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Budgeting Best Practices
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pages. This presents a problem for senior management when it wants to conduct
‘‘what if” analysis work with the budget. For example, the president of the com-
pany may want to know what would happen to profits if there were 1 percent less
direct labor, or if materials costs changed due to an increase in inflation. Given
the size of the model, a senior manager’s only way to get this information is to
request that a budget analyst access the budget model, make the changes, and
send the results back. This can take days for one request to be completed, which
is a problem when the manager may want to model dozens of changes. Waiting
for the results of all possible variations on the manager’s requests may require
months. During the budget period, there is not enough time to process all of these
modeling requests, which leads to delays in completing the budget and frustra-
tion on the part of senior management.
The best practice that eliminates this problem is to create a small, summa-
rized version of the full budget model for use by the senior management team. By
doing so, these managers can play with all possible ‘‘what if” variations on the
budget on their own computers, without waiting for someone in the accounting
department to process these changes for them, saving a very large amount of
time. To create such a budget model, it is extremely important to interview senior
managers to see what kinds of variables they will want to alter. These will not
vary much from year to year, unless there are drastic changes in the business, so
once the variables are identified, they can be listed in the front of the model for
easy access by the managers. For example, the variables can include the direct
labor and materials percentages, the inflation rate, average pay raise, average
employee benefit percentage, seasonality percentage for revenues, changes in
revenues, and the tax and interest rates. The remainder of the budget should be
shrunken down to the point where there is only a single expense line item for
each department and the smallest possible number of revenue line items. The
goal should be to keep the summarized budget model down to just a couple of
pages. Also, to keep the data in this model fresh, one can either give it a direct
computer link to the main budget model, automatically extracting the most cur-
rent data from the real budget, or else manually extract the information and
retype it into the manager’s budget model (which is a much easier proposition,
and avoids any special programming). Creating this model may take a few extra
weeks, but will be greatly appreciated by senior management.
The only problem with this budget model is that senior managers may not
know how to use it or the computer on which it runs. If so, training is necessary,
which may be difficult to fit into a manager’s busy daily schedule. A good alter-
native is to train each manager’s executive assistant, who can process any
changes to the budget model that the manager wishes to make.

Cost: Installation time: