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Tracking Your Budget

Once the budget has been approved and allocated, it is necessary (or at least wise) to track it, to ensure that spending is proceeding on track.

Authorizing and Tracking Expenses

Generally speaking, the manager in charge of a budget will have signatory authority over it, and will approve the payment of any invoice from that budget.

There may be an involved process for making purchases, even when they are approved: getting a purchase order approved, receiving an item or service, approving payment of the invoice (or making payment from other sources, such as petit cash).

Accounting will be of some help in keeping track, but they tend to have their own agenda and methods for tracking expenses (largely for tax purposes) that are not entirely suitable to the practicing manager.

One key difference is accrual - accounting tracks cash when a purchase is made, but a manager should consider reducing his budget when funds are committed. The problem with failing to do this is that a budget may contain funds that, while not spent yet, have been committed and cannot be spent on other things.

There's also a special note for mangers whose budgets receive funds from sales. This adds an additional level of detail the manager needs: funds that are earmarked for a budget, but not yet received. Especially in business that operate on credit (which is most of them), you cannot use an "accounts payable" sum to pay one of your own invoices - you have to wait until it is collected.

Closing a Period

From an accounting perspective, the books are "closed" periodically - perhaps each month or each quarter - at which time the accountants balance out their accounts. In most companies, this is handled within the accounting department itself, and managers merely provide information.

He describes this in some detail for the sake of the manager who will have to do his own accounting (for example, the manager of a store or a small branch office), but like many other ancillary topics, it's handled in an abbreviated and sloppy manner.

Overspending and Underspending

On a regular basis, a manager should compare his budgeted expenses against his actual ones, and identify potential problems. The evidence of problems are variances - where you are overspending or underspending your budget on a line-item basis.

The problem with overspending is clear - you are exceeding your budget and will run out of money, and be unable to meet your needs after the funds run out.

Underspending is often considered a "good" thing (a sign of saving money), but that is not necessarily so: the fact that you are not spending money in a category means that you are not doing something that needs to be done, and there may be dire consequences in the long run (maintenance is a good example of this).

At this point, the reason for creating month-to-month budgets rather than having an annual sum divided by twelve should be clearer: if there is a period of high activity early in the year, it will appear that you are overspending; or if the period of high activity comes late in the year, it will appear that you are underspending; when in truth you are right on track - but the variance may cause accounting to raise some red flags.

Budget Adjustment

Where there are variances between the budgeted and actual amounts, budgets must be adjusted. In some cases, a manager is authorized to adjust his own budget - but in others, permission must be sought, and getting that permission requires some explaining and negotiating.

Adjusting a budget is generally straightforward when you are even or ahead on the bottom line - funds can be shuffled as needed or returned to treasury - but when you're overspending on the bottom line and need to get more funds allocated to stay afloat, getting additional funds allocated can be a difficult issue. The author's advice in those instances is to be proactive and to attempt to rectify the error early, before it becomes a catastrophe.

Reviewing Financial Statements

The author speaks at some length about the balance sheet and income statement. He draws some parallels between budgets and these figures, but it seems rather oblique and not entirely germane to the task of budgeting.

For what it's worth ...

On the balance sheet, cash and investments are where funds are stored until they are dispensed. If you purchase equipment or produce goods, it also shows up on the assets side of the sheet. Any invoices you create appear briefly in the liabilities column, until it is paid.

On the income statement, the cost of materials to produce goods is included in cost of goods sold, other expenses accrue under G&A, and capital assets may be depreciated over time. Naturally, in any income-producing operation, the sales are rolled up into the company's totals.

Having a fundamental understanding of this relationship may enable a manager to predict senior management's reactions to "problems" that are evidenced by these documents - but that's largely trivia, as the "big picture" is beyond the front-line manager's control.


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