Components of your budget

When reviewing your department’s budget, you will find that the items within it can be categorized into one of three types based on your control to affect them. These categories are

• No Control
• Some Control
• Full Control

 Before I explain these three categories, please note they are not official accounting or finance terms. In fact, the accounting and finance managers reading this column may not be able to decide if my categorizations are brilliant and insightful or rather funny, but they are very true.

 “No Control” items are costs/expenses you have virtually no control over. These expenses are typically allocations of overhead costs based on number of employees, technology usage, office space size and/or location, etc. such as

• Business insurance
• Employee benefits
• Occupancy (rent, heat, electricity, etc.).

 Since you have no control over what the company pays for rent, you can’t really be judged on these costs. However, if these costs go up dramatically you may be required to adjust other items in your budget to stay within your overall budget. Your finance person is your best line of defense against problems with “No Control” items. It’s the finance department that calculates the allocations. Therefore, your finance person may be able to find a way to minimize the effect of these items on your total budget or at least make sure that you are not penalized for it at bonus time.

 “Some Control” items are costs that you have a limited ability to control. Examples of these expenses include payroll, telephone and vendor agreements. Regarding your payroll expense, you obviously have to pay your people, but you can delay hiring. Delaying a new hire by a month or two has a very positive effect on your expenses. It not only reduces your actual expense by the salary amount, but it also reduces the costs of benefits, payroll taxes and headcount-based allocations like those previously mentioned.

 Generally speaking, the “Some Control” items will be the biggest piece of your budget. Therefore, small percentage savings in this area can give you the biggest gains.

 “Full Control” items include items like training, travel (airplanes, hotels, food, etc.), user conferences, professional dues, lunches for noontime meetings and offsite meetings. Unless your department does a lot of required travel, the “Full Control” items tend to be a small percentage of the overall budget, but are the easiest to cut when times get tight. Think of it from a personal perspective, it makes more sense to reduce your personal expenses by bringing lunch rather than by not paying your rent.

 Department budgets are a little counterintuitive; I always thought that the bigger my organization and the bigger the budget, the more flexibility I would have on how to spend it. The truth is, I never found that to be the case. Yes, of course there was more money, but generally speaking, the proportion of no control, some control, and full control was roughly the same. Also, with the wider level of responsibility, came increased complexity regarding prioritizing how the money should be spent.

 The primary advice and takeaways are to know that:

• Items in your department budget can be classified as you having no control, some control, or full control over the expenditures
• Knowing which of your budget line items fall into which of the categories can provide you with insights into the best way to manage your budget

 (First published in GateHouse News Service.)