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Budgeting Best Practices
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much easier to set up each one as either a flexible expense account or one that is
fixed within a broad range of revenue levels. If it is fixed, there is no need for
change, unless there is an enormous alteration in budgeted revenue levels. How-
ever, many other expenses will vary directly with revenue; in these cases, it is
possible to revise the budget formulas so that they are listed as percentages of the
monthly revenue level. By making these formula alterations, it becomes an easy
matter to adjust revenue and see a swath of expense changes ripple through the
budget model—with no manual intervention whatsoever. This best practice can
reduce budget maintenance work to a fraction of the amount formerly needed.
Though the flex budget discussion has centered on tying expenses to specific
revenue levels, it is also possible, and probably more accurate, to tie some
expenses to other levels of activity. For example, telephone usage or office
expenses should be linked more properly to the number of budgeted employees,
while utility costs can be tied either to square footage used or the number of
machines in operation. Thus, one can link expenses to a number of activity mea-
sures in a flex budget.

Cost: Installation time:

5–12 AUTOMATICALLY LINK THE BUDGET TO
PURCHASE ORDERS

A budget is not of much use if it is not tightly linked to company operations. It is
common for a company to spend an inordinate amount of time constructing a fine
budget and then to struggle with how to force the company to live by it. When
this happens, the people who participated in creating the budget wonder why they
spent time on it and will certainly be less willing to do so in the future. In this
instance, the budget is seen as a mere formality.
To avoid the problem, one can link the budget to purchase orders. Under this
method, the budget is loaded into the purchasing database used by the purchasing
staff to create purchase orders. Whenever they enter a new purchase order into
the computer system, they must include the account number to which the expense
is charged; the system then compares the total year-to-date or period-to-date
expense for this item to the budgeted amount and either issues a warning for an
over-budget expenditure or rejects it. By using this best practice, one can be
assured of keeping expenditures within budgeted levels.
However, there are some issues to deal with when using this system. One is
that there may be necessary reasons for making an expenditure, such as an emer-
gency purchase of some kind that must be made in order to keep the facility run-
ning. In this case, it may be useful to allow a manager to override the system with
a special password. Also, some managers may be caught unawares toward the
end of the year—if they have spend an inordinate amount earlier in the year, they
will have no funding available at all for the last few weeks or months of the year.