Budget Every Item Until Truth Surfaces

“One of the great advantages of budgets is that to achieve something near to accuracy of forecasting, one must completely analyse the details of costs. It is re- markable then what you find out when you set down on paper what your costs are for every single item necessary in the operation of the company. Managers have often told me that they had never known the real facts—or all the facts—about their operation until they looked into their expenses in preparing a budget. In this activity many extravagances are uncovered and many opportuni- ties to effect savings which can be used elsewhere are brought to light. Unless costs and revenues are predeter- mined and set down so that from one month to another the results are always being brought as near as can be to the estimates, a balanced judgement will not be brought to bear on the operations. And it is just as important to inquire why one figure happens to be so far below the budget of costs as why another figure is so far above it.”

“In almost all businesses, the revenue fluctuates by months and seasons of the year. In most cases costs have a relationship to the sales of that particular time, but many costs are fixed and cannot readily be changed to conform with a monthly change of revenue. Our budgets are all set up on the basis of average monthly costs for the whole year, and then every month is separately budgeted for revenue, so that the fluctuations don't make any one month look better or worse than it really is, and we also show each month what we've got to do during the remainder of that year.”