Step 7. Explanation. Budget explanations create a lot of trouble for everyone. That’s because in most cases, there is no logical assump¬tion base. So what can you say about an expense that’s higher than the budget?
In the traditional system, you might make an explanation sound good, without really saying anything at all. For example, “Actual expenses were 12 percent above last year’s level. We estimated a 5 percent increase.” This explanation says nothing at all about the cause of the variance; it only admits that the budget was too low, a fact that everyone already knows.
Unfortunately, this type of non explanation is so common that it’s acceptable. We find ourselves coming up with new and novel ways of saying nothing, so that the corporate belief in budget review is satisfied. A real explanation, in comparison, is based on an analysis between the components of actual spending (or income), and the components of the assumption base. With this method, precise reasons for a variance are quickly and easily identified. From there, it’s a relatively easy step to take action, because a cause is now understood.
A variance exists for only one of four reasons: (1) The budget did not anticipate something that happened. (2) The timing of the budget was in error, and will be offset in the future. (3) Internal accounting created the variance. This may include a coding error, an accrual, or an allocation not included in the budget. (4) The variance was predictable, but the original budget was changed arbitrarily from above or by the accounting department-in spite of well-docu¬mented assumptions.
Step 8. Investigation. In some cases, the explanation cannot be filled in by the budget review meeting, because the person or depart¬ment preparing the review (usually accounting) does not know the answer. At that point, an investigation is in order. It might be possible to assign the problem to one department, or it might be necessary to ask each manager to look into individual budget assumptions to identify the components of the variance.
Investigation is troublesome on a companywide basis. No one will want to take responsibility for explaining the variance, or for looking into it. As an unfortunate consequence, the accounting department ends up with the lion’s share of budget-reporting duty. This means that, with or without your knowledge, your department could be criticized for a budgeting problem, even if you had nothing to do with developing that budget.
Step 9. Response. Once investigation is complete, some form of response is demanded. If an expense is running above a reasonable budget level, it should be brought under control. If the problem is strictly in one department, assignment of response is simple. How¬ever, it is more often a companywide problem and, again, no one will want to tackle the problem. So the accounting department again is given the responsibility and the power to respond and to solve. The power issue wouldn’t be a problem in itself, except for the fact that you should want to control and answer for your own budget.
Step 10. Review. Once a problem is discovered and the process of correction is entered into, the review process begins. This is a year-¬round, never-ending, ongoing effort, one that should be instituted as a daily priority and as part of your routine. The idea of monitoring the budget is too often delegated, or thought of as an unpleasant and inconvenient demand on our time. Think of the control and review process not as manipulation of rows and columns of numbers, but as real and tangible events and financial consequences-that you can and should control as part of your job.
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