Year End Budgets

It is the fourth quarter of the year and everyone is hard at work. Turkeys are praying for pardons from the White House, Santa’s elves are toiling overtime in toy factories, and business people are preparing their annual budget for 2018. Fling your window open wide, clean out your ears, and you’ll hear accountants everywhere singing “Whistle While You Work.”  Is it any wonder that this is my favorite time of year?

As a consultant and former accountant, I’ve always enjoyed working on the annual budget. It gives me an opportunity to review the current plan and its assumptions and determine whether we reached our goals or fell short of them. It’s also a time to meet with management and establish fresh goals for the coming year. In past years this work was accomplished by multiple accountants who would spend endless hours with the senior management team analyzing and forecasting future growth of revenue and expenses in Excel, outside of our back-office ERP system.

Yes, I am dating myself. These days, many of the leading back-office systems have advanced budgeting capabilities that make it easier to generate forecasts based on past and future data points. For example, Yardi has an excellent Advanced Budget and Forecasting module that enables its users to create and manipulate budget worksheets and eventually lock the final version. Some of the latest systems even allow for job cost budgeting to be included.

Of course, the big advantage of using a state-of-the-art system is that you can easily compare budgets to actuals each month with very little human interaction. It is automatically updated by the back-office system, and reports can be effortlessly generated for comparison purposes. For those with older systems there are numerous add-on applications, such as InformXL, that can be configured to provide monthly budget-versus-actual reporting. I must admit, however, that most systems still have an issue tracking variance reasons monthly. Some vendors have made accommodations in their products while others are utilizing SQL tables to capture the data and display it on reports.

At Cornerstone, we highly recommend that users set up their reports to run on an exception basis. If a company is meeting its budget, then management should not waste valuable time reviewing it each month. On the other hand, budget exception reports can be easily developed, highlighting budget variance exceptions based on specific criteria and thresholds. For example, management may choose to be notified if sales revenue falls below 10% of budget or an expense line item exceeds 8% of budget. In these cases their time and attention is more highly focused on deviations and resolving them.

In the coming year, we expect that margin will be greatly affected by the current administration in Washington DC. We have already seen a labor shortage based on proposed immigration policies and an increase of lumber due to tariffs with our neighbors to the north. Budgets will be critical to the homebuilding industry to ensure that margins and sales prices are maintained in a harmonious relationship. Otherwise, we will see a significant growth in inflation in the next 12 to 24 months.

Cornerstone believes very strongly in the need for solid and accurate budgets which should be used as a guideline for management to make sound business decisions in both the short and the long run. The Annual budget is going to be more important ever next year.