Budgeting models at a South African university

Abstract

Higher education institutions have faced increasing funding pressures. For this study, budgeting was identified as a mechanism to better manage these challenges. This study investigated the budgeting model most suitable for a selected university while balancing its duty to meet the demands for public service provision and commercial sustainability.

A literature review was done to identify the various models of budgeting that the university could employ. The empirical data allowed an analysis of how profitable the university’s departments are. Many departments at the university were found to be unprofitable and cross-subsidised, despite the institution's strategic objective to operate like a business.

The research proposes target ranges for the contribution margin ratio (68-72%) and the direct profit margin ratio (0-5%) to enhance sustainability without burdening profitable departments or undermining the public service provision. The performance budget model was identified as the most appropriate for the university, as it allows targeting direct costs, which mainly consist of salaries. Implementing this model could significantly improve departmental profitability while maintaining the overall profit. Additional recommendations include compiling department-level budgets, calculating anticipated contribution margin ratios and direct profitability margin ratios, and strategising for loss mitigation or determining acceptable losses for departments fulfilling the university's public service.