Do you budget at nominal code level?

David

I work for an engineering co., turnover c.£3m. We budget down to G/L code. The areas that have a heavy influence on the bottom line are, of course, reviewed and pondered over, whereas the lesser lines are put in as P/Y with an allowance for inflation. Any lines that are one-offs are, obviously, excluded and one-offs for this year added.

One trick : We had a system for which budget was an additional module at extra cost. However we already had multi-company so I just set up a budget co., copying the main one, and used excel to merge the two together. Easy and cheap!

David

In a previous life when I was a European FD in a US Group, I had 'control' over the NL\GL structure for Europe. OK, I had to deal with different country ways of doing things but the line was

"if you are not going to report on it in clear view on a Management Report, and therefore not produce a budget value for it, then you can't have an account.......and nobody is allowed a Sundries or Other account anywhere. You want an account, you need a budget. You need a budget it must be on a report. You want it on a report, agree it with the Operational guys who make our money"

Outrageous !!!!

OK, so I have a reporting line called Building Cost that is made up of GL\NL codes for rent, rates, insurance, repairs, etc......don't confuse the two. The GL\NL coides can exist and need a budget (are you telling me you can't budget rates ??), but I may have reports that disclose all the lines to the general manager because he is responsible for those lines or I may have a summary building costs line in a Board Report that merely totals the various sub lines (actual and budget). In the end, if you want to record it in a separate bucket, I want you to be able to budget for it. Keeps life simple for everybody

If you then add in that some businesses have 'cost centres' where they re-allocate the total (ie an HR budget) across other departments. This can still be budgeted, but it is then a line that is not controllable by the other departments, so normally the budget value is the same as actual, merely to reflect that me having a factory, does mean I have a cost of HR, but I can't control it., as it is central, but it does help 'viability' questions

There is no right answer, just what works for the organisation

Cheers

Daniel

Daniel Clark
Ryba Macaulay Ltd
info@ryba-macaulay.co.uk

Personally, I would disagree with the earlier contributions.

Having said that, I'm a practising accountant so may not be allowed a full vote! However, whenever I prepare forecasts for clients or when in the dim and distant I subcontracted in industry, I don't prepare a line-by-line budget.

My view is that line-by-line budgeting promotes spurious accuracy. There is also a tendency when budgeting to be prudent on income lines and build in bunce on expense lines: over a lot of codes, that can seriously impact on the bottom line!

Finally, line by line budgeting promotes shedloads of variances, half of which may be caused by misanalysis.

Personally, I would cluster expense headings together in some meaningful manner and budget solely at the "cluster" level.

A good, current example of the less than satisfactory approach and results from 'higher level' budgeting is the 2012 Olympic Games / East London Regeneration fiasco.

Two leading politicians neither of whom have any professional financial management training, professional accounting disciplines or contact with the real world set about producing a budget for a far off event and pitched at the highest level just to secure their 15 minutes of fame.

Once the real world kicks in and the eventual, real costs of this exercise -for "Dome 2" - are found to be so stratospherically off target that only then will we understand why the former head of the ODA - an experienced international businessman of repute - cut and ran at an early stage back to the US and to the security of a working environment that truly understood that you build budgets and businesses from the ground up and not the top down.

If managers want to spend money then they should be fully prepared to explain what they wish to spend it on, ahead of time and not make it up as they go along. By all means build in some cushion but it all needs to be justified and accounted for as part of a comprehensive thinking and planning process otherwise you are totally and utterly doomed.

Our software is set up to have multiple cost centres and we have the ability to hold a budget at the cost centre/nominal code level. We have about 1,700 active cost centres.

Our nominal codes are stuctured so that employee related costs begin with an A, premises costs with a B, transport with a C, etc. In general, we would compare the budgets held for all costs of that type with spend, eg budget for all A codes against spend for all A codes. We would then home in on individual costs and budgets where this higher level analysis shows an anomoly.

Just to complicate matters, the cost centres are held in a hierarchical structure and we can budget at a higher point in the structure. Budget comparisons are then only be possible by consolidation of spend in the cost centres (we don't hold spend at higher structure levels, only budgets).

Currently looking after an accounting app that allows budgets at GL level (where that is the lowest level of resolution), but also allows them to be held at a higher level - sounds similar to the previous reply.

So a GL account is company-cost centre-project-account code, and in simple terms you could hold a budget at this level or say at account code level.

But it gets more complex, because it is possible to have summary (alternate) codes that the GL codes roll up to, and it is possible to hold budgets at this level as well, either rolled up from the GLs or simply entered at this level. As an example, if we have an alternate set called statutory, with statutory p&l and balance sheet headings, then we could enter budgets at that level. Or alternatively we might have one called management expenses!

Ultimately it depends on what reporting you require, BUT we are moving on because we are running a project to implement rolling forecasts in a planning application, with all the data from the different sources stitched together and reported from an OLAP structure - so budgets in the accounting app are becoming redundant.

I have always tried to maintain the link between nominal codes and budgets, and particularly ensured that the managers doing the budget are aware that i need their cost & revenues summarised this way. The added bonus is that costs will be allocated where the manager expects to see them in the actual and it makes variance analysis easier for them to understand.

Small accounts may be ignored so long as the budget holder is aware of this and as a result a miscellaneous or sundry line for £1-2K may be used.

Also where a higher level budget is all that is available i have used lookups to summarise the actual nominal codes to agree to the one line budget.

Thanks to this and David's Pivot table tips i have, in the past had managers who were able to drill into the monthly overhead analysis and determine the key question that they needed to ask someone in accounts to answer rather than the old question "Why is that account wrong"

Give them ownership and the results can be surprising!

Liam

PS thanks for the Pivot tips - they are invaluable

Adding to my comments and taking note of Adam's comments, I would never budget for someone and any budget process that is done for someone has no real merit as you have absolutely no 'buy-in' (terrible phrase) to it. Some points

1 - Managers who are responsible for an area, should budget for it with assistance
2 - Of course people try to inflate cost and reduce revenue, but then if it is a transparent process with a few rules on how to budget, where to budget, etc, etc, senior management would be looking for improvement over last year anyway and having a view to the margin as well, so this is fairly easy to spot. If building repairs were 10K last year, including a 4K one-off, I'd be very suspicious if the budget for next year was 10.5K
3 - I appreciate all budget processes are different, but ours included people budgets, space budgets (forces people to think of electronic storage, better seating arrangements, etc) as well, so you had to justify why you needed to employ those 4 people and the rules took care of how their costs and associated costs were dealt with
4 - Budgets can be as detailed as you wish, but my experience in 400m down to 1m size firms is unless operational management are involved and it is open and transparent, it is a waste of time and effort and our golden rule "if you want a new GL\NL account, get a budget approved for it"

Cheers

Daniel

I was involved on some software development for a University. They had a multi-level nominal structure and budgeted at the lowest (most detailed) level. The system was able to roll these budgets up to higher levels. Interestingly, the system needed to prohibit the progress of a Purchase Order if there was insufficient budget available. So the budget check was flagged at a higher level, which meant that you could overspend on low level budgets at the expense of others under the control of the same budget holder.

I am the Budget manager for a oil company with over a $300m turnover based in Santa Cruz Bolivia partially owned by a British oil company. In answer to question yes for the most part we do budget on an N Code by an N Code basis, however, this is done by grouping various N Codes together. In the event of this not being the case percentages are used in calculating those accounts which are not budgeted for seperately. It has to be the case as we scorecard against each department and each cost center monthly.

Thanks everyone, this is really useful. I guess the message is that if you have a permanent accountant in place at the company, the chart of accounts is jealously guarded.

However, a lot of the implementations I've done have been smaller businesses where the client really just wanted to know the actuals. Nominal accounts got added on and when they got around to deciding they wanted to do budgets, the chart of accounts was by that stage too detailed and a bit of a mess.