Page 114 - Accounting Best Practices

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5–17 Simplify the Budget Model
small balances. Thus, this is only good for a few accounts and is not as definitive
a solution as eliminating accounts from the chart of accounts for good.
Cost: Installation time:
5–16 REVISE BUDGETS ON A QUARTERLY BASIS

Most organizations create new budgets just once a year. By doing so, they make
estimates of sales volume for a number of months into the future that are
extremely difficult to meet, and then build a “house of cards” of projected
expenses and capital purchases that are justified by these weak sales numbers.
Because of the difficulty of estimating these sales, managers tend to err on the
conservative side, estimating revenues that are too low. Furthermore, when the
budget year has been completed, the management team tends to waste time argu-
ing about why actual performance did not meet the expectations set within the
budget. Finally, any unexpected changes in the business during the year, such as
an acquisition or the elimination of a product, will not be included in the budget,
so all budget-versus-actual analyses will be off by the amount of these changes,
rendering the analyses worthless.
One can incrementally revise budgets on a quarterly or even a monthly basis
in order to avoid these problems. By doing so, all key revenue and related
expense or capital decisions can be revised to reflect short-term changes in the
business, making the budget a much more relevant document.
The difficulty with this best practice is the greatly increased number of
required budgeting iterations. Since this is generally considered to be a difficult
process to complete just once a year, imagine the consternation of management if
the process is done again every three months! To reduce the pain of this process,
one should consider shifting away from the use of electronic spreadsheets for
budgeting calculations, instead using commercially sold budgeting packages that
allow for direct updating of budget information in the model over the Internet or
the company intranet, while also allowing for easy changes to the budget model
without the attendant calculation errors that are so common in an electronic
spreadsheet. By making this change, budgeting iterations are much easier to com-
plete, allowing for frequent budget revisions.

Cost: Installation time:

5–17 SIMPLIFY THE BUDGET MODEL
A company that has used the same budgeting model for many years will find that it
gradually becomes more complicated. This is because there are incremental changes
each year—a new analysis page here, extra departments there, perhaps some