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Budgeting Best Practices
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assumptions as well. Though the changes seem minimal if looked at for just one
year, the accumulation over many years makes the model very cumbersome, diffi-
cult to understand, and prone to error. For example, if formulas are added to the
budget that require inputting the final balance sheet numbers from the previous year,
it is possible that no one will remember this when the next budgeting cycle arrives in
the following year, especially if the person who made the change in the previous
year is no longer with the company, or if the change was not documented anywhere.
As the number of these changes pile up over the years, it becomes increasingly diffi-
cult to complete the budget on time. The person managing the budget model
becomes increasingly indispensable, for no one else knows how to use it.
To avoid these problems, it is necessary to regularly simplify the budget
model. This does not mean that the simplification can be done once and then
dropped. On the contrary, the standard budget procedure should begin with a
review of the model from the previous year to ensure that all budget line items and
calculations are thoroughly documented and understandable, and that they are still
needed. There should also be a step that specifically requires the budget manager
to review the need for extra line items and formulas, with an eye to eliminating as
much as possible from the budget model every year. Though it may not be possi-
ble to completely streamline the budget model in one year, a continuing effort in
this area will yield excellent results as long as the review is continual.
An added benefit of simplifying the budget model is that less budgetary
“gaming” arises. For example, when a large number of expense categories are
used, managers tend to resort to all kinds of expense juggling as the budget year
progresses in order to ensure that actual expenses incurred exactly match the
amounts budgeted. These games are a waste of corporate resources, since they
take management time away from the corporate mission. By summarizing many
revenue and expense line items into just a few budgetary line items, managers
will have the leeway to run the business in response to ongoing developments in
the marketplace, rather than in accordance with the dictates of the budget.
Though the main focus of this best practice is to reduce the complexity of the
budget model, it is sometimes sufficient to ensure that the model is adequately
documented. Some businesses really become more complex over time and there-
fore require more detailed budget models. This is particularly true of companies
on a fast growth track, especially if they are growing by acquisition and must
account for the operations of many new businesses. In these cases, the budget
manager should review the model at the end of each budget cycle to see what has
been added to the model this year, and verify that complete and thoroughly
understandable descriptions have been included in the budget procedure that note
the reasons for the changes, how they work, and the resulting impact on the entire
budget model. This step may be all that is needed for some companies.

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