What’s the difference between a budget and a financial plan?

Think about maneuvering a rowboat. The energy you use to make the boat move is like the money you have to spend. You can row all day, but if you don’t spend any time steering, you’ll never arrive at your destination. Budgeting, like rowing, provides the resources needed to keep a school district moving forward on a daily basis. Financial planning, like steering, focuses our effort on our destination. Rowing without steering, or budgeting without a long-range strategic financial plan, will keep you moving — but not necessarily in the right direction.

Most school districts’ finance efforts are directed at budget development, financial compliance and reporting, and control of expenditures — important tasks but ineffective ways to chart a strategic course. Most districts spend far too little time evaluating how effectively their funds are being used, identifying future financial needs, and gauging the impact today’s decisions will have on future needs or goals.

Fiscal responsibility

School board members, superintendents, and business managers have two levels of fiscal responsibility. The first level is compliance with state and federal law. Compliance ensures that the budget meets state standards and that state funds are directed to legislated accounts and programs. Compliance does not ensure that funds are being used efficiently or effectively, however.

The second, higher order of responsibility is that of fiscal stewardship, which goes well beyond compliance and ensures that funds are spent on programs that make a difference and move the district toward its vision. Fiscal stewardship avoids deficit spending and the need for drastic cuts that undermine education. It requires that policy and process are in place to ensure that funds are used effectively and wisely and that deficits are avoided.

How does a School District achieve effective fiscal stewardship?

The answer is financial planning. You would never build a new house only to tear down part of it because you didn’t budget enough to finish the entire building. Unfortunately, that’s how some districts often handle funds. Some build a district vision for student success one year at a time and often end up spending so much on small projects that they don’t have enough for the programs that would really make a difference.

Building a successful district requires a strategic plan, improvement goals, and a financial plan to support the vision — plus the fiscal stewardship to make sure tax dollars are being directed to the most effective programs and departments.

Budgeting versus financial planning

Financial planning differs from budgeting in a number of key ways:

1. Purpose — compliance versus fiscal stewardship. Budgets are usually developed to match revenues against planned expenditures and comply with state budget development and reporting requirements (state law rarely requires financial plans). The purpose of strategic financial planning is to project the long-term sources and uses of funds, evaluate the effectiveness of programs and departments, and focus financial resources on programs that help attain the district’s vision for students. Enrollment histories, enrollment projections, patterns and strategic goals are all imperative to the planning and purpose.
2. Process — routine versus evaluative. The budgeting process usually involves routine review of annual expenditures. Budget center directors are given directions on spending limits and possible increases, and new programs are occasionally introduced. Each year, school officials spend a lot of time reviewing these budgets, when all they’re really doing is approving last year’s budget with a few changes. Financial planning, on the other hand, takes the district through an evaluation process that identifies areas in which district funds are being overspent or spent on ineffective programs. With financial planning, programs are renewed if they produce material results for students— not because they have become part of the way of doing things. Site-based or school-based improvement plans and their evaluations are the impetus to continuous improvement.
3. Focus — tactical versus strategic. The focus of a budget is on taking care of day-to-day operating needs, such as staff, supplies, utilities, and benefits. Financial planning focuses on allocating resources efficiently, making long-range plans for new funds, and ensuring that funds are directed toward goals and priorities of a strategic plan that is well thought out in advance, implemented and followed.
4. People involved — middle to lower-level employees versus top administrators. The superintendent, business manager, building principals and the people who report directly to them are involved in financial planning, which plays a more strategic role than traditional budgeting and places accountability on those managing budgets and departments. The school board should review and monitor the district’s finances throughout the year, including written reports at monthly board meetings.
5. Information — revenue projections and budget allocations versus spending trends, performance benchmarks, district goals, and performance. Most traditional budgets focus on the collection of minutiae, from head counts to supply use to salaries. Strategic financial planning uses this information as a foundation and build on it. Districts that use only the traditional budget document as a management tool force the board and superintendent to review information that is the proper domain of mid-level administrators. Strategic financial plans, on the other hand, provide information on issues of fiscal stewardship, effectiveness, vision, and change.
6. Time frame — next year versus next five years. Traditional budgets usually provide data for the budget year and the previous year. Financial plans, in contrast, generally provide two or more years of history and a three- to five-year projection of future expenditures based upon strategic documents. Such documents can include enrollment histories and projections, facility ages and capital needs for maintaining each building’s infrastructure, staffing patterns and it’s ability to adequately serve the number of students under its roof.
7. Accountability — spending questions versus goals questions. Traditional budgets ask, how is your department or program going to spend its funds next year? Strategic financial plans ask, what will you achieve with the level of funding requested for the next five years, and how does that compare to other alternatives for the same goal or service? In addition, financial plans have contractual negotiations as the impetus for accountability. The ability to restructure financially during collective bargaining is paramount for the vision of a school district and community.
8. Issues addressed — operational versus strategic. Budgets address the immediate operating needs of the district: how much money is spent on salary versus supplies, for example, and how much is spent on each department. Strategic financial plans address critical issues, such as when new funding will be needed, the cost of alternatives for improving academic performance, the long-range impact of reducing class size or adding a new school, and the total annual capital and operating costs to fully implement and support technology. Most importantly, financial planning addresses whether a district is investing funds in programs that support district goals and vision. Districts that don’t use financial planning seldom learn about their educational inefficiencies. And when the adults have chosen comfort and status quo over work and change, the children will suffer in the long run. Financial planning and analysis ensures the needs of students are always put first.
9. Ability to influence district vision — short term versus long term. Traditional budgets affect what happens during the coming year, while strategic planning affects results for up to five years. Without the benefit of financial planning, a simple budget cannot affect the long term results or sustainability.
10. Communication with taxpayers — dollars and cents versus results. Traditional budgets show categorical spending only. Strategic financial plans show whether the funds are being used effectively, what funds are used for, what they will accomplish and most importantly, what affect the money will have on students and education. It also tells taxpayers that we are open about our district’s financial condition and that we are responsible and care how taxpayers’ money is being used. In short, financial plans are the most effective tool school officials have for achieving results and establishing accountability.

The current tough economic times require strong fiscal leadership. You can’t have leadership without fiscal stewardship. Your elected school board, in conjunction with administrators and staff members, should be committed to making sure the students of your community receive a quality, first-rate education. High stakes education now requires high commitment from everyone involved.

Source: East Longmeadow (Massachusetts) Public Schools, Executive Summary Budget Summary FY 2009-2010