Budgeting: Adding Some Certainty
in Uncertain Times

By: Jeff Bauman

Many managers believe budgeting is a waste of time because of the challenges associated with predicting the future. As a result, they often fail to take this process seriously. While we recognize the irony of budgeting for the “foreseeable future” you should think of a well-prepared budget as an important aspect of managing your company. Below are some tips on how to utilize effective budgeting to measure and improve your company’s performance.

Start early

Before you dive in, it is important to understand the scope of the budget as well as the end user. The following questions should be addressed:

• What time period(s) should the budget cover (monthly, quarterly or annual basis)?

• What level of precision is desired (account view, product view, department view, etc.)?

• Who will have access to view and make changes to the budget?

• How often will the budget need to be updated?

Also consider the capabilities of your accounting system and whether you perform a “hard close” at month-end with all estimates and accruals made. If you only do this once per quarter, it may not make sense to do a monthly budget.

Involve Others

An effective budget takes time (especially the first time) and requires coordination amongst all departments. It often works best when one person or small group controls the process and coordinates with the departments. A complete set of written guidelines should be distributed to minimize confusion on responsibilities and timelines, and periodic meetings should be held to ensure the process is moving along and that any questions are resolved timely.

Dig Deep

A budget prepared at a low level, and one that is sufficiently detailed, provides the best results. For example, sales budgets work best when each product line and each customer within that product line are considered separately. Some things to keep in mind are:

• Estimated purchase volume by customer

• Financial health of your customers

• Expectation of changes in customer base

• Past trends and future outlook of product lines

When analyzing expenses, you should consider the operational needs of the company and the expected changes in your business environment. For example, if your company is planning to hire personnel, you will need to know the relevant departments and pay rates. Also, you should reach out to department heads or third party vendors to make sure you have all contracts and pricing schedules covering the budget period.

Maintain a Healthy Level of Skepticism

You should be somewhat skeptical with the information you receive from other departments because you may be the one tasked with explaining variances resulting from oversight in the budgeting process. Be aware of any incentives that the department heads may have to prepare budgets that don’t reflect reality. For instance, a sales manager may purposely low-ball his sales target in order to meet an incentive plan target to receive a bonus.

Also, be aware of any tax or accounting changes and their effects on your company’s results. There have been several accounting standards updates issued in 2010 that are effective in 2011, as well as several tax law changes. Consider consulting with your CPA.

Track Results

It is important that your accounting system be set up to track results against budget. This may sound simple, but if your budget is not aligned with your accounting system, you will not get the results you want. For instance, if your budget for sales is by product and your accounting system tracks sales by location, you will not be able to capture the relevant information to compare actual results to budget.

Tracking results against budget allows you to identify and take action on the following:

• Significant trends

• Accounting irregularities or fraud

• Resource allocation

You must have a good budgeting process in place and have confidence in your budget in order to identify these items and not explain significant variances as a “bad budget.”

Update Regularly

It is wise to update your budget throughout the year. Most companies update their budgets and call them “outlooks” or “forecasts” while retaining the original budget, which is important because it allows you to understand the real reasons for variances - whether they result from mistakes in budgeting or actual changes in circumstances.

We all recognize these are uncertain times, but do not allow that to deter you from the budgeting process. Certainly none of us can control the future, but a budget can be an effective tool to help you manage your business, and simultaneously help you control your response as the future unwinds. And remember, just like most things, the more you budget the better you get at predicting the “foreseeable future.”

Kingery & Crouse, P.A.

About the Author
Jeff Bauman is a senior audit manager at Kingery & Crouse, P.A., Certified Public Accountants, located in Tampa, Florida. Jeff spent the first eight years of his accounting career at the accounting firms of PricewaterhouseCoopers and Deloitte. He has served both public and private companies in a variety of industries including health care, manufacturing, insurance, mortgage banking and real estate. Kingery & Crouse, P.A. is a full service public accounting firm with a staff of dedicated professionals providing audit (including SEC), tax and accounting services. You may contact Kingery & Crouse at (813) 874-1280 or on the web @ www.tampacpa.com.