CFOs and trustees in higher education express growing interest in aligning their institutional budgets with Generally Accepted Accounting Principles (GAAP) financial statements–particularly the Statement of Activity’s “Change in Net Assets from Operations.” The key advantage of this approach is more robust institutional financial planning. The movement toward GAAP-budget alignment is a positive trend, worthy of consideration by all college and university leadership teams.

Today, most higher education budgets have limited value for financial planning. No external agency sets industry standards, so approaches can vary by institution for budgeting transfers, debt service, endowment distribution, restricted funding, depreciation, interdepartmental charges, central allocations, and other items. Fund balance accounting adds further complexity. Additionally, many budgets are not “all-funds” and only take into account a portion of the available resources. As a result, the “bottom line” of many budgets provides an incomplete and potentially misleading indicator of financial health and can require laborious and complex crosswalks to audited statements.

Several objectives in today’s budgeting practices are common and should be retained, such as setting near-term priorities, allocating spending authority, and incentivizing behavior. By aligning budgets with GAAP, an institution’s leaders transform their budget from a tool that not only supports these objectives, but also forecasts actual operating performance and other metrics of financial health. University and college executives and board members are better equipped to serve as fiduciaries, plan the overall financial condition of their institution, and communicate that plan through the annual budget.

The level of effort required to align an institution’s budget with GAAP will depend on current budget definitions, and the related processes and technology that support that budget. Some institutions may be able to retain budget formats that are distributed to departments and accomplish GAAP conversion through central planning units. Other institutions may decide more fundamental change is needed and restate formats used by departments. Effort may be required to preserve the institution’s objectives to use the budget to allocate spending authority, incentivize behavior, and manage fund balances. Nevertheless, aligning budgets with GAAP has compelling financial planning benefits, especially in the current stressed environment for higher education.

For more information, David Woodward Vice President, Higher Education Management Consulting at Kaufman, Hall & Associates, LLC, can be reached at 847.441.8780 or dwoodward@kaufmanhall.com.