A company that has used the same budgeting model for many years will find that it gradually becomes more complicated. This is because there are incremental changes each year – a new analysis page here, extra departments there, perhaps some assumptions as well. Though the changes seem minimal if looked at for just one year, the accumulation over many years makes the model very cumbersome, difficult to understand, and prone to error. For example, if formulas are added to the budget that require inputting the final balance sheet numbers from the previous year, it is possible that no one will remember this when the next budgeting cycle arrives in the following year, especially if the person who made the change in the previous year is no longer with the company, or if the change was not documented anywhere. As the number of these changes piles up over the years, it becomes increasingly difficult to complete the budget on time. The person managing the budget model becomes increasingly indispensable, for no one else knows how to use it.
To avoid these problems, it is necessary to regularly simplify the budget model. This does not mean that the simplification can be done once and then dropped. On the contrary, the standard budget procedure should begin with a review of the model from the previous year to ensure that all budget line items and calculations are thoroughly documented and understandable, and that they are still needed. There should also be a step that specifically requires the budget manager to review the need for extra line items and formulas, with an eye to eliminating as much as possible from the budget model every year. Though it may not be possible to completely streamline the budget model in one year, a continuing effort in this area will yield excellent results as long as the review is continual.
Though the main focus of this best practice is to reduce the complexity of the budget model, it is sometimes sufficient to ensure that the model is adequately documented. Some businesses really become more complex over time and therefore require more detailed budget models. In these cases, the budget manager should review the model at the end of each budget cycle to see what has been added to the model this year, and verify that complete and thoroughly understandable descriptions have been included in the budget procedure that note the reasons for the changes, how they work, and the resulting impact on the entire budget model. This step may be all that is needed for some organizations.
Budget model simplification can require a considerable amount of time to complete, because the budgeting manager must review the entire model from top to bottom, and any changes made will likely require alterations to the underlying budgetary formulas, necessitating a careful verification of the changes made. Consequently, the time required for a review should be built into the budgeting manager’s annual schedule of activities, preferably just before the annual budgeting process is scheduled to begin.