Guidelines to Better Budgets

    Nov 28, 2018

    It’s time to update budgets. In his book The Essentials of Finance and Accounting for Nonfinancial Managers (Second Edition, Edward Fields gives some helpful advice:

    • Have each function and area of responsibility prepare its own budget, consistent with corporate goals, objectives, and policies.
    • Understand that having a budget improves the performance of the entire organization and each of its parts—really.
    • Understand that a budget is developed to ensure that every department head is working toward the same goal and knows the department’s resources and constraints.
    • Recognize that the budget department does not create the budget. It is simply a coordinator, consultant, and adviser.
    • Arrange educational meetings to ensure that everyone involved has an understanding of the process and the expectations for it. Do this at least twice during the process.
    • Make certain that interdepartmental relations are coordinated. Departments cannot perform well without the cooperation of other departments. Make certain that these interdependencies are properly documented.
    • Ensure that expenditures above a specific threshold amount that are included in the budget are supported with proper documentation and financial analysis.
    • Incorporate into the budget procedure specific requirements covering approval for nonbudgeted expenditures and cost overruns.
    • To sell the budget concept, select one department or profit center manager to convey the value of developing an intelligent budget. Demonstrate how the budget has improved the performance of this manager’s organization. The word will spread among the manager’s peers.
    • Provide each involved department with information on the department’s past financial and statistical history, known economic factors, and the accounting chart of accounts in order to properly prepare the department for effective participation.
    • Do not create theoretical models that make accountability unachievable. Prepare budgets that incorporate alternative environments and competitive factors. Have a fallback plan available for emergencies; identify best- and worst-case scenarios. This enhances the thought process.