April 2009 Edition

Jonas Construction Buyer Guide Banner

Accounting Concepts:

Budgeting and Profit Planning: Modern Methods for Budgeting and Profit Planning - Part 1

This is the 1st article in a series about Budgeting and Profit Planning. This material is adapted from The Automated Accounting Systems and Procedures Handbook (John Wiley, New York 1991) Chapter 10.


Well-disciplined organizations require that their management team annually develop a profit plan.  This plan plays a significant role in focusing resources over the coming year and has high visibility with the board of directors.  An integral part of this plan is the fiscal budget that defines performance objectives in terms of monetary and statistical information retained in the chart of accounts.

The annual planning process usually starts several months before the new fiscal year and involves multiple iterations as well as review and approval through several layers of management.  Current performance levels and environmental expectations strongly influence the resulting financial budget.  Certainly corporate goals of growth, return on investment, and new business expansion play a role here as well.  The annual plan and budget development help translate long-range corporate strategy into the individual financial goals of every affected manager.  In this respect, the budget can be considered a tactical plan—a short-term plan that reflects a longer term corporate strategy.

Anyone who has been involved in manually preparing the budget for an annual plan understands the drudgery of pouring over budget worksheets, footing and cross-footing account budgets, and reiterating this after the corporate controller rejects the resulting budget and requests revisions.  Automated budgeting systems have virtually eliminated all forms of manual budgeting.  There are several reasons for this:

1. Accuracy.  The arithmetic operations performed by an automated budgeting system offer accuracy unsurpassed by any manual budgeting system.

2. Ease of Budget Preparation.  System features make budget preparation  far easier to use than any manual system.  For example, the budget center manager can create a new budget by copying the current actual performance and making a few adjustments, all with a few keystrokes.

3. More Timely Budget Preparation.  Timeliness results from ease of budget preparation.  In addition, when an organization is geographically diverse, the automated budgeting system speeds up budget preparation by allowing instantaneous communication of budget information across great distances.  Also, the faster the budget is prepared, the faster the annual plan can be completed.  And by performing all of this in the last two or three periods of the year, the organization is assured of a more meaningful budget.

4. Additional Functionality.  The budgeting system offers improved functionality over manual budgeting methods.  Integration with the automated general ledger and chart of accounts, flexible reporting by budget center, and efficiency in creating an initial budget are some of the added features that make automated budgeting a preferred approach.

5. Greater Level of Participation.  It is easy to see that organizations that lack an automated budgeting system tend to restrict their budgeting to higher levels of the organization.  By using an automated budgeting system, it is possible to obtain a more participatory budgeting process and (hopefully) produce a budget that everyone will take more seriously.

This chapter discusses how modern organizations conduct budgeting and profit planning.  It describes the annual planning process and the automated tools that help support this process.  These tools, referred to throughout this chapter as the budgeting system, are very much a part of the general ledger system and closely rely on the general
ledger chart of accounts for budget development and reporting.


Although this text refers to the budgeting system as an entity distinctly different from the general ledger system, quite often it is considered a subset of the general ledger system.  For example, if a budgeting system were being purchased from a software vendor, it would likely be sold only together with the general ledger system.  There are two factors that should be understood with regard to a budgeting system's relationship to the general ledger system:

• Sharing the general ledger master file.
• Budget versions.

Sharing the General Ledger Master File.  As Figure 11-1 suggests, the storage of budget data alongside the other financial data maintained by the general ledger is the reason for this close relationship.  For each account number, the system maintains budget information, current actual information, and prior year actual information within the general ledger master file.  This approach makes sense because it allows the system to easily store and treat budget information much the same way as it does other account financial information.  For example, this allows the system to easily retain budgets for all types of accounts—asset, liability, expense, revenue, and even statistical accounts.  In addition, just as actual amounts are stored for each period, so are budgets.

However, even though budget information and actual information are shared in one file, they are updated by two separate processes.  The general accounting processes update actual and prior year amounts in this file and the budgeting process manages the development of budget amounts.  Because these processes are so different (and even though this information is shared), it is appropriate to talk about the budgeting system as a separate and distinct entity.

Budget Versions.  A modern budgeting system allows multiple versions of the budget to be stored.  This adaptation assists with all areas of budgeting and budget development by allowing budget managers to simultaneously work with different versions of the budget.  At any one point in time, several of these versions may be in use, some for budget development and others for budgets that are currently in force.  To secure active budgets from inadvertent revision, the system may allow selected versions to be locked so that they are not disturbed.

As an example of how different versions can be used, consider that an organization's budgeting system may contain five different budget versions:




Last year’s budget


Current budget


Revised budget for current yea


Next year’s budget under development


A variation of the sales/marketing budget under development

As an example of the usefulness of multiple budgets, consider that a controller may be asked to prepare different budgets for any of the following situations:

• The president requires an optimistic, expected, and pessimistic budget.
• Because of an impending merger, the vice president of finance must prepare two budgets, one based on the assumption that the merger takes place and the other on the assumption that it does not.
• The budget committee desires to examine several budgets that reflect different levels of capital expenditures for the year.
• Due to currency rate fluctuations, budgets that reflect two alternative choices of new debt financing for the coming year must be prepared.
• The company may wish to model the effect of starting up a new product line.
• When purchasing new equipment, the controller may wish to study the impact of different depreciation methods on net income.

To allow flexibility in choosing the budget version to use for comparative (budget versus actual) financial reporting, the system should allow each comparative report to specify a budget version.  The default budget version may be stored in the company table.


Material in this chapter has been adapted and reprinted with the permission of Warren, Gorham & Lamont, Inc., from Chapter 43, “Automated Budget Systems,” in Budgeting and Profit Planning Manual, 2nd edition, by James D. Willson.  Copyright 1983, 1989 by Warren, Gorham & Lamont, Inc. 210 South Street, Boston, MA 02111. All rights reserved.

About Author:
Doug Potter is the owner of The Newport Consulting Group a professional management consulting organization that provides clients with information systems planning, selection, and implementation services. He can be reached at dpotter@newportconsulting.com or through his Web site, http://www.newportconsulting.com. Note: The contents of this article were excerpted from Mr. Potters book "Automated Accounting Systems and Procedures Handbook" Copyright 1991 by Douglas A. Potter, published by John Wiley & Sons, Inc. New York.

Contact info:
Doug Potter
The Newport Consulting Group
Email: dpotter@newportconsulting.com
Website: www.newportconsulting.com


Main Page
Printer Friendly
Email Page

BillQuick – Time, Billing and Project Management

With BillQuick, all your critical business functions—time and expense tracking, project management, billing and accounts payable—are in one system. If you are already using QuickBooks®, Peachtree Accounting® or MYOB®, you can leverage your existing investment by integrating with BillQuick. You can also get the mobility you desire with BQE’s feature-rich SaaS product which also comes with an iPhone and Android mobile app.

Recently rated five stars by CPA Practice Advisor!

Click here to learn more

Free Accounting Software Search

Our complimentary software search service will help you locate software providers specializing in your business to help you with all your software needs. It's simple, easy and only takes a few minutes.

Click here to start your free software search.

Jonas Construction Buyer Guide Banner

Company Info | Privacy Policy | Terms of Service | Advertise With Us | Contact Us | Help |
Copyright © 2006-2007 Accounting Software 411, LLC. All rights reserved.