Budget application methods and implementation

Control function, may it be management or accounting, plays the same key role. It is, in many ways, a two-way process. First of all, a top-bottom control flow, where the upper management or higher authorities oversee a certain process, but it is also a bottom-top process, as is the case when the feedback and follow-up actions come from the lower levels.

In the case of the expenditure process, the top-down circuit is, first of all, characterized by the budget restrictions that are imposed on the upper management levels of the company. In this sense, the top management defines a certain amount of money that can be spend and notifies accordingly the lower levels within the company. All acquisitions are thus limited by the expenditure levels fixed in the budget.

In many ways, the control function tends to be associated with management accounting. As we know, one of the most important issues related to management accounting is r elated to "determining the cost of producing goods"

, but management accounting also related to controlling the expenditures within a company.

Additionally, we need to consider the auditing processes that are usually performed either by internal factors (in the case of internal auditing) or external ones. The auditing process can be deemed a controlling action performed by a different authority than the management. However, in terms of accounting and bookkeeping, auditing does not necessarily control the expenditures within a company, but mostly the way these are recorded and classified in accounting, to prevent any possible frauds.

In general, and this is also applicable to the other functions of bookkeeping and accounting functions we will be later discussing, the 4000 Direct Expense Account and the 5000 Indirect Expense Account of the balance sheet are where expenditures are generally recorded. In this sense, the control function will provide an overview evaluation of (1) whether the expenditures within the company were correctly recorded in each separate account (auditing process) and (2) whether the recordings are in line with the company's fixtures in term of budget and budgetary expenditures.

The 4000 Direct Expenses account is where expenses that "will stop when you are not working"

. Labor and materials are two examples that come to mind in this case. However, there is a long list of indirect expenses that are associated with a business and these are recorded in the 5000 Indirect Expenses account. This are supposed to never go away, but it may often be the case that a manager will discover all kinds of expenditures that were made and were recorded here, expenses which do not necessarily increase the added-value of the company.

A close eye on the 5000 Indirect Expenses account should be a key factor related to the control function and a way to improve the accounting system. The upper management can be associated into the process by relevant information send to the top management members and an evaluation on their part.

In my opinion, a significantly important role in the expenditure process, as related to the control function, is determined by the employees' feedback and the way this reaches the top management, as the main decision body within the company. Indeed, it is futile to establish some ground expenditure rules if you do not receive the necessary feedback that will let you know that the rules you have implemented are also respected. In this sense, as part of the control function, I suggest a weekly bulletin (a bulletin can be no longer than two pages) from each division in the company that will list the most important expenses from the respective division during the respective week, with a brief explanation of why this was performed and of the way it was recorded in the accounting books.

Of course, in order to make the process relevant and useful, only the expenses that are over a certain amount need to be listed. Such an "expense bulletin" would have several notable advantages. First of all, it would help us avoid unfortunate incidents such as Enron and, especially, the denial of responsibility from the upper management, who will not be able to say that they were not aware of what was going on in their own companies.

Second of all, the upper management would be constantly involved in the expenditure schemes and would be able to make relevant estimates on the future budget, knowing what the ground realities actually are.

The "expenses bulletin" can play the information role in the expenditure system. However, I also propose an approval scheme going up to relevant levels of the company's management. The approval scheme can include some of the items recorded in the 5000 Indirect Expenses Account (not related to the company's direct processes) and which are surpassing a certain established amount.

On the other hand, the upper management can also be included in parts of the 4000 Direct Expenses account, especially in terms of negotiating important contracts, both related to labor costs (salaries) and to supply and materials (supply chain).

As a brief overview, the control function of the bookkeeping and accounting system in the expenditure process is related to ensuring that the recording process is according to regulations, but also that the expenses follow the pattern established by the top management in the annual budget. Improvements in the expenditure system, as related to the control function, can include reports to the management of expenses that surpass certain established limits, but also the direct implication of the management in expense related negotiations.

Forecasting

Forecasting is essential in a relevant and well setup expenditure system. Forecasting permits the upper management and the decision factors within the company establish what the financial requirements will be for the company in the next period of time. Most important of all, forecasting, both income and expenses, creates the necessary premises for a thoroughly established budget.

In terms of expense forecasting, the first recommendation for an improved bookkeeping and accounting system is related to a close watch on the 3000 Income accounts. Indeed, in my opinion, expenses need to be closely correlated with the company's revenues, so that the overall financial situation of the company is not destabilized over the next period of time.

As such, forecasted expenses need to be compared to the company's expectations in terms of income and that should probably include almost everything within the company, going from the company's market shares and its sales expectations to any future enlargement plans the company may have.

An analysis of expectations over the next couple of years will allow the management to make evaluations in terms of what is needed for the company and what the expenses are likely to be over the next period of time.

As an example, let's suppose that the company intends to increase its market share from 25 to 35%. This will be done by a new marketing campaign that will aim at some of the categories of consumers that have not yet been attracted by the company's product or service. Additionally, one of the competitors may be acquired in order to create the appropriate synergy.

At this point of the forecasting analysis, we are in no possession of data regarding the company's forecasts on expenses. However, each of the actions in the future implies a strict relationship with future expenses. As such, the acquisition campaign is equivalent not only to acquisition expenses, but also to subsequent expenses related to the integration of the acquired company, in terms of employees and work processes, within the company.

Further more, the marketing campaign brings about obvious related advertising and promotional expenses that need to be properly evaluated prior to the actual actions occurring.

As such, evaluating in advance goes hand in hand with tracking the strategic measures that the company intends to follow in the future. This will give important clues about what the future expenses may be and will ensure that the projected budget is in close relation with the actual realities in the field.

The forecasting function connects the 3000 Income Account with the 4000 Indirect Expenses Account by ensuring that the future incomes of the companies are explained with the current expenses.

In this sense, the forecasting function projects into the present the revenues that the company will be making in the future. The feedback and informational process is important here, just as in the control function. As such, the upper management decides upon the main strategic approaches that the company will be following in the future and ensures that this strategic vision is transmitted to every employee. The strategic vision will determine the way the company will be working in the future and the objectives it will be following.

This vision implies, however, a set of expenses that need to be discovered and recorded into the present, because the budget that will be made following this procedure will include the relevant future data on expenses and will carry a realistic relationship with future activities within the company.

As such, we may state that the relevancy of the forecasting function in the expenditure process is necessarily linked with the expenditure system in terms of what the company will be doing in the future and how this will present the recordings of the present.

Performance Measurement

The performance management function works in relationship with the controlling function, because it provides the relevant top-down feedback to the employees. Performance management is, first of all, related to a constant evaluation process. A constant evaluation process will include some of the following components.

First of all, an informational feedback process that can be realized through a series of reports such as the management report or the financial report. The financial report, for example, will be able to provide the "how" of a certain operation: how the respective expenses were recorded and how they were actually dealt with from an accounting point-of-view, not to mention how they appeared and whether they match the actual evaluations in the respective matter.

The feedback process is thus initially a bottom-up process, but the relevant feedback also goes top-down, from the management down to the employees in the departments. Performance management does not only include here feedback on the actual job performed, but the trends to be followed in the future as well.

A good manager will always provide a feedback for the employees, a feedback that is likely to motivate them in the future. However, even more important, the feedback will create the necessary connection between the top management and the actual bookkeepers.

The expenditure system can be improved through an excellent informatory channel, which will allow the upper management, while acting on a decentralized level, to be constantly informed as to the expenditure plans within the company.

The actual measurement of performances can take two forms in this case: quantitative and qualitative. The quantitative aspect consists of associating a set of data with the performances obtained. The relevancy of a quantitative analysis comes from the fact that such an analysis provides actual figures that can be interpreted.

On the other hand, qualitative measurement gives a more general overview of the issues at hand and permits the manager to create a performance interpretation that will provide the relevant details in the decision making process.

Preparation for future budgets

This function practically encompasses the three different functions I have discussed in the previous paragraphs. Indeed, first of all, the forecasting function has obvious reverberations here, because it coordinates the future activities of the company, transforms them into expenses that are likely to be included in the future budget.

An improvement of the budget preparation function, from this point-of-view, will most likely include a keen forecast on future data. Once the budget is actually decided upon, one needs to take into consideration the relevant subsequent modifications that the budget is likely to include.

Ideally, the budget modifications should be as few as possible, because any budget modification will partially destabilize the accounting process within the company. Additionally, a budgetary modification will need to be approved by the top management and this will most likely increase the necessary period of time before an action is actually implemented.