Bonding with Budgets
Often, when people think of budgets, images of CPAs and CFOs come to mind. They’d assume leave the numbers to those with the titles and letters following their names. However, in reality, budgets are for many more than just those with accounting backgrounds. In fact, all
individuals with any spending authority in an organization should be comfortable bonding with the organization’s budget.
A budget is an invaluable tool to help individuals make well-informed decisions based on actual numbers, rather than hypotheticals. With those decisions, individuals can guide the organization strategically through each quarter and fiscal year, with a clear picture as to where the organization stands and in which direction it is heading. The budget creates a detailed road map to help navigate through expenditures and forecasts.
Ultimately, there are three primary budget considerations for any organization:
1) More People Involved from Inception. Each person who authorizes an expenditure in any way, whether it is signing checks, approving invoices, paying bills, or some other task affecting financials, should participate in the budget preparation process and the monthly budget review. It is critical that they are involved in the budget process from inception, or are brought up to speed as quickly as possible. Often, when I ask someone who is in charge of expenses why the budget to actual is off, they respond that they have no idea how the budget was put together in the first place. How can anyone expect these individuals to properly manage expenses when they are unaware of the principles behind them? This is easily solved when the individual is involved from the beginning.
2) Alignment of Budget and General Ledger. The budget line items and categories should be identical to those in the general ledger. Accounting and finance teams need to focus on analyzing differences at month-end, not inputting, exporting, and manipulating data merely to get it to the point where they can analyze it. It should all be organized in the same way from the start. For example, a property and casualty insurance company may have their general ledger categorized by type of customer, while their budget is categorized by their annual statement (the document each insurance company is required to file with the state of domicile). Varying methods of organization requires increased allocation comparing the actual results with the budget, resulting in misspent time and resources. To make matters worse, through this time-consuming process, an organization lacks the critical information needed to pivot at a time of crisis. For example, when a country’s entire economy shuts down due to a global pandemic.
3) Accounting Alignment. The accounting in the budget analysis and the general ledger should be the same by department. One common issue occurs with payroll. Oftentimes, payroll is run every two weeks and recorded on a cash basis in the general ledger, but on an accrual basis in the budget. For example, if an employee gets paid $120,000 per year, the budget would allocate $10,000 per month for payroll, while the general ledger would show $9,230 for two payroll months and $13,846 for three payroll months. It would never match. When budget to acutal analysis is presented to the management of the organization, there should not be time for an explanation of the accounting differences in the budget and actual. Rather, the conversation should be 100% focused on maintaining alignment with the strategic goals that were established when initially creating the budget.
Other benefits of proper budget management include, empowering more employees to make better decisions for the organization, saving money over time, curbing spending, and increasing preparedness. Additionally, when the budget process is carried out properly, it can reduce fraud. Once the person authorizing the expenditure understands that someone will be carefully analyzing the details for which they are responsible, they will be less likely to steal from the organization.
While many people would rather push off the numbers, columns, and formulas of the budget process to someone else, it’s really the last thing they should do. In fact, when they are involved in the process, they will understand all of the components and essential information on a more comprehensive level. In doing so, they not only create a stronger bond with the budget, but also create a stronger bond to the organization itself.
If you would like to discuss your budget and how to ensure it is working efficiently for you, or if you have other specific areas of concern, please click here to schedule a 30-minute free consultation.