Allocations budgeting provides a clearer picture of how specific resources and costs are being consumed within an organization.
Allocation budgeting, also referred to as inter-departmental billings or chargebacks, is the process of funneling monies/costs to the different cost centers or departments within an organization. Allocation budgeting usually covers the costs of running an organization, that are shared by a number of other departments dependent on that service cost. In this paper we will take a deeper look at how local governments are using allocation budgeting and the benefits of adopting this method for your organization.
In municipal budgeting, allocations budgeting can be used for any number of costs, such as information technologies, building rent, employee benefits, workers compensation and general administration. This allocation usually takes into consideration the specific percent-age or amount of a resource each department will be using or is responsible for.
Information Technology (IT) departments are a perfect example of the benefits of allocation budgeting. IT department costs typically include hardware, software (licensing) and support services, which are distributed throughout the departments within an organization. In order to truly reflect where these specific costs are being used up, a clear picture must be established of what the costs are for each department using these systems..
For example, the IT department may purchase and be responsible for maintaining a total of 200 computers, but these computers are actually located in and being used by other departments. The Public Works department may have 50 computers, and the Library 30 computers. Allocation budgeting can apply a per-computer value, or other weighted value, to determine what portion of the IT department costs should be reallocated to each departments’ operating budget.
Traditionally, organizations have used tools such as Excel spreadsheets to manage their allocations. This, however, this method presents limitations in terms of flexibility, time consumption and visibility.
Allocations budgeting at Oceanside, CA
Like most local governments, the City of Oceanside, California had a number of fairly typical departments to consider when budgeting for allocations, in addition to a number of special departments. Using Excel to handle the allocations for all these departments resulted in an over-whelming volume of spreadsheets.
Some departments, like IT, can be moving targets until finalized. If a budget element is changed (i.e., worker’s compensation premiums go up), budget allocations had to be recalculated in Excel. The time required to compile the data in this format was excessive. In turn, these spreadsheets were handed to Finance to post to all departments—again a labor intensive undertaking.
The Departments at Oceanside were given one month to enter their data and then were locked out of the system while Finance worked through the steps of allocation. The departments didn’t understand why their window was so narrow, but weren’t seeing the work that was required during those two months of lockout. With only bottomline numbers being posted, departments were in the dark as to why the decisions were made around the specific details of costs. Additionally, for security reasons, departments didn’t have access to other department’s budgets, so they couldn’t enter data for other departments—it had to be done by Finance. This placed a heavy reliance and burden on the Finance team at all times.
Accuracy was an issue with this process. It was difficult to ensure that numbers updated in one area took effect in all associated records. Version control was challenging—the City ran into the situation of using an outdated allocations file. Scenario creations were a vicious cycle with no dynamic way to create them. And departments weren’t using the most current budget in their system, so the older version didn’t have all the changes applied.
City of Oceanside’s Finance team had their work cut out for them each budget cycle, and they needed a better solution than spending countless time and resources just on their budget alone.
Oceanside made the move to an allocations tool to assist in their budgeting process.
Because they were dis-satisfied with the functionality of spreadsheets, they adopted Questica’s Budget solution. The Finance team was already familiar with allocations budgeting, so implementing a tool didn’t present much of a challenge. Using an add-on module for their existing budgeting solution, they went “live” with the simple click of a button. Their budget and allocations data exist together in one data-base. Two training sessions were held and they began using the tool immediately.
Considering an allocations tool should be handled carefully. Organizations that have not completed an allocations budgeting before, should be prepared for a steep learning curve and for a process that can be a bit overwhelming the first time around. However, if your organization is already familiar with the process and have done it before, getting comfortable with the right software tool can be pretty straightforward.
The allocations tool provides a more dynamic method of data entry and change. The Finance team no longer spends endless hours entering data into Excel. Subsequent years are easier as the data is already in place, and only changes need to be applied.
Multiple scenarios can easily be created and the impact understood before committing a specific scenario.
Changes made throughout the process automatically trigger an update. The Finance team no longer has to backtrack through their 17-step process.
Greater visibility and understanding
There is more visibility throughout the allocations process. Finance has set up the system to post live data twice daily, providing departments with a current picture of their budgets. They can also see the breakdown of each budget item, understanding the decisions behind the allocations.
Accuracy is now easily managed. Changes are automatically updated in associated records and budgets. Version control is now easily managed, with only one “live” version of the budget. Subsequent changes can be made and the version published. With the system posting live data twice daily, departments can be certain they are seeing up to date budget data.
The benefits that Oceanside has with implementing an allocations tool:
- Time savings
- Greater visibility and understanding
The Questica suite of products is a fully featured web-based budgeting preparation and management solution, designed specifically for the public sector. Integrating with your current financial system, it makes the process of tracking, measuring and reporting more efficient, and in turn, less painful.