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Chapter 5
Budgeting Best Practices

Many companies find the budgeting process to be an excruciatingly slow and
painful process, requiring many months of continual effort before a reasonable
budget document is completed. Once it is done, they wonder why the company
went to all the effort, since no one makes a strong effort to follow it. This chapter
addresses both problems. There are a variety of best practices that focus on creat-
ing and implementing a budget model, ranging from defining capacity levels and
step-costing points to using activity-based budgeting. These are designed not
only to make the budgeting process simpler, but also to result in a better budget
that closely reflects management’s expectations regarding operations in the
upcoming budget period. In addition, there are several best practices that can
improve a company’s usage of the budget, so that it is closely integrated into
daily operations.
This chapter begins with an overview of implementation issues for all of the
best practices, followed by a discussion of individual best practices, each one
being presented in a separate section. The chapter finishes with a review of how
these best practices will change a company’s budgeting operations.

IMPLEMENTATION ISSUES FOR BUDGETING BEST PRACTICES

With few exceptions, improvements to the budgeting system are easy to implement
and can be done rapidly, with a minimum of fuss. The cost and duration are noted
in Exhibit 5.1. The reason is that most changes are to the budgeting model and pro-
cedures, neither of which are under the control of anyone but the accounting depart-
ment, and neither of which need, unlike humans, some explanation and cooperation.
Accordingly, one can assume a rapid implementation process that can mostly be
completed during the current budget cycle, resulting in immediate and rapid
improvement in the entire process.
There are only three best practices requiring a considerable amount of imple-
mentation effort. One is linking the budget to the purchase order system, since this
usually requires some custom programming. The second is switching to an activity-
based budget model, since this approach requires a complete revamping of the budget
model, as well as a new chart of accounts to reflect the changes. The third is the
installation of budgeting and planning software, which is particularly difficult for
multilocation companies. Also, on-line budget updating and video conferencing

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