Magazine article CMA - the Management Accounting Magazine

It's Time to Face the Music on Budgets

Magazine article CMA - the Management Accounting Magazine

It's Time to Face the Music on Budgets

Article excerpt

Professional accountants contribute to the development of every municipal, provincial and federal government budget, as well as to the annual operating budgets of just about every firm on earth.

The same professional accountants play a significant role in casting the estimates and budgets for capital projects, from the purchase of modest machinery to the acquisition of equipment for huge projects like Hibernia.

Each of these budgets is designed by an accountant. Junior accountants gather the figures and put them into the required format. And those among us with the degrees, designations and powerful titles, review and finalize the budget presentations, supposedly based on professional expertise and experience.

Yet, everywhere, virtually without exception, the actual results come in bearing little resemblance to the original forecasts. And just about every budget that fails, misses on the downside. Revenues are less than expected; and/or, expenses are higher than forecast.

This problem is critically serious when it comes to capital budgeting in particular. We all know that Canada, emerging from recession, must make high yield investments in plant, machinery and equipment. Our organizations must choose and develop their products and services with care, and cast them profitably on a restless sea of new markets. And the same holds true for government as much as for business.

When the problem of budget variances is queried, the inevitable answer relates to the complexity of forecasting. What garbage! If complexity were the problem, why then isn't there at least roughly the same number of under-runs as over-runs? The answer is that budgeting is badly infected with that common disease called "an inability to face facts."

The sad truth, in many cases, is that the professional accountants who put the budgets together know full well that the chances of realizing them are extremely slim. However, following often unstated, but clear, instructions not to upset the boat, the budgets go forward.

For far too long, professional accountants have perceived their job to be complete when a set of figures is delivered "upstairs." "Someone else took the decision. You can't blame me," has become the "face-saving" comment offered up by too many professional accountants. The fact is that when actuals come in much worse than estimates, management, including the accountants, looks foolish to have prepared a budget in the first place. …

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