Effective Practices : Finances


Capital Planning and Fund Management
Finances Section 5

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1. Does your school have a capital budget? If yes, how is that budget developed? If no, why not?
2. Who is involved in the planning process? Who provides input into the capital plan and how are decisions made as to what items receive priority in the capital budget process? What is the timeline for creating the capital budget for the coming school year?
3. What level of detail is planned prior to the beginning of the school year? Does your school simply set an amount for capital projects, or are individual capital purchases planned prior to the start of the school year?
4. Does your school have any guidelines or rules of thumb for establishing the amount of funding reserved for ongoing capital purchases and improvements? For example, does your school set aside a certain percentage of tuition or create a budget relative to the value of its plant and other assets?
5. Which person or group is responsible for administering the capital budget during the course of the year?
6. Do your usual practices for capital budget administration change during periods when your school is undergoing major capital improvements such as adding a new building? Is a special project manager or group created to administer the significant cash outlays associated with projects of this magnitude? What else is different and why?
7. Describe the key elements of your school’s philosophy in relation to capital budgeting and administration.
8. What about your school’s capital budgeting and administration process is particularly effective?
9. If there were something you could change in relation to your school’s capital budgeting and administration practices what would it be and why?

FIN 5-1

Does your school have a capital budget? If yes, how is that budget developed? If no, why not?
The presence of a capital budget and the approach used in its administration are in many ways a reflection of the school’s stage of development and its history.

Younger, smaller schools frequently operate in leased facilities and their capital purchasing is relatively limited. This small scale means that it is often not worthwhile to set up and maintain a detailed capital accounting system. In these operations it is typical to find that all major expenditures are run through the operating budget. At the end of the year the auditors identify any capital items, restate the financial statements and calculate depreciation. In these schools the repairs and maintenance budget is planned at a level high enough to take care of the major things the school anticipates needing. These expenditures are typically made during the summer when school is out of session, with little activity during the remainder of the year. Of course the challenge comes when something that had not been anticipated breaks during the school year. Since the planned items have already been purchased or repaired during the summer there is no budget left for the emergency repair or replacement. For this reason small schools often operate with a contingency fund so that unexpected matters can be dealt with in a timely and effective manner.

As schools begin to grow they find that their capital expenditures become larger and involve many more transactions. As a result a transition is made to the creation of a capital accounting and expense management system that allows this portion of the operation to be managed separately from the ongoing operations of the school. One of the first steps in this process is the need to define a capital expenditure clearly. The definitions vary somewhat from school to school, but several schools define it as a purchase of an item valued at $100 or more that has an expected life of three years or longer, or a significant repair to a capital item that has a remaining expected life of three years or more. By this definition the purchase of file cabinets, computers, musical instruments, office and classroom furniture, and carpet replacement would all be examples of capital expenditures. The re-roofing and repainting of a building are examples of repairs that would be capitalized. Schools that are entering this phase of capital planning are typically still operating with fairly limited funds for capital improvements, and have not yet developed the history to know what amounts should typically be budgeted from year to year. One school solved this problem by establishing the capital budget each year as an amount equal to one half of the excess of revenue over expenses from the prior year. The school was able to make significant improvements in the quality of its leased spaces and their furnishings. In addition the remaining half of revenue over expenses was set aside and in eight years the school had saved $200,000 to be used to help pay for a new building site.

As schools reach full maturity they begin to develop detailed plans for their capital expenditures. These plans are often developed by the business manager and the Building and Grounds Committee. The business manager develops a list of standard items for the capital budget such as the entries related to mortgages and equipment loans. The Buildings and Grounds Committee prepares the detailed capital budget in several categories such as office needs, classroom equipment, musical instruments, and campus improvements. Items in each of these categories are compiled by the Buildings and Grounds Committee in conjunction with the various stakeholders (classroom and early childhood teachers, music teachers, office staff, etc.).

Capital planning for strategic improvements such as adding a new building is handled separately either by the special committee handling the project or by a project manager hired by the school to coordinate projects of this size. The school administrator, business manager, and the Buildings and Grounds committee all work in close partnership with the project manager on these major projects.

Mature schools also begin to develop very clear policies and practices for the investment and use of cash (capital). These policies are typically established by the Board of Trustees, often at the recommendation of the school’s finance committee, and are then implemented on an ongoing basis by the business manager. (See: Cash Management)

FIN 5-2

Who is involved in the planning process? Who provides input into the capital plan and how are decisions made as to what items receive priority in the capital budget process? What is the timeline for creating the capital budget for the coming school year?
The key players in the capital budget planning process are the business manager, the Buildings and Grounds Committee, and the administrator. Capital requests are solicited from all stakeholders in October. The list of requested items are reviewed by the College or other pedagogical leadership group for prioritization, and the Board of Trustees signs off on the final amount in the spring. This timing ensures that there is ample lead time for the various projects, many of which are completed over the summer while school is out of session.

FIN 5-3

What level of detail is planned prior to the beginning of the school year? Does your school simply set an amount for capital projects, or are individual capital purchases planned prior to the start of the school year?
In schools with limited capital expenditures there is a minimum of detailed planning. For example, a school that sets its capital budget as a percent to the prior year’s excess of revenue over expenses has limited funding and the administrative core team is able to easily identify the few priority items that will be purchased over the summer.

Schools with larger capital budgets tend to plan their budgets by item at a detailed level.

FIN 5-4

Does your school have any guidelines or rules of thumb for establishing the amount of funding reserved for ongoing capital purchases and improvements? For example, does your school set aside a certain percentage of tuition or create a budget relative to the value of its plant and other assets?
The schools in the study report that they have developed some rules of thumb that guide their budgeting process each year. As noted earlier, one school sets its capital budget at an amount equal to one half the excess of revenue over expenses in the prior year. Another school with an older site reserves about 25% of the physical plant maintenance budget for contingency spending. Due to the age of the facility it is necessary to reserve some funds for unexpected improvements and purchases that must be made over the course of the year.

Another well established school shared that although it plans its purchases at the item level the capital budget will typically include $65,000 in principle reduction on its loan plus depreciation of $150,000. This school has also created a depreciation replacement fund of $25,000 a year; this entry shelters cash that is targeted for the replacement of office and other equipment. The school typically budgets about $10,000 a year for the school instrumental music program, about $10,000 for office equipment, $80 to $100,000 for Buildings and Grounds related items, and $30,000 for classroom equipment.

FIN 5-5

Which person or group is responsible for administering the capital budget during the course of the year?
In mature schools the Buildings and Grounds Committee manages the capital budget on a project by project basis. The business manager is responsible for overseeing the capital budget as a total line item. In small schools it is usually the administrator that manages the budget on a line item basis, with review occurring in partnership with the treasurer.

FIN 5-6

Do your usual practices for capital budget administration change during periods when your school is undergoing major capital improvements such as adding a new building? Is a special project manager or group created to administer the significant cash outlays associated with projects of this magnitude? What else is different and why?
When a major project such as the addition of new buildings takes place schools usually name a special steering committee for the work and often hire a project manager. These special projects have a much longer timeline than what is typical at the school. Often new buildings or additions have an impact on the operating budget that must be planned for. These include additional janitorial expense related to increased square footage, and changes to utility bills due to increased space less the reduction from any green architectural choices.

Often times these projects have separate budgets and checking accounts, as well as their own protocols for entering into contracts, approving payments and authorizing change orders with contractors.

FIN 5-7

Describe the key elements of your school’s philosophy in relation to capital budgeting and administration.?
The school made an agreement with its community years ago to always fund capital improvements at a certain level so that the facilities and programs could be maintained at a high level. The only time this guideline is deviated from is in the time period just prior to major building renovations. At this time expenditures on buildings which are scheduled for replacement or major retrofit may be maintained at lower levels for a short period. However, safety concerns are always addressed, even when a building is scheduled for major renovation.

A school must build in routine maintenance just as it does other areas of operating expense. Tuition must cover these costs, including the replacement of desks, computers, carpeting, etc. on an ongoing basis.

One should consider how the school will be capitalized for larger improvements. The school can depend on donors, save from operations, or borrow.

The most important thing in capital budgeting is to remember that capital expenditures are a use of surplus and gift money, and there won’t be any of either unless all the school’s relationships are managed in an effective and honorable way. If a school does not have a reputation for effectively using and showing appreciation for gift money then it won’t receive the gifts it needs to grow.

People who have gift money to give need to be honored for their gift, and the school has a responsibility to be a good steward for the gifts it receives.

Do your research on how capital campaigns are seeded then grown. Make sure that critical mass of employees and parents understand the process before you begin.

FIN 5-8

What about your school’s capital budgeting and administration process is particularly effective?
The school has good historical data on its expenditures and its cash reserves. This allows good investment decisions to be made as it is clear when funding will be required for the operation and for capital expenditures.

The school is never over budget in the capital budget. The only difficulty occurred many years ago during a period of major construction when major construction caused damage to the school’s irrigation system, causing a cost over run in the grounds maintenance budget. The school learned from this experience important lessons about ensuring that the contractor is held liable for damage to the school caused by the building process.

The school had great success in sending out finance committee teams to meet with each family in the school to describe the capital needs of the school. This practice brought a new living reality both to the community members and to the people on the team who asked for funds for the new building project. When a school does its work then destiny moves too.

The fact that it is institutionalized makes it effective. We have professional business management and an effective volunteer committee. There is real consistency in the people who are managing this part of the process.

The contingency reserve in the capital budget is important, especially when a facility is older.

FIN 5-9

If there were something you could change in relation to your school’s capital budgeting and administration practices what would it be and why?
As a growing school we have outgrown our current accounting practices in the area of capital planning and management, and will be working this year to develop processes that better serve our needs in this area.

We stayed in survival mode for too long following a period of financial instability. We have changed direction and are just now starting to plan proactively for the future.

We are finishing our first major building project. It would have been nice to have had more time to explore other options but the need to get into the new building dictated a certain speed. Given our inexperience, we have met the unknown with steadfast commitment and partnership. Mistakes are expected, but our improvements are ongoing.

The actual accounting and reporting system could be improved to make information more readily available to larger numbers of stakeholders.

We use a cash approach for capital expenditures for our internal management purposes, and don’t tend to look at depreciation as much as we should.


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