Page 102 - Accounting Best Practices

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5–4 Establish the Upper Limit of Available Funding
remaining ones are put in the budget, capital constraints typically lead to some of
them being thrown back out. As a result, capital projects can be a bottleneck dur-
ing the formation of the budget.
The best practice that reduces this bottleneck is to establish project ranking
criteria in advance and distribute this information to anyone who may be submit-
ting a capital request. These criteria should itemize how funds will be allocated.
For example, any project with a return on capital that exceeds a target level is a
top priority; next in line may be any project needed to bring a company in line
with government regulations, and so on. Once they see the criteria, budget partic-
ipants may voluntarily eliminate some of their own requests. In addition, if the
capital expenditure request form accompanies the ranking criteria, applicants can
fill out all the information the accounting staff needs to sort through the various
projects, making the accountant’s jobs much easier. This method not only elimi-
nates some of the least probable capital projects up front, but also does a better
job of categorizing those that are left.

Cost: Installation time:

5–4 ESTABLISH THE UPPER LIMIT OF AVAILABLE FUNDING

Too many budgeting processes take an inordinate amount of time to complete
because management goes through too many iterations while deciding on how
much money it has to spend. For example, the initial budget model may include
funding for a new facility, an acquisition, or a distribution to stockholders. How-
ever, once management determines that the amount of available funding is not
sufficient, they must recast the budget in order to arrive at a much smaller total
expenditure. This plays havoc with the accounting staff, who must coordinate all
the budgeting changes, modify the model, and reissue it.
The answer to this issue is to determine the amount of available funding as
early in the process as possible. For example, the amount of fixed assets, inven-
tory, and accounts receivable currently on hand can be extrapolated into the
next year to determine the total amount of borrowing base that is likely to be
available for borrowing purposes. Also, one can inquire of senior management
if there is any likelihood of making a public offering of shares or of making a
bond placement in the near future; this option is most unlikely for smaller com-
panies, while larger ones may be constrained by established policies regarding
the suitable debt-to-equity ratio that management is not allowed to exceed.
Finally, the company may spin off cash from continuing operations; a review of
current margin levels and cash flows can be used to determine the level of
funds originating from this source. When all of these sources are put together,
management usually finds that there is far less money available than they had
wished for, which keeps them from developing overblown budgets that cannot
possibly succeed.