Accounting Best Practices, Fifth Edition

5–15. Automatically Link the Budget to Purchase Orders

A budget is not of much use if it is not tightly linked to company operations. It is common for a company to spend an inordinate amount of time constructing a fine budget and then struggle with how to force the company to live by it. When this happens, the people who participated in creating the budget wonder why they spent time on it and will certainly be less willing to do so in the future. In this instance, the budget is seen as a mere formality.

To avoid the problem, one can link the budget to purchase orders. Under this method, the budget is loaded into the purchasing database used by the purchasing staff to create purchase orders. Whenever they enter a new purchase order into the computer system, they must include the account number to which the expense is charged; the system then compares the total year-to-date or period-to-date expense for this item to the budgeted amount and either issues a warning for an overbudget expenditure or rejects it. By using this best practice, one can be assured of keeping expenditures within budgeted levels.

However, there are some issues to deal with when using this system. One is that there may be necessary reasons for making an expenditure, such as an emergency purchase of some kind that must be made in order to keep the facility running. In this case, it may be useful to allow a manager to override the system with a special password. Also, some managers may be caught unawares toward ...