Accounting Best Practices, Fifth Edition

5–21. Revise Budgets on a Quarterly Basis

Most organizations create new budgets just once a year. By doing so, they make estimates of sales volume for a number of months into the future that are extremely difficult to meet, and then build a “house of cards” of projected expenses and capital purchases that are justified by these weak sales numbers. Because of the difficulty of estimating sales, managers tend to err on the conservative side, estimating revenues that are too low. Furthermore, when the budget year has been completed, the management team tends to waste time arguing about why actual performance did not meet the expectations set within the budget. Finally, any unexpected changes in the business during the year, such as an acquisition or the elimination of a product, will not be included in the budget, so all budget-versus-actual analyses will be off by the amount of these changes, rendering the analyses worthless.

One can incrementally revise budgets on a quarterly or even a monthly basis in order to avoid these problems. By doing so, all key revenue and related expense or capital decisions can be revised to reflect short-term changes in the business, making the budget a much more relevant document.

The difficulty with this best practice is the greatly increased number of required budgeting iterations. Since this is generally considered to be a difficult process to complete just once a year, imagine the consternation of management if the process is done again every three ...