Keep checking budgetary variances – they could so easily get out of hand

It is a concern that many take budget compliances casually. Either they see this from the perspective of a cost control measure, or as an annual P&L mark businesses need to achieve, mostly by overlooking the need for regular compliances.

It is an anomaly for many companies barring a few, primarily listed entities, where it is a corporate governance requirement due to the sensitives of public scrutiny of accounts. Budget compliance requires deep foresight to monitor business performance continually. A budgetary alignment is one critical measure to augment this objective.

A proper budget compliance exercise helps track the company’s macro-finance position and projects profitability and cashflows.

Budgets must not only be adhered to as a governance requirement but as prudent method of managing company resources. Each aspect of budget variances needs to be monitored on a quarterly basis if not monthly.

Budget monitoring must not be viewed with suspicion but be ‘co-owned’ by business managers. At a recent P&L session, I noticed that certain divisional heads were under the impression that budget compliance must be viewed towards the end-of-year results, not from the year-to-date performance.

They believed that so long they pledge to meet the promised numbers by year-end, it must not be of a big concern for the management, even if the quarterly estimates are trailing. In this particular case, the monthly and quarterly numbers were much lower than the budgeted.

If not monthly, the quarter budget estimates need to be achieved, and any moving parts - such as deferment of new business wins or variation revenues - be factored with commensuration of related cost deferments, unless there is an exceptional situation duly vetted within the budget governance guidelines.

Al incremental costs be monitored and controlled if they cannot be deferred. Expenses should not be allowed just because they are budgeted and available to use, but be commensurate with overall compliance to targets set in the budgets.

First, the very exercise must not be done with a feel-good factor of preparing an ambitious budget. I often see glaring gaps in provisions when looking at budget variances. It becomes a common bone of contention between business and finance when variances start exceeding most estimates.

Conventionally, there are challenges as most organizations often falter in putting a strong governance around budget preparations. When it comes to budget control - one word that is considered by most in a sinister context - each has their own perception.

Finance will use as measure of risk to control, and businesses will see it with a suspicion of them being controlled through this process.

Revenue

It is crucial to track revenue generation and compare it against the quarterly budgeted target to ensure that the company meets its financial goals.

Cost

Cost of sales and overhead expenses are two essentials that need tracking. Costs connected to development aspects, even if it is amortized be mapped, as well as the cost of sales be monitored if revenue targets are missed.

Cashflow

Managing cashflows based on actual monthly budget compliance is a must, and any significant variance be flagged appropriately. It helps companies avoid cash crunches, which are bound to impact operations.

Investments such as capex in fixed assets and IT projects should be made with due impact on P&L and cashflows as often managers tend to defuse the P&L impact through longer amortization methods leaving a significant impact on cashflows All such expenses, therefore, should be tracked through a closed budget monitoring process.

It must be analysed whether the investment is critically required for the business continuity or purely a developmental expense that can be deferred if not annulled. It is vital to reduce costs if the quarterly budget variances demand to put immediate efficiency or austerity measures without sacrificing the company’s ability to grow and invest in new opportunities.

Budget variances usually do not suggest cutting risk management aspects. Although, one can study and identify and assess their related cost and minimize these whilst ensuring no negative impact on operations.

Compliance

The quarterly budget compliance should consider all regulatory requirements costs or any other compliance related costs with zero tolerance on any misadventure. Business must ensure compliance is maintained, more so on taxation-related matters as these derelictions can cost dearly.