than it was originally. A.wood or composition shingle roof might be replaced by slate, and the difference in the cost of the two types of roofing material 'would represent the value of the improvement. According to the Operating policy, this amount is to be raised by the supporting organization, so it will be understood that this improvement is made possible by a capital donation. The Budgeting and Control of Equipment Purchases The planning Of monthly equipment purchases, like repairs, is largely under the control of the management, and should not be difficult to allocate. Form III is a convenient method Of organizing this information. It outlines for each department the approximate date of each purchase, the estimated cost, and whether it is an addition to or replacement Of present equipment. The additions to equipment, of course, should be made as a result Of capital donations, and this will receive consideration in a later stage of our discussion of the financial budget. Unlike Form II, this form is kept as a subsidiary record. Attention has already been called to the method Of financing 25. (2) FORM III BUDGET OF ESTIMATED EQUIPMENT EXPEKDITURES EQUIPEENT BUDGET Department Authorized Purchase Estimated A c t u a 1 Under- Over- Item. Date Cost ddition Replace- run run ment additions to laboratory equipment and the library, namely, by student fees. The funds thus raised are for a specified purpose, and should not be left with the regular Operating funds, where there is like- lihood that they will quickly lose their identity and be used for other purposes. To avoid the embarrassment which such a situation may create, it is essential that a trust fund be created for these moneys. This can be done by transferring the fees to a separate bank account as rapidly as they are recorded on the books. The effect on the operating fund will then be the same as though the fees were spent immediately for the prOper purpose, but actually can be spent only by order of the proper committees. It will not be necessary to budget the actual purchase of this equipment, as operating funds are no longer involved after the transfer to the trust fund has been made. When purchases of this equipment are actually made, they can be journalized in the regular manner, the only difference being that payment will be made from the trust fund. Care should be taken, though, that these latter entries are not given in any reports of purchases, explained below; Such an inclusion would constitute a duplication, inasmuch as the (2) Lake, John R., Jr., op. cit., p. 270 (An adaptation). 26. operating fund bore the burden of the purchase when the fees were transferred to the trust fund. Control of Purchases It is not enough that careful plans be made through the medium.of budgeting. It is the greater part of successful management to see to it that the plans are carried out. This can only be done when frequent comparisons are made between the budget and the actual. This can.be done with the purchases through Form.IV. The "Budget for Month" column is for the period just closed, while the "Budget to Date" column is cumulative for the year since June 1. The actual figures can be obtained readily from.the -*-*-*- FORM IV PURCHASES CONTROL SHEET For Period Ending Budget Actual Budget Actual Budget DEPARTMENT For Month For Month To Date To Date For Year Academy 3 $ 3 $ 8 75.00 music 65.00 Culinary 2,800.00 Dormitories 150.00 Laundry 50.00 Bookstore 520.00 Farm. 600.00 Print Shop 1,100.00 wood Shop 7,500.00 Administration 150.00 Coal 2,000.00 Electricity 700.00 HL&W Supplies 100.00 Insurance 800.00 Interest 127.00 Sustentation 145.00 Tel. & Tel. 180.00 Repairs 1,400.00 Cap. Impr. 300.00 Equipment 900.00 Trust Fund 300.00 TOTALS 19,962.00 I‘ ‘ -——___L 27. Purchases Journal. It should be observed, too, that this report can be made up about as conveniently during the summer months as any other time, so regarding the summer as one financial period does not affect this phase of financial control. While this form makes a convenient comparison of the actual with the budget possible, it is not an end in itself. It is only a means to an.end. Comparison is not control. Control is an admin- istrative matter, and the comparison only facilitates that control. Nor should the control be exercised only at monthly inter- vals, but constantly. The budgetary program has been adopted as a 212p to be followed, a working policy for the period covered. It needs to be referred to constantly if it is to perform.its intended function. While formal comparisons are issued by the accounting office monthly, most of the institutions under consideration are small enough so the manager can keep himself informed as to the extent of purchases within the month without the aid of formal reports. In some of the larger institutions, a more frequent report of purchase orders issued or of invoices received may be advisable, but individual circumstances will dictate such details. Planning the Credit Maturities The planning and control of the monthly purchases is a very important part of financial budgeting, but it is important largely because of the problems of financing it brings before the management. The analysis is not complete until a schedule of payments has been made out. Such analysis requires a careful review of the credit terms of the purchases for each department. Any illustration that may be 28. given here, of necessity, must be quite arbitrary. In order to avoid an itempby-item discussion of the problem, the symbols appearing on Form.I will greatly abbreviate the treatment of the method used. A single asterisk preceding the account indicates that all purchases are for 50 days, and will consequently fall due for payment the following month. A double asterisk preceding the account indicates (except for the print shop, interest, and trust fund) that part of the purchases are cash purchases and part are on a 30-day basis. The cash purchases are principally from local business men. The ratio of cash purchases to the total is small in any event, but the extent to which the practice of making cash purchases is carried on will depend on management policies. In some places the practice is virtually non- existent. But frequently, under such circumstances, local merchants issue statements very irregularly, even six months or more often elapsing between their issuance. This can have no other effect than to jeopardize the operation of a well-planned financial budget. Unless some other means of regulating the situation is possible, it is recommended that such purchases be on a cash basis. The print shop purchases are made on terms of 2% 10 days, so if it is contemplated that the discount will be taken, most payments will have to be made during the month of purchase. In the case of interest, payment becomes due on a specific date, and that date is within the month that the interest was budgeted as a purchase. The trust fund payments, as well as interest, are on a strictly cash basis. WOOD SHOP. Having summarized the credit maturities for the institution as a whole, a more detailed analysis of the wood shop purchases now seems timely. This analysis is made by means of Form V. 29. ohms comm com cos cos” com ooe ‘ on oom.a nausea oom cow an as: C 000.“. Coon. O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O C .§.H. O C m CON CON «N A 4 . 8* O . C y.‘ . . . . O O . . C . . . . . . . . . . . . C . . . . O . . . . . C . . . .8¢. . . . cam com an as: . . . . .oooa . . O ‘. .oom. . . . . O O . . . . . . . . . . . . O . . O . . . . . . ‘ .§.H. . . com com em pea O O O 0 Doom. 0 O O I O O I O O O O O O O O O O O O O O O O O O O O O O O O O O O O D Coom. O 0 com on .82. com cow m .ssm O O O o 0,. O O O O O 0 0 O .0 O O O O 0 O O O O O O O O O O O O 0 O O O O O I I Q 0 O 83 Se fie a e 58 ooa cos a .eoz 0H .peo ma.pe.m an haze O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O C O 0 v 0 O O O O a a a o a a a a o o on a a on a on sees an an: em sm¢,sm seams“ son on see N sue n one a pez oH poo as men an ass on use sqsqa< «museum cowhom pom escapewaapo Inuwnfleam coanom wnwuzn.o:n oHHsm Raoshdm azaaamqmmn monm eons mom mmHaHmDafia 59mm". mo mHmwflsfi b. Each 30. As was done in Form.I, the wood shop purchases have been separated into major and minor purchases. The upper figure represents the aggregate of minor purchases each month, which bear the terms of 2% E. 0. M., net 30 days. They will therefore have to be paid by the tenth of the month following purchase, if they are discounted. The lower figures represent the major purchases each month, the 51,500 items being car-load purchases of lumber, and the other items constituting paint purchases. The freight on the car-load shipments falls due upon the arrival of the car, so a payment of about #500 must be made during the month of purchase. The maturities for the lumber and paint are regulated by the advanced datings on the invoices. As it is the intention to have all current liabilities paid by the end of the fiscal year, nothing is scheduled for maturity after May 31. THE RECAPITULATION. In actual practice, it might be advisable to apply Form V to the purchases of a number of departments, particularly to the purchases of coal, where the freight must be paid immediately while terms are enjoyed on the coal. However, the use of the form.is a matter of expediency, and is recommended only in cases where it will be most practical. Once the credit maturities for each department have been determined, the task of recapitulation is a simple one. This is done in Form.VI. As in the case of the wood shop, no purchases are scheduled for payment after May 51. The totals of Form.VI will give the monthly cash requirements for purchases. The disbursements program is now complete except for the determination of the salary, mileage, commission, and student withdrawal requirements. The latter appraisals will not be made, however, until the cash receipts have been estimated. 31. Home HNoN oNHH apes eooN one” oaks Nnoa oHeH Haas oeo mod Noo.oa .Hepoa oo ooN oo» ooze posse 0m» 0m com com com anoamdswm .umaH .mdo oN oH oH oH oN oa oH oH one ooo ooa oos.H one onaooom on ma ma ma oH ma oH ma oH me ha ooH .Hoa e .Hoa oN NH ma NH as NH ”a NH oH oa oH nos soasossoooom oN o oa on oN sNH eoonoeoH oNH ooN ooa oaN ooo oooensooH oe oH oH oe ooa aflooom.gsqm ooH no os os oh no on on o« oo oe oos apaoanpooam ooH o8 8e 8e ooN o3 oNH o3 ooo.N 38 «N o o oo o o o on as o oH n one s.oneoasaso4 one” ooNN ooN ooa oosa ooN ooo on ooo.s mono eooa ooN oNH os ma ms me ms me we me we ooH ooH.H mono posse ooN oo oN oN oN oN oN he on on he ooo .snoa no oN one oNo ooopesoom oN oN on anessoo oN no no ooH soasopaenoo one ooN ooN ooN ooN ooN ooN on» oNH ms oNH ooo.N ansssflso oH ea oH on no oases S . e o a e e S. a e on e 3 a e e e 2. o 333 an we: eN nomwsN no: sN son on use N goo m sea a poz oH poo NH new as Hoe on one Hopes u-.weooom ooasom wanton one woaaaoa enoaoooeapo mnonmm .qumHm Mm qmmmdmogm mom magdm mo Egon H> 59m 32. Chapter IV BUDGETING CASH RECEIPTS Budgeting Student Receipts BY STUDENT BUDGETS. A logical approach to the problem of budgeting receipts from students is through individual budgets with the students. The school, by reference to the operating budget, will be able to determine how much labor it can profitably offer. It will then be in a position to accept students on this basis, and can make budgets, or agreements, with the students accordingly. These agreements, of course, need to be definite with regard to the work that is to be performed. They must also be definite with reference to the cash that will be available. It may be contended by some that the practice of making budgets with students is already a widely followed practice, and that many managers would not place much reliance in the budgets as a basis of estimating cash receipts. There is some truth to the charge. Many times circumstances arise which require a change in the budget with the student. But while these changes are frequent, they also often counteract one another in their effects. Thus the change resulting from a student having to work more because of financial reverses at home is often offset by the student who pays a larger share in cash in order to take additional class work. The greatest weakness in the student budget program does not arise from the frequent changes in budgets, but from.a failure to sense the implication of the word "budget". After the plans 33. have been laid, they must be followed. This is just as true with student budgets as with any other budget. In this connection, Mr. L. N. Holm, business manager of Emmanuel Missionary College, Berrien "My experience Springs, Michigan, writes in a letter to the author: is that a budget is not worth the paper it is written on unless there is someone who is willing to put forth the effort to see that it is lived up to. It is not a pleasant task, but it does make for good collections, . . . keeping both the student and the institution out of financial difficulty." Mr. Holm, in a personal interview, expressed the Opinion that, in his institution, the coefficient of error Of the student budgets was not more than five percent either way from actual receipts. This conclusion is given support by a statement taken from a letter from Mr. C. E. Kellogg, manager of Atlantic Union College, South Lancaster, Massachusetts, in which he says: "The individual budget can be quite fully relied upon on an average. On one occasion we checked our student budget face value for $249 per capita. They actually turned in $250 per capita." In each of these institutions, provision is made for adjustment of budgets, indicating that the program.may be flexible without sacrificing accuracy. Student budgets, then, can be made the basis for estimating receipts, if administered properly. Constant followaup work is necessary, however. Ordinarily, it would seem preferable to have the budget prepared some time before registration takes place in order to avoid a hurried consideration of the problem. The parent, of course, should be a party to the agreement, particularly if the students are of high school age. No particular form is here recommended, it being 34. more essential that greater diligence be exercised in using the forms already in use. The principal failing of this method of budgeting collec- tions from students is that the data is not available until fall, whereas the budget should be in complete form by June 1. The method can be of value in making budget revisions at the Opening of school, however. BY PAST COLLECTIONS. Fortunately, it is not necessary to rely wholly on the student budget for collection estimates. Entire reliance on this source might be unwise, especially until its reli- ability had been established for the individual institution. More- over, it is possible to Obtain accurate data on past collection trends which can be used as a basis for forecasting. This is done by computing the percentage of monthly charges collected in cash. Thus, if a month's charges were 32,500 and collections were $1,500, there would be a 60 percent cash collection. Of course, this is technically incorrect, for the collections of one month are in payment of the previous month's charges. But the method does permit cash received the first school month to enter into the computation in a way that would be difficult otherwise. SO long as the method is followed uniformly, the value of the information gained thereby is not affected. The use that can be made of this information will be Obvious upon examination of Form VII. It will be assumed that the data found therein is the collection record of the illustrative institution with which we are dealing. Summer collections have been omitted. This is because such collections are usually for the past school year, and bear no relationship to the summer charges 35. FORM VII PERCENTAGE OF CASH COLLECTIONS TO STUDENT CHARGES 1931-1938 Monthly 1931-2 1932-3 1933-4 1934-5 1935-6 1936-7 1937-8 Average Sept. 73 72 53 44 40 61 53 57 Oct. 61 39 33 39 40 37 46 42 Nov. 45 38 25 26 36 43 56 38 Dec. 36 4O 36 4O 38 48 46 41 Jan. 46 3O 35 41 4O 44 37 39 Feb. 36 31 27 51 43 29 38 36 Mar. 33 64 29 42 41 41 33 40 Apr. 29 :57 21 45 37 49 33 36 May .72 _6_6. .2. .524: .23 1.2. .332 .623 Average For Year 48 46 34 42 42 48 44 43.44 (Aver. for period) -i-t-t. of work students. The yearly average is the arithmetic mean Of each year's percentages, and is not the percentage Of the total receipts to total charges. (The two calculations will not agree, because both ‘ the monthly charges and collections are variable factors.) But either method of calculation will be effective in indicating the effect of general business conditions on collections. In the illustration, collections reached the lowest point in 1933-1934, and recovered to a new high in 1936-1937, only to recede in 1937- 1938. This correlates closely with general business conditions. The monthly averages indicate the average seasonal variation in collections. Thus, the two end months are the best for receipts, while collections for the remaining seven months tend to be stronger during the first semester than during the second. In making the receipts budget, the management, after studying business conditions and other factors, determines to raise the collection percentage to 46 percent during the coming year. In 36. order to do this a budget of monthly percentages will have to be computed. This can be done by finding the product of each monthly average and the prOposed annual average, and dividing by the average for the entire period. In this particular case, the solution would 46 43.44 But there is also a variation in the monthly charges. be: x Each Monthly Average. This variation, however, should follow rather closely the pattern of previous years. The Operating budget calls for a total of $24,700 in student charges for the coming year. Of this, it is believed that $2,200 will come during the summer, leaving a total of $22,500 for the school year. The first month's charges will be the heaviest, due to the charging of books, and other items. There will be some shrinkage through the first semester, followed by a steadying during the second semester. Once the probable monthly charges have been decided upon, they can be multiplied by the budgeted percentages of collections as computed above in order to determine the probable collections. This computation is shown below, to which is appended the estimated summer receipts, based on preVious experiences Probable Month Estimated Percentage Estimated Ending Charges of Collections Receipts Oct. 10 $3,330 60.4 $2,010 Nov. 7 2,670 44.5 1,190 Dec. 5 2,500 40.2 1,005 Jan. 2 2,500 43.4 1,085 Jan. 30 2,350 41.3 970 Feb. 27 2,300 38.1 875 Mar. 27 2,300 42.4 975 Apr. 24 2,250 38.1 860 May 31 2,300 65.7 1,510 22,500 46 (Av.) 10,480 June 30 70 July 31 150 Sept. 12 300 Estimated Total for Year 11,000 37. OLD ACCOUNTS. The year's collections on old accounts has been budgeted at $1,500. Not much can be done to determine the monthly distribution, except that the months of largest receipts usually follow times when the greatest collection effort has been put forth. It is therefore planned to make a special effort at collection the first of the months of July, October, November, and April. As a result, it is anticipated that collections will be about as follows: June 30 $75 July 31 150 Sept.12 150 Oct. 10 75 NOV. 7 150 Dec. 5 150 Jan. 2 75 Feb. 27 150 Mar. 27 75 Apr. 24 150 May 31 150 STUDENT AID. Many of the supporting organizations main- tain a fund for aiding worthy students. The budgeting of student aid fund receipts will depend on the policies on which the fund is administered, as well as on the accounting procedure followed. It is possible, of course, to credit such receipts to the proper students in the same manner as other student remittances are handled. In this event, the budgeting of student aid would not need to be done indepen- dently, but would automatically be included in the budgeting of current account receipts. However, this method of accounting for these receipts results in the loss of the fund's identity as such. It is frequently more desirable to credit the actual receipts to a Student Aid account, and transfer this credit to the personal accounts by means of a 38. journal entry. For purposes of this illustration, it is assumed that the student aid fund, of which the supporting organization is trustee, will be able to provide aid to worthy students to the extent of $50 per school month. With the exception of the May remittance, this will be received after the close of each month. Budgeting Receipts from Commercial Industries PRINT SHOP. It has already been stated that the print shop is assumed to Operate rather uniformly throughout the year, except for a peak period in the late spring. It is believed that the commercial business of $1,600 will likewise be evenly distributed for all periods other than the first two and last months. Concen- tration on institutional printing in the early summer will limit receipts to $50 in June and $100 during July. Thereafter it is expected that receipts will average $125 per month until May, when receipts from the printing of the school annual will raise the month's total to $325. Inasmuch as sales are largely to a local market, collections are usually made on delivery of the printing. Even when credit is granted to the larger customers, the discount is an incentive to pay promptly. Most of the collections, therefore, occur during the month of sale. The cash discount will be treated later. WOOD SHOP. An accurate estimate of monthly cash receipts from the wood shop is not only dependent on the probable schedule of sales, but also upon an accurate estimate of the collection period, or the "lag" between sales and receipts. The latter is Inost commonly determined by dividing the accounts receivable by 39. the average sales per day, the figures being taken from the annual financial statement. The quotient will be the average number of days elapsing between sales and collections. In our hypothetical problem, the collection period has been computed to be 28 days. In other words the sales of one month are, roughly, the collections of the next month. The above method of estimating collections, obviously, is made much more difficult if the collection period is of different length than the fiscal period. In this event, the most convenient method of estimating collections is by means of a cumulative graph. This is illustrated in Form.VIII, although the data used therein is not intended to illustrate wood shop sales and collections. —*— *c- *- FORM VIII CUZULATIVE GRAPH OF SALES AND COLLECTIONS “2 000 l? ’ *_ 35 days a. F / _ v 1, 500 7’ f— // F Sa es Collections p. I _ / I 1,000 l/ y.— I I h 35 days #— r, 500 7 l L— / / _ / ’l h- ’I 1 i4: 1__ J, J I let 2nd 3rd Month Month Konth 40. Taking 35 days as the collection period, it is clear from the illustration that collections for the first month's sales will not begin until the second week of the second month. Furthermore, only slightly more than $500 can be expected the second month as remittances on the $700 sales of the first month. And while sales for the second month would be $1,200, collections the third month would be a little short of $1,100. The graph would be read shnilarly throughout the remainder of the year. However, there are reasons why this calculation cannot be used to give the most reliable monthly estimates of cash receipts. Only in the event that the collection period remained, in fact, "average" throughout the year could it be said to be truly reliable. But frequently this is not the case. There are usually seasonal fluctuations in the collection period. An accurate forecast of collections must therefore take this fluctuation into account. Perhaps this adjustment can best be made by means of a rough correction, as has been done with the wood shop collections below} Collections Month Estimated as per 28— Collections Ending Sales day period as Adjusted June 50 i 550 July 31 50 s 550 $ 400 Sept.12 50 50 225 Oct. 10 50 50 50 Nov. 7 50 50 50 Dec. 5 5O 50 50 Jan. 2 50 50 50 Jan. 30 50 50 50 Feb. 27 2,000 50 50 Mar. 27 2,500 2,000 1,575 Apr. 24 2,800 2,500 3,085 May 31 2,200 3,500 3,725 Totals 10,400 8,900 9,310 Add: Estimated June collections on present year 690 10,000 41. Thus, past experience indicates that collections of June sales tend to be slower than average. Collections of February sales likewise tend to be slow, while March sales are above average. May is a five-week month, and receipts can be expected to be five-fourths of April sales. Experience, however, shows that collections usually exceed even this amount, and so May receipts are budgeted for $3,725. A June collection of $690 is anticipated on the previous year's business. The fall sales are for custom work, and are usually collected promptly. Budgeting Receipts from Miscellaneous Departmental Sales CULINARY. Past experience would indicate that there will be approximately $300 cash sales for the culinary department during the coming year. It is believed that these sales will average about $10 for each of the summer periods, and $30 per month there- after. BOOKSTORE. many of the bookstore sales will be charged, but it is believed that $220 in cash sales is a conservative estimate. There will be virtually no sales during the summer, but cash sales the first school month should be about $110. The second month should be about $20 and the fifth about 330, while the remaining months should be about $10 each. FARM. It is believed that the farm.will produce foodstuffs in excess of domestic needs so that $1,000 in cash sales will result. There will be a surplus of dairy and poultry products during the summer, which can be marketed along with the small fruit and truck gardening crops. Late garden crops, potatoes, and the late tree fruits will be marketed in the early fall. In view of these consid- 42. erations, it is felt that there will be $150 in cash sales during each of the first two periods, $250 during August, 8300 during September, and $150 during October. Thereafter no sales are budgeted. Budgeting Operating and Capital Donations It should not be difficult to make the monthly distribution of donations. Except for May, the operating subsidy is received shortly after the close of each calendar month. It will be received late so long as the institution's periods close with or before the calendar month. This item.will be budgeted at $3,000 for the year, or $250 per month. As for the capital donations, the budgeting of purchases 'was predicated on receiving the donations before the maturity of the purchases. Therefore, the $300 improvement in connection with repairs (Form I, page 19) should be received during the month ending September 12. The donations to cover equipment additions (Form.III, page 25) should likewise be received before the purchases fall due. Two hundred dollars will then be budgeted for the month ending December 5, and $350 for the final month of the year. Recapitulation of the Cash Receipts Program Having determined the cash receipts by months from each of the sources, the remaining problem is solely one of recapitulating this information in order that the data may be used in planning the financial program of the school. This is done in Form IX. It needs to be borne in mind, however, that the receivables from firms and current students may be discounted. 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Determining the Loan Requirements The determination of loan requirements now becomes largely a work of integrating Forms IX and X, the cash receipts and cash expenditures. The only additional information that will be necessary is the beginning cash balance for the year. Obviously, this will have to be a matter of estimate through the early stages of budget development, but with the close of the old year it becomes a known quantity. Having either a known or estimated beginning cash balance, one can quickly compute the monthly cash balances. This is done in Form XI. The months requiring loans, and the months in which loans may be paid off then show up clearly. Control of the Cash Budget hhat was said in connection with the need for control of purchases applies fully to the control of cash. It is therefore necessary only to present a form by which the control may be main- tained. This is done in Form.XII, the data for which is readily obtainable from the cash journals. After the faculty has been elected, virtually the only avenue open for appreciable control of disbursements is through purchases. In view of the consideration already given to this subject, it is unnecessary to discuss it further except to point out its importance as the key factor in the internal control of finances. In this connection, it should be noted that no comparative form was developed for purchase maturities, because it was felt that such a form would be redundant in most cases. Effective control is 51. 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