Accounting Best Practices, Fifth Edition

5–22. Simplify the Budget Model

A company that has used the same budgeting model for many years will find that it gradually becomes more complicated. This is because there are incremental changes each year—a new analysis page here, extra departments there, perhaps some assumptions as well. Though the changes seem minimal if looked at for just one year, the accumulation over many years makes the model very cumbersome, difficult to understand, and prone to error. For example, if formulas are added to the budget that require inputting the final balance sheet numbers from the previous year, it is possible that no one will remember this when the next budgeting cycle arrives in the following year, especially if the person who made the change in the previous year is no longer with the company, or if the change was not documented anywhere. As the number of these changes pile up over the years, it becomes increasingly difficult to complete the budget on time. The person managing the budget model becomes increasingly indispensable, for no one else knows how to use it.

To avoid these problems, it is necessary to regularly simplify the budget model. This does not mean that the simplification can be done once and then dropped. On the contrary, the standard budget procedure should begin with a review of the model from the previous year to ensure that all budget line items and calculations are thoroughly documented and understandable, and that they are still needed. There should also be a step ...