There are some common budgeting blunders that plague many companies, and these blunders are often associated with well-meaning individuals who unintentionally bring some bad budgeting practices to the table.
Let me introduce you to Calculator Cindy, Sneaky Smith, and Sandbagging Sally.
Calculator Cindy: Calculator Cindy appears to be really organized when she comes to the budget meeting. She has her line numbers memorized. She knows each account and the amount spent from that account thus far this budget year.
But when questioned about her budgeting numbers, it is discovered that she simply takes the current spending and annualizes that for the year. What’s wrong with that?
How can you avoid this budgeting blunder?
It is quite possible to annualize waste. The practice of merely multiplying monthly expenses by twelve months does not lead to careful evaluation of the current expenses.
While constantly re-bidding, re-quoting, and re-evaluating would be maddening and horrific stewardship, annual budgeting provides a time to reflect on current spending.
I often advise that every time a process improves, there is new waste to eliminate. And the discovery and removal of new waste in operations would release more money for things you value more.
Sneaky Smith: Sneaky Smith masterfully keeps his budget as high as he can (with good motivation to reach and disciple people) by sliding over project expenses from one budget year to the next. For example, Smith worked hard 18 months ago to slide some new equipment into his budget. Now that the system has been purchased, it would make sense to take that out of the starting point for his budget. But he knows that most people will simply look at the total budget from year to year, so he comes to the budgeting table with the same amount and boldly articulates, “I am not raising my budget.” In reality, he has raised his budget the amount of the equipment.
To avoid unintentionally annualizing major expenditures, I recommend having a line item in each department for “equipment or major purchases.” Simply zero that line each year for an accurate picture of the department’s regular budgeted expenses.
Sandbagging Sally: Sandbagging Sally is risk adverse and abhors the idea of “going over budget” in her spending. Rightfully so, but her fear leads her to overstate her expenses so as to overly hedge against her fear. By doing so, other department budgets can be adversely affected.
My recommendation is not to place “hedges” in individual department budgets but within the overall budget. This allows for more accurate budgeting of expenses and simultaneously gives those with responsibility over the entire budget the job of properly watching and administering expenses.
Cindy, Smith, and Sally are great people.
Cindy’s attention to detail needs to be leveraged to more deeply look at current expenses. Smith’s passion for his area needs to be applauded and focused.
Sally’s concern for shrewd spending needs to be affirmed, but she needs to be lovingly reminded of the need to have expenses accurately planned.
Next month in September, is the budget preparation month. Are you ready?
Other pitfalls – adding 10% to this year’s expenses makes it easy preparation. However, this does not give you real picture. There are many items of expenditure are high this year due to unforeseen situations that may not repeat next year.
There are cases of wrong postings which show high expenditure in one account. This cannot be added by 10% to make next year’s budget.
Zero budget is the answer – Assume you are starting from the scratch.
Also, look at the trend – whether your expenses are rising or decreasing over last two years. You may not go totally wrong in following the trend analysis.
Please let me know if you need help in preparing your budget for the year 2014. We can work together. I am going to work with few companies assisting them in budget preparation.
Suresh Shah, M.D., Pathfinders Enterprise