Variances, properly used, can give budgets a new purpose. Companies need to look on variance reporting not just as a means for calling managers to account for problems, but a way of turning that budgeting process into a profit center. Suggesting this perspective to top management will turn heads and gain attention. It is a good idea and it works.
There are a number of steps you can take to achieve the benefits intended from the budgeting process, and you will see tangible results at once:
• Respond to discovered variances. When you discover that an account in your department has a significant variance, take immediate action. Identify the cause of the problem and fix it. If the variance is significant in either direction, it deserves a careful look. And when you find the answer, your task has just begun. From there, you need to decide what actions are appropriate; then you need to follow through and take those actions.
• Build control ideas into assumptions. If you think of budget¬ing as a function outside what you actually do, then you have missed the point. In fact, budgeting should be (but rarely is) an ongoing exercise in control.Typically, the budget comes up only at the end of the month, when a variance report is prepared; or at the end of the fiscal year, when you’re reminded that, once again, it’s time to stay late and start filling out worksheets. But suppose you have a problem keeping expenses down, so you correct the problem. The budget assumption for that expense category might be the logical starting point for getting your accounts under control, assuming your control ideas work.
• Modify to correct, not to avoid problems. Unfortunately, budgeting priorities might prevent you from achieving this. How should you respond? Get in there and solve the problem. If the budget is reasonable but employees are spending more than they should, put a preapproval system in place. If the budget is simply wrong and the spending level is right, document that fact as part of your explanation. In either case, don’t let the problem go. And don’t complicate the real reasons for the problem by providing an accept¬able answer that doesn’t really say anything. That only prevents anyone from knowing what should be done.
