Budget & Expenditure Systems

by Bert Markgraf Google

The system you use to create your budget lets you predict how much money you are going to spend in specific areas of business activity. Because your budget estimates are not always accurate and because your business's situation may change between the time of your estimates and when you incur the expenses, your expenditures will differ from your budgeted amounts in many cases. The system to control expenditures limits the differences and requires an authorization with an explanation of the reasons for large discrepancies.

Cost Breakdown

While your budget has an overall total, you have to break down the costs into separate types and items to track expenditures. Start by establishing categories of costs such as advertising, salaries, benefits and production. Break down the costs further to the level of contracts for major suppliers and costs that have similar characteristics. For example, advertising costs might include costs for radio ads, print ads and fliers and for your public relations firm. If you use software for budgeting, your system usually includes a framework in which you can establish cost groups and cost items. If you use a paper system or generic software such as spreadsheets, you can establish the cost items yourself.

Budget Preparation

Once you have established individual cost items for your budget, you can fill in the cost estimates that make up the totals. Numbers from the previous budgeting period are a starting point for these estimates. Your budget system has past records. You can verify what has changed and adjust the numbers from past periods accordingly. For new budget items having no previous records, you can use amounts for similar types of costs, standard amounts from industry publications or prices you obtain from suppliers.

Cost Reporting

To track costs effectively, your expenditure system has to assemble cost reports that match your budget items. Your budget system typically has codes for cost categories and cost items. For example, production might be code 5000, while labor is code 5100 and assembly line labor is 5120. Set up your expenditure system to track budgeted costs under the same codes. For example, whenever salaries are paid out for assembly line labor, the expenditure system collects all the costs under the 5120 code.

Tracking Actual Costs

Controls to ensure that you only exceed budgeted expenditures with special authorization require input from both the budget and expenditure systems. An effective method of tracking costs is to create columns of budgeted and actual costs and to update them regularly. Your budgeted cost column remains the same, while your actual cost column continues to change. Two additional columns in your system can track the percentage of the budget period elapsed and percentage of budget spent. While your budget and actual cost columns give you the dollars, the percentage columns let you see at a glance if you are over budget.

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