Budgeting by Paul Becht of Baker Tilly

Budgeting – Plan the Work and Work the Plan
By Paul Becht, CPA

After several years of planning audits at a CPA firm, I’ve often heard the mantra “plan the work and work the plan”. The point being you can’t achieve success without adequately planning that which you hope to achieve and then doing the work necessary to reach your goals. The same idea applies to budgeting. Businesses of all sizes prepare budgets in order to set goals they wish to attain over a future period of time. Whether it encompasses a month, quarter or year, the budgeting process allows businesses to determine their revenue and profit expectations for a certain time period and the expenditures necessary to reach their goals.
Why Bother Budgeting?
So why do businesses bother going through the process of budgeting each year? Given the various challenges in our current economy such as increased international competition, limited access to credit, cost of living increases, and cash management pressures, businesses must anticipate these challenges in order to simply survive another year. Budgeting provide a means for organizations to set performance targets and then compare the targets against actual results. With this information, member of management with budgeting responsibilities act as physicians to assess the current financial health of their organization. By viewing the budget setting process as an opportunity to determine how to proactively take on international competition or anticipate cash flow needs, organizations can be sure they are financially healthy and hopefully grow and thrive in an increasingly difficult business environment.
Who Should Do the Budgeting?
Planning is the key characteristic of budgeting. Organizations should start planning by creating a budget committee to spearhead the process. But should one department or group be responsible for preparing the budget? Budgeting entails discussing prior and current year operations with managers and staff throughout a business. Therefore, all employees throughout an organization should be included in the discussion. They should discuss the challenges facing the business and schedule a reengineering session that includes brainstorming about expenditures that produce the most revenue with the highest profit margins. After this meeting, the budget committee should be able to start the process of building a well thought out budget that allows the organization to achieve increased profitability.
The employees involved in the budget process should be empowered to create the budget without too much interference from executive management. Management should encourage departments to interact with one another. For instance, members of a sales department should work with employees of a production department to develop a realistic budget. If the sales department expects to achieve a certain revenue number, the production department should provide input as to what materials, labor and equipment are necessary to meet the sales goals.
What Details Are Involved in Developing a Budget?
In developing a budget, employees and management should ask themselves the following questions:
– What period should the budget cover and is the organization’s fiscal year most appropriate?
– How many levels must contribute and evaluate the budget?
– Does the budget meet the organization’s business objectives?
– Is there a strategic focus to the budget?
– Will the budget provide a competitive advantage?
– Does the budget provide some flexibility should circumstances change?

Budget building should include (1) building the budget from scratch, (2) using historical figures and (3) then combining the prior two approaches to develop the best estimate of budgeted amounts. In carrying out this approach to budgeting, the committee must consider historical data alongside the company’s current revenue and profit goals and keep in mind the various outside factors that may impact the company’s future performance.
What are the Best Practices and Pitfalls in Budgeting?
In creating the budget, the committee will want to be sure that they gather all necessary data from all departments, apply appropriate judgment, accurately calculate the numbers, be detailed, recheck results and if necessary, recalculate the budgeted figures once more. The budget committee will also want to avoid certain budgeting pitfalls including:
– Taking the prior year’s figures and simply adding inflationary increases.
– Lacking a timeline from start to completion of the budget.
– Creating a budget that is not based on a stated objective or in-line with the organization’s mission statement.
– Not considering significant changes in the organization or events impacting the business and industry.
– Including only general, high-level line items.
– Failing to monitor the budget and hold responsible parties accountable.

At the same time, the budget committee should be cognizant of the influence budgets have on the behavior of employees. After all, are people likely to act more or less ethically if they are beholden to a budget? By following a budget, employees will be on notice that their employer closely monitors expenditures and performance and as a result employees are somewhat less likely to do something unethical. However, if employees are held to unrealistic budget goals, they may rationalize that they were pressured to act in an unethical manner in order to meet the budget.
There are various levels of management who will typically scrutinize a budget. Management will likely focus on whether the budget will help achieve the organization’s goals. The budget committee must have a sufficient understanding of the organization’s mission/strategy if it hopes to please executive management. However, the organization’s goals will not be realized unless there is buy-in by the employees. To achieve this buy-in, there must be adequate preparation and inclusion of employees in the process.
Before presenting the budget to others in an organization, the budget committee should consider the following:
– Does the presentation include a summary of the objectives of the budget?
– Does the budget presentation provide an overview of the organization’s strategic plan/goals?
– Is the presentation being given in a setting that allows for proper attention to be provided to the presenter?

Work the Plan – Why is Monitoring Important?
After the budget has been scrutinized by all the appropriate parties within an organization, there should be regular monitoring of the budgeted numbers against actual results. Executive management should meet periodically throughout the fiscal year to discuss budget versus actual balances and should seek explanations for any significant or unexpected variances. The monitoring process of budgeting is an important step in determining whether an organization is on track to meet its goals.
Management should be wary of getting too far along in any fiscal year without periodically revisiting the budget to determine problem areas and address issues on a timely basis. If too much time passes by without addressing an unexpected variance from the budget, the organization could end up with a disappointing fiscal year that could have been avoided had management been able to resolve any problems before they became unmanageable. By getting into a routine of reviewing and discussing the budget against actual performance, an organization will be more likely to achieve its goals as people are apt to succeed when they are routinely held accountable.
Of course, when the fiscal year has passed, it is time to reflect on the past year’s successes and failures and once again reassess the organization’s goals and start the budget planning process all over again.
Paul Becht, CPA is an audit partner at Baker Tilly Virchow Krause, LLP’s New York regional offices, specializing in real estate, healthcare and debt collection services.
Mr. Becht is a CPA licensed in New York State and a member of the American Institute of CPAs (AICPA). He is a statewide board member of the New York State Society of CPAs (NYSSCPA) and is co-chair of the NYSSCPA – Suffolk Chapter Accounting & Auditing Committee.
He can be reached at paul.becht@bakertilly.com

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