Page 100 - Accounting Best Practices

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5–2 Clearly Define All Capacity Levels
have a moderate associated expense, since they require modem access (in the first
case) and video conferencing equipment (in the later case). With these exceptions,
one can expect best practice implementations in this area to be an easy chore,
resulting in quick improvements.
5–1 CLEARLY DEFINE ALL ASSUMPTIONS
When the budget model is first presented to senior management, the person doing
the presenting is deluged with questions about what assumptions are used in the
model. Examples of assumptions that can cause problems are tax rate percentages,
sales growth rates (especially by product line, since some of those lines may be
exceedingly mature), capacity levels (see the next section), cost-of-goods-sold
margins, commission rates, and medical insurance rates per person. Upper manage-
ment wants to make sure that all assumptions are reasonable before they spend a
great deal of their time reviewing the presented information. If there are specious
assumptions, they will probably kick the budget back and demand changes
before they will agree to look at it.
The best way around this problem is to list all key assumptions either right at
the top of the budget model or else in clearly noted spots on each page. It is also
helpful to note how these assumptions have changed from previous years, either
by providing this information in a commentary or by showing prior year informa-
tion in an extra column in the budget. By providing this information as clearly as
possible, there will be fewer questions for the budgeting team to answer.
An even better approach is to tie as many of these assumptions into the budget
model as possible, so that a change to an assumption will result in an immediate
ripple effect through the budget. For example, changing a tax rate assumption will
immediately alter the tax expense in the budget, while altering the medical expense
per person will have a similar impact on personnel costs. Linking assumptions to
the budget allows one to make nearly instantaneous changes to a budget with
minimal effort.

Cost: Installation time:

5–2 CLEARLY DEFINE ALL CAPACITY LEVELS

When creating a budget that contains major increases in revenues, a common
problem is failing to reflect this change in the rest of the budget, resulting in an
inadequate amount of manpower, machinery, or facilities to handle the added
growth. For example, a planned increase in revenue requires a corresponding
increase in the number of sales staff who are responsible for bringing in the sales,
not to mention a time lag before the new sales personnel can be reasonably
expected to acquire new sales. Similarly, new sales at a production facility may