A budget is a quantitative expression of a goal. One of the greatest tools accountants have to help management achieve their goals is a budget.

The Sales Department must achieve the targets that they have committed themselves to. If revenue falls short of expectations and expenses are not reduced accordingly, then losses may occur. Alternatively, if expenses exceed budget targets, and revenue is not increased accordingly, then again losses may occur. Therefore we must hit our budgets. Please note that “Setting the budgets” and “hitting the budget” are two different things. Organizations that just set a budget and do not hit the budget; do so at their own peril. They will find that competitors who continuously improve their budgeting process will be tough to compete against.

Please note that “hitting the budget” does not mean that selling at a loss or cutting out expenses that are crucial for the business i.e. equipment maintenance, certain types of insurance etc. These may be necessary to ensure the company continues to operate and are that they are protected against certain risks.

I worked in one organization; as a newly hired Controller. I had been given a major list of responsibilities (as usual). I was working 7 days a week for the first six months on them, but still keeping my eye on the statements. I noticed that we were barely squeezing out a profit, and began championing cost reduction, process improvements and encouraging greater Sales through:

• Increased export development
• New product development
• Increase prospective base(Sales were encouraged to approach the mid size co’s as well as the largest in the industry)a few of these equaled or more than equaled a large company and would mitigate the negative effects of losing one large player
• etc

I also strongly recommended the use of a budget and rolling forecasts. It is still a puzzle to me that not all organizations use this tool. How can you get anywhere without a map or these days a GPS. The budget is your GPS. For instance: if the following diagram was your Sales budget and your Sales are $7M at the end of the month; then you know that you have to do something now to make up the difference while you have the time or you may not achieve the $25M quarter Sales goal. It becomes even more difficult if you find out at the quarterly or semi-annual point that you are behind your budgeted Sales goals and it would be too late at the annual point. The budget lets you know your quantifiable objectives and how you are doing against those objectives. Note: I used monthly, quarter, semi-annual and the year here. I would strongly suggest using this monthly and in some cases even weekly; especially for Sales.

Note: In some cases it may be worthwhile to exceed budget if there is a greater benefit such as Marketing that generates a greater return on the investment. However you must be certain that it is as successful as you believe. An example would be: a Googles AdWords campaign costing $5,000 that yields Sales of $80,000. You would have to evaluate this expense by determining the return on the Sales; if the after-tax net income on this sale is 8%; which equates to $6,400 then you know you should continue. In fact you should have an unlimited budget amount for marketing expenses if these returns continue. It never ceases to amaze me how companies will put a lid on Marketing expenses; even though scenarios like this indicate to spend more to make more.

Excerpt from Paul J. Calleri’s up and coming book on Management Excellence.
Paul J. Calleri is a CPA, CMA of Paul J. Calleri, Chartered Professional Accounting. He is also the founder of TheGAAP.net