Over the course of the last 30 years, I have prepared static and variable budgets on an annual basis and on a rolling 12 month basis. The process is actually quite simple, but it can take a significant amount of effort to get it right in the first place. There is a simple key to doing so – that is to focus on getting the salaries and a couple of other major components “right” and the rest of the budget becomes additional noise.
Salaries generally represent 55-65% of the budget. When you add the Employee Benefits piece (which is a direct function of salaries – in the case of APS approximately 28-30% of salaries) you have accounted for 75-80% of costs included in the budget. If you get this part “right”, the rest tends to be a function of what was spent the year before – especially with major contracts that are in place for multiple years.
So what does this mean? If the budget overstates Salaries by even 3%, with a $600 million budget, the error can amount to
$18 $10 million – which for APS represents a substantial portion of the deficit projected for FY14. Please note that I am not saying this is the case, simply saying that a substantial amount of the time devoted to preparing a budget MUST be spent on getting the Salary line item right the first time.
In addition, CFO’s tend to be financially conservative and know that “things happen” during the year and it is a wise policy to insert reasonable “budget cushions” to provide for the unexpected events that always occur. We tend to be sneaky with these “cushions” so that they are hidden and available when needed (as they always are). However, except for very minor “cushions” for expected raises, promotions, etc., the Salary line item is not the place to do this as it gets too much scrutiny. And unfortunately for financial officers, once a “cushion” is found it often gets taken away and reallocated to other purposes. However, there are great places to hide “cushions” – but that is a trade secret that non-CFO’s will have to figure out on their own!
All that being said, when reviewing an expense budget, it makes sense to spend the most amount of time on the Salary line – understand that and you are 75-80% of the way to making a reasoned judgment on the integrity of the numbers presented.
And that is the process I am going through now – deliberate, detailed and thorough – it is the only way.