The last few years have seen colleges and universities of all shapes and sizes tighten their budgets. They’re trying to contend with unexpected challenges, shrinking enrollment, and more. Budget decisions and university budget models are more scrutinized than ever, both within individual units and across the entire institution.

Against that backdrop, it makes sense to closely examine the potential university budget models at your disposal. In the wake of the COVID-19 pandemic, the coming student enrollment cliff, limited state appropriations, and other challenges, what has worked at your institution for decades may no longer align with your strategic priorities. In fact, the type of budget your institution lands on could make a massive impact on how your college or university is managed for years to come.

1. Centralized Budgeting

Perhaps the most traditional budgeting process on this list is centralized budgeting. It describes a model in which all revenue is pooled centrally. Then, it’s distributed from the institution’s leader to the heads of each core university unit. The leader typically uses a budget advisory council that determines the budget allocation every year based on previous spending and institutional priorities. This allocation process is popular in no small part because it is relatively simple to implement. Also, it allows for strategic investment across the board.

Benefits

Centralized budgeting is among the most common university budget models because of how simple the leadership oversight tends to be. Decision-making can be quick and adaptable, enabling university leaders to implement key initiatives quickly in any fiscal year. Investing in a virtual campus tour, for example, can happen easily—even without input from a wide range of stakeholders.

Another key benefit of the centralized budget model is that each academic unit will receive relatively consistent funding every year. That makes it easier for deans and other leaders to plan ahead. They can focus on creating and funding their own strategic initiatives in the process.

Limitations

Of course, this model’s simplicity is also among its biggest drawbacks. University leadership will sacrifice transparency in revenues and expenditures. This can become an issue when financial decisions begin to be questioned in times of financial crises. In addition, units not directly represented in the central models could feel left out of the process. They may have no incentives to seek out their own revenue generation opportunities or minimize costs.

2. Incremental Budgeting

A variant of the centralized higher ed budget model is incremental budgeting. This describes a process in which all financial figures from the previous fiscal year serve as the basis for the future year. Revenue from new sources is allocated to the units needing it most. Simultaneously, potential budget cuts are implemented across the board. As a result, it’s relatively straightforward in both planning and execution. Everyone knows what to expect.

Benefits

The primary benefit of incremental budgeting among university budget models in this guide is its predictability. Boards and presidents can use it to plan multiple years ahead, increasing their ability to build a stable budget year-to-year. It also tends to be inherently received as a fair budget methodology, with departments never receiving unexpected cuts except when those cuts happen across all departments.

Limitations

While its predictability is a major benefit, it also inherently limits incremental budgeting. Indirect costs are difficult to account for. After all, it can be challenging to determine where new costs over the prior year might have occurred and how those costs should impact revenue allocations. As public calls for budget accountability in higher ed continue to increase, this lack of trackability could transform from a nuisance into a significant issue.

3. Zero-Based Budgeting

In terms of university budget models, zero-based budgeting is near the opposite of an incremental budget model. It wipes the budget every fiscal year, requiring university areas to reapply for the funding they need. Each unit must justify its request, making an investment like virtual tour software realistic only with a comprehensive case for how it could benefit the institution.

On a negative note, zero-based budgets take a lot of time to prepare. Also, they can be too unwieldy for some boards.

Considerations

Zero-based budgets take longer to prepare and may be too aggressive a strategy. This model requires a lot of time, energy, and communication. It could also disrupt your institution’s professional climate, as some staff and faculty members may perceive zero-based budgets as a threat to their stability or autonomy.

Benefits

Zero-based funding offers the most cost control among the university budget models on this list. Requiring funding requests every year incentivizes units to truly think through their budget, minimizing waste in the process. When a strong process is in place for leadership to allocate expenses, this approach can ensure that all or close to all spending aligns directly with strategic initiatives.

Limitations

In its purest form, a zero-based budget is immensely time-consuming and complex. Evaluating every dollar spent for every unit can take months. This makes it unwieldy for institutions embracing shared governance for financial purposes. In addition, unit funding is entirely at the discretion of leadership, which can lead to concerns and complaints that the budget is allocated unfairly across units.

For these two reasons, a pure zero-based approach is rare; more often, institutions embrace a hybrid model in which every unit gets a baseline of funding while all major expenses and initiatives still require the same request and approval process.

4. Performance-Based Budgeting

As its name suggests, a performance-based approach assigns budgets to units based on pre-set goals and measurable metrics. Units may forecast that they are likely to reach their metrics based on past performance. Those metrics can include anything from tuition revenue for academic departments to ticket sales for athletics. As a result of their forecasting, they can expect to receive the same funding again in the future. Those who don’t meet their goals will see a lower amount in the future, along with a realignment of what would constitute success.

Benefits

Due to its transparency, performance-based budgeting is a preferred means of allocating funds for many. Unlike zero-based approaches, there will be no question on why some units receive more funds than others. In addition, the institution gets to set the success metrics for each unit, which means non-revenue-generating units can still receive sufficient funding based on metrics most relevant to them. Finally, units looking for increased funding have a direct path to do so, and they know exactly what it would take to get their request approved.

Limitations

Like zero-based budgeting, this method requires significant time and effort. For it to work, the metrics have to be just right and will need to be reevaluated annually. An ongoing analysis of where each unit stands in terms of reaching them will also be necessary, further adding to the necessity. Finally, units that don’t reach their goals could struggle significantly in the long term. They might receive fewer funds and become even less likely to reach their benchmarks in the future.

5. Activity-Based Budgeting

Like performance-based funding, activity-based budgeting awards funds to units and initiatives with the greatest return potential. But it’s more narrowly focused, aiming specifically to maximize the return and revenue for every investment. The model actively separates direct costs from indirect costs, acknowledging that general non-revenue activities like advising, disability services, etc., will require a set budget even if they don’t contribute to revenue.

Benefits

Performance-based budgeting may be the most streamlined option among the university budget models outlined in this guide. Everything can easily level up to balancing the budget and accomplishing strategic initiatives—with a clear and transparent justification for why the funding is allocated the way it is.

Limitations

Its streamlined nature is also among the biggest weaknesses of this higher ed budget model. Measuring even revenue-generating programs only on revenue can sideline programs that may be strategically valuable for the institution but can’t compete against ‘hot’ programs. For a faith-based school, for instance, the Theology or Philosophy department may teach fewer credit hours than STEM, but it can still not be neglected in keeping with the institution’s mission.

6. Responsibility Center Management (RCM)

The RCM budget model is the most complex option on this list, but it has gained significant popularity in higher ed institutions in recent years. This unit-centered model delegates authority to the many functional areas across the school, with each assigned its own revenues and income along with a central portion of external funding like government grants. Academic units compete for students to receive their budget while sharing costs for non-revenue activities central to the student experience.

Benefits

Compared to other university budget models on this list, RCM offers a significant baseline of accountability for financial decision-making. Units are incentivized to build efficiencies that reduce waste and find innovative ways to gain revenue. Finally, the enhanced financial autonomy can increase flexibility, enabling units to make financial decisions more quickly and decisively based on their needs.

Limitations

RCM comes closest to aligning higher ed with private industry in building a competitive, flexible environment where fiscal responsibility is at the heart of every academic unit. But that is also this model’s biggest limitation, risking the neglect of initiatives that can’t compete on a financial level. In addition, internal competition for revenue can disrupt the organizational culture at a time when removing organizational silos has already become a point of emphasis within executive leadership.

Factors to Consider When Choosing Between University Budget Models

University department discussing their financial strategies under a new set of university budget models

There is no simple ‘best’ university budget model. Instead, several factors can help to decide which budget model may be most relevant and beneficial for your institution to implement.

Institutional Size and Complexity

For smaller institutions, one of the simpler models in the above list, like incremental budgeting, may be more beneficial. Larger universities with a more diverse set of academic programs and administrative units may benefit from more decentralized models like RCM.

Strategic Goals and Priorities

Part of the consideration set is cultural. Does university leadership prioritize tight central control over finances, or is departmental flexibility and innovation a higher value? An honest assessment can help to guide your institution into the right model. Similarly, a focus and priority on cost-cutting and streamlining processes may lead to a different budget model than achieving strategic goals like student success or making education more affordable through enhanced financial aid.

Financial Health and Stability

Your institution’s current and past financial health can also impact what university budget model may work best. For instance, a strong need for cost control and efficiency may require a centralized or performance-based approach. Meanwhile, the diversity and reliability of your revenue streams through tuition, state funding, research grants, and other variables may impact whether the budget model should focus on simply allocating these resources or finding new funding and revenue sources.

Administrative and Operational Capacity

Assess your institution’s ability to implement and manage your chosen budget model. Do you have the resources and governance model in place to support what complexities may come at you? Do you have the staff and skills in place that will be necessary to operate and maintain your budget model effectively every year? If not, a simpler model may benefit your institution more despite the theoretical benefits of the more complex alternatives.

Optimize Your Budget and Increase Student Engagement Through Concept3D

The budgeting process is among the most complex and important processes your institution will face every year. The above university budget models all come with significant benefits and potential drawbacks that will be important to consider, whether you’re looking to scale your admissions marketing or simply balance your budget.

Regardless of the model you choose, smart and efficient budget management will be vital in this pivotal time for higher education. In fact, it’s the only way to ensure that you can make strategic investments needed to bring in new students and help your students succeed. Among these investments is Concept3D, a market-leading virtual tour, map, and calendar solution that can help your institution succeed regardless of your budget model. Learn more about our solution and how we can help your institution succeed in the months and years to come.