Any Tips for Managing Budget in Accrual System?

[CPaugh]

Hello,

In our company the various departments have fixed budgets that the department manager works within for buying supplies, tools, etc. I manage the machine shop. For my department I purchase tools, tooling, abrasives, and other items.

We use accrual basis for accounting against this budget. As I understand it this means that purchases are reconciled against my budget as invoices are received. It doesn't matter what my Purchase Orders total for a given month, only what is billed from vendors. My vendors bill when they ship the items. Some items ship same day and others may not ship for weeks. Unfortunately, I don't see real time what invoices have been received against my budget and don't have a good idea when some will be received. I get a weekly budget performance ( a list of accrued item costs ) to help me manage my purchases, but I struggle to keep tabs on when invoices are going to hit. It becomes a high wire balancing act trying to guess how much I have left in my budget when I can't see when things clear. I don't get a budget report the last week of the month because the monthly budget meeting will be the first week of the next month and I receive my monthly budget performance report. Unfortunately, the last week quickly becomes the most critical when I try to anticipate where I am.

Does anyone have any tips for keeping tabs on my budget expenses with limited visibility as to what expenses have accrued?

Thanks...

[Freelancier]

It sounds like you haven't fully embraced accrual accounting and want to run things using cash accounting, so that you can manage it like you would the cash in your pocket. With accrual accounting, there's no "guess how much I have left in my budget"... the minute you receive an invoice, it's recognized... the minute you get a bill, it's recognized.

What you might want to do is go to your manager or the CFO and explain how you're struggling with this and that you'd like to go to a training class to make it easier to get your mind around how to manage based on accrual accounting.

[CPaugh]

Thank you for the response. I feel like I understand fairly well the fundamental principle. It's just that I am locked out of our accounting system (QuickBooks) for everything but creating PO's. I am not able to see when an invoice is received. I only get a report 3 times a month that shows what has been invoiced. I can pull up a list of items I've purchased, but I don't have any knowledge if and when they were invoiced. I feel it would be much easier if I had real time information. It feels like I am flying blind.

Am I still missing something?

[Freelancier]

Ok, that what sort-of buried in your original post. That should have been your lede... "How can I convince the powers above me to give me real-time access to our accounting data so that I can better manage my department?" Does that sound right? If so, my recommendation would be to take the question to your CFO/controller -- whoever is responsible for QB -- and see if you can't get them to pull reports for you more frequently until you feel like you don't really need that information any more.

However, you're basing your decisions on when invoices hit instead of when you make the purchase. Just assume that once you make the purchase, the invoice will hit and you just need to focus your budgeting on what you've already spent, not on when the invoice is going to arrive so that the purchase gets paid for. And if getting real-time info will help you in the short-term until you get comfortable with not worrying about when the invoice will hit for a purchase, then ask for that info to start getting sent to you a couple of times a week.

But eventually, you just have to make the leap that your purchases are immediately costing against your budget, regardless of when the invoice shows up.

[CPaugh]

Thank you again. I find your last statement ( "your purchases are immediately costing against your budget, regardless of when the invoice shows up" ) very interesting, because that is exactly how I would like to operate. I would like a purchase to basically a reservation against my budget and control that since I have that data any time I want it. It seems to me that this keeps things level based on budget numbers and therefore I have a clear guide to my monthly expenditures. If the total of my purchases is less than my budgeted amount each month then I have success. I consider the funds to be accounted for and will be relieved whenever the invoice comes because the funds are there until such time.

This is not how it is handled here, though. It only matters when the invoice is received. So I may have a purchase that has a lead time of 3-6 weeks in which case I need to keep tabs on when it ships and gets invoiced because it could show on my budget any time over a span of 3 months. If it is a large purchase, as long lead purchases usually are, then I need to pay close attention and know when it hits and hold back on purchases until then so that I won't overspend. It gets sticky because I there are purchases I need to make, but I am in limbo waiting for that invoice to fall. So I can end up losing those funds from my budget for two months instead of just one because a promised delivery was missed on the vendor's end. My budget is tight enough that I cannot afford to lose those funds.

I greatly appreciate your insight.

[Freelancier]

Ok, now I think we have a full picture of what's going on. Thank you for your patience. Other people might want to weigh in on this now, based on their experiences with this situation, which sounds like it might be pretty common.

My recommendation would be to sit down with the CFO/controller (and maybe managers in other groups within your company) and explain this gap between their reports and how you see what's going on with purchases and see if they can help you devise a way to manage that lag time between when something happens and when it gets into the accounting system. I would think that when you do a purchase like this, there's a purchase order process that is (or should be) maintained to keep track of incoming expenses with a lag time. If not, maybe it's time the CFO/controller created that process so that you can get reports about outstanding POs.

[CPaugh]

I appreciate your time and your help. My next move will be to request some time to discuss this as you suggested. I just wanted to make sure I had a real problem and not was not completely oblivious to standard practice.

[Paul]

That system seems odd on their part. As freelancier said you should be able to book your purchase orders against your "open to buy" budget without such a strict monthly cutoff. At least your unused budget under their system should roll over to the next month. It does seem difficult and odd the way you explain it. Shouldn't be that hard to solve.

[CPaugh]

Paul... It is interesting that you use the "open to buy" inventory plan in this case. I think it makes sense to think of it that way, too. The feedback I get when I discuss this type of scenario is the hard fast rule that since we are on an accrual basis, is that the sum of the monies paid out during a given month, based on when invoices are received and paid, is how my budget is reconciled. So it seems that I have to foresee what purchases are COD, Net 10, Net 30, etc. and when they will ship so I know when the payment is going to go out. There seems to be great inflexibility in our system. I am OK with unused budget not rolling over. But it seems that used budget is not retroactive and applied to the month the purchase was made.

I am not an accounting type and am just trying to understand why it has to be this strict. I am told it is due to the fact that we operate on an accrual basis.

Thank you for your response.

[Evan]

If you're buying a lot of routine supplies from vendors, where the pricing is fairly fixed or stable from purchase to purchase, you may wish to print off the PO for your records so you know what has been ordered and subtract that from your department's budget.

Your budget, based on how you describe, is very much on a cash basis, not accrual. If you order 20 widgets at $1 each, and only $15 can ship right now, you should have $20 dinged from your "budget", not the $15 that shipped this month, and then $5 the next month when the remainder ship. It seems like they don't quite understand cash and accrual accounting. And technically, you should be recognizing the expense NOT when the bill is received, but typically when the goods ship (FOB shipping point) or are received (FOB destination). When you receive items, do you count that they're there and notify accounting that 15 widgets arrive, so they can verify it when the bill comes in that there are 15 they should pay for and that you agree with the pricing? It's really at this point that the expense should be recognized. It doesn't matter when the invoice comes in, and it doesn't matter that the invoice (arriving later) is paid tomorrow, next week, or in 3 months.