Budget overspends and variations from forecasts are a fact of life for many organisations. When these occur, it is too often left to chartered accountants in the finance team to identify and report them. That can be an exercise in diplomacy and it can be challenging to be the bearer of bad news, but it’s also an opportunity to put things right.

“Where possible, (planned) deviations from budgets or forecasts can be agreed beforehand with the appropriate manager who has the authority,” explains Greg Foord CA, Financial Controller at ME Bank. 

When an overspend occurs, without being authorised, chartered accountants need to open up a candid, two-way communication with a number of different stakeholders

“However, deviations to budget or forecast will always occur due to the timing of expenditure. The budget will have been set a number of months prior to spend being incurred and budget assumptions may have changed.

"When an overspend occurs without being authorised, chartered accountants need to open up a candid, two-way communication with a number of different stakeholders. By doing this, finance teams can be proactive in addressing the immediate impacts and preventing it from happening again.”

The team which overspends

The team responsible for the overspend can help the finance team to establish the circumstances and facts of the matter, including the size of the variation, the line item of expenditure involved, the cost centre and the context for why the overspend occurred.

“The finance team then needs to explain the impact of the overspend upon the cost centre itself, as well as (on) the wider organisation,” says Foord. “Then you may need to recommend remedial action to offset the overspend, or suggest how to recover some of the costs.

Accountants also need to explain how they will share details of the overspend with higher levels of management. “It’s best to be up front and explain that the finance team has a responsibility to do this.”

The cost centre manager

The reporting manager or cost centre manager must be alerted to the overspend or variation, the wider impacts of this and how this will be communicated more broadly.

“There is one additional conversation you need to have here too,” says Foord. “You need to establish whether any procedural or control breakdowns have occurred. For instance, most organisations have delegation of authority limits for expenditure and it may be that someone has breached these. Any such breakdown needs to be reported and remedial action taken.”

To read practical steps to prevent budget variations, see this Chartered Accountants ANZ guide.

The CFO and CEO

Depending on the size of the organisation and the size of the breach, you may need to report it to the CFO or CEO. Clearly and concisely, you should report the size of the variation, the steps taken to offset it, and remedial action to prevent it happening again.

The board of directors

If the overspend or variation is deemed significant enough, you may need to report details to the board too, says Foord. “The board is interested in the bigger picture, so don’t bog them down in the detail. Explain succinctly why the breach happened and how it will be addressed.”

Preventing a repeat problem

Chartered accountants are in the perfect position to help colleagues from making the same mistakes twice. This starts with educating profit and loss owners (some of whom may have little or no accounting experience) on fundamental accounting concepts such as accruals and prepayments.

“The best approach is to partner with the business so that you can build up trust and open communication,” says Foord. “Let colleagues know that you’re approachable and available to advise and that the door is always open if they encounter problems.”

Whatever budgeting or forecasting system your organisation uses, it is vital that a variation between actual and planned expenditure is visible. Variations need to be included in management reports that the finance team prepares for the cost centre or business unit and – importantly – these reports need to be read.

“Making sure that your colleagues are opening and reading management reports is paramount,” says Foord. “If possible, I recommend you meet with each profit and loss owner to discuss the reports, and to get an appreciation for what is occurring at their level.” You’re more likely to pick up variations and investigate them early, if you talk regularly to the profit and loss owner.

Andy McLean is the former Acuity publisher and now a writer and content marketing consultant. www.andymclean.net

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