Accounting Best Practices, Fifth Edition

5–5. Establish the Upper Limit of Available Funding

Too many budgeting processes take an inordinate amount of time to complete because management goes through too many iterations while deciding on how much money it has to spend. For example, the initial budget model may include funding for a new facility, an acquisition, or a distribution to stockholders. However, once management determines that the amount of available funding is not sufficient, they must recast the budget in order to arrive at a much smaller total expenditure. This plays havoc with the accounting staff, who must coordinate all the budgeting changes, modify the model, and reissue it.

The answer is to determine the amount of available funding as early in the process as possible. For example, the amount of fixed assets, inventory, and accounts receivable currently on hand can be extrapolated into the next year to determine the total amount of borrowing base that is likely to be available for borrowing purposes. Also, one can inquire of senior management if there is any likelihood of making a public offering of shares or of making a bond placement in the near future; this option is most unlikely for smaller companies, while larger ones may be constrained by established policies regarding the suitable debt-to-equity ratio that management is not allowed to exceed. Finally, the company may spin off cash from continuing operations; a review of current margin levels and cash flows can be used to determine the level of ...