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Budgeting: black magic or red ink?

THE BUDGET PIE CONTINUES TO shrink as companies try to sustain profits in a slow economy. Security directors have become more adept at winning a share of these limited resources, but those who mismanage their slice may not find a place at the table when next year's portions are dished out.

Running over or even under budget gives management the impression that resources are not well controlled. To ensure that funds fought for are properly used, a security director must develop systems to monitor how much money is available, what has been spent, what has been committed to the future, and what is left. These systems act as a crystal ball, which should be consulted every time a director is asked to authorize spending.

The first step in building a crystal ball is knowing how much money is available and how it will be allocated. In most organizations, the resource manager provides the head of each department with the line-item budget, but the security director then needs to examine the budget and determine the amount of detail required. Each major expense category should have a separate line in the budget.

The company resource manager can provide missing details if the budget does not include the information needed. Resource managers appreciate people who are interested in their work and they are often cooperative. Building a friendly relationship with the resource management department will make future budgeting research easier. The security department will also develop a reputation for caring about the budget, which builds credibility with senior management.

Once it is clear how funds should be directed, a security director needs to develop a system to determine how much money has been spent. Many corporations have a resource management system that tracks payouts and generates monthly variance reports. This report tells a manager what his or her actual expenses are and how far over or under budget he or she is. The report forms a critical part of the budget crystal ball, but some pitfalls exist.

The problem with variance reports is that they only list costs that have been paid out. They do not include costs that have already been committed but not yet paid. Assume, for example, the monthly budget for material is $10,000; $5,000 has been paid out, and another $2,000 has been committed in purchases. The variance report will show a balance of $5,000, even though $7,000 has actually been spent and the balance is only $3,000.

Security directors cannot rely on variance reports alone. Previous expenses, also known as commitments, must be accounted for before making new expenditures. The easiest way to do this is to keep a copy of each spending authorization and use a spreadsheet to keep a running total. When an expense is paid out, the security director must remove it from his or her list since it will now be included in the variance report. By not removing an expense, the security director runs the risk of it being counted twice and running under budget.

Once good commitment and variance systems are in place, security directors may be tempted to relax and think, "I know how much I've spent and, as long as I'm in the black, I can keep spending." This is a short-sighted approach. The monthly variance report only tells a manager where he or she is right now.

Future spending also needs to be taken into account. A spreadsheet software package can help with this function. Any spreadsheet software, such as Lotus 1-2-3 or Excel, will work.

Figure 1 is an example of a spreadsheet that forecasts the budget for material for the first quarter of the year. Each step in the monthly example is indicated by a superscript number.

The spreadsheet begins by listing the budget for each month (step 1). Variance is then accounted for (step 2). The reported variance is listed only in the current month. In January, since it is the start of a new fiscal year, the variance is zero.

In each subsequent month, the previous month's predicted variance is used (step 3). Each month will build on the predicted variance for forecasting purposes. Since what has happened in the past is of no consequence, all previous entries at the beginning of the month are deleted, and the previous month's predicted variance is replaced with the reported variance.

Outstanding commitments are added next (step 4). January's commitment shows some expenses that carried over from the previous fiscal year. The following month's commitments are zero because commitments are accounted for only in the current month.

Routinely recurring expenses, such as office supplies and training material, are listed next (step 5), followed by a miscellaneous category for nonroutine expenses (step 6). The final number listed is the predicted variance for each month (step 7). The predicted variance for the last month is also the variance for the end of the quarter (step 8). Remember that these expenses are recorded as negative in relation to the budget, and the reported variance must be listed as either positive or negative.

Using this example, when a security director receives a request for expenses in January, he or she can predict that more than $29,000 is available. With spreadsheet software, all computations are performed automatically, which allows the director to conduct a sensitivity analysis. A sensitivity analysis is simply plugging in various numbers to see what the outcomes are.

Assume the director has been asked about the impact of transferring $5,000 a month to another division. That amount is then entered as a miscellaneous expense, and the director will see that this transfer causes a budget overrun, which can be conveyed to senior management.
Figure 1
Material Budget Forecast
1 Budget $10,000
2 Reported variance $ 0
4 Commitments ($7,000)
5 Office supplies ($ 500)
5 Training material ($ 300)
6 Miscellaneous ($ 0)
7 Predicted variance $ 2,200
1 Budget $10,000
3 Reported variance $2,200
4 Commitments ------
5 Office supplies ($ 500)
5 Training material ($ 300)
6 Miscellaneous $ 0
7 Predicted variance $11,400
1 Budget $10,000
3 February variance $11,400
4 Commitments ------
5 Office supplies ($ 500)
5 Training material ($ 300)
6 Miscellaneous $ 0
7 Predicted variance $20,600
1 Budget $10,000
3 March variance $20,600
4 Commitments ------
5 Office supplies ($ 500)
5 Training material ($ 300)
6 Miscellaneous $ 0
7 Predicted variance $29,800
8 End of quarter variance $29,800

The security director's credibility, a crucial factor in his or her ability to get a fair share of corporate resources, hinges on the department's reputation for running neither grossly over or under budget. By developing a few simple management systems, a security director can create his or her own crystal ball to peer into the future and manage the department's resources more effectively.

C. Gordon Jenkins, CPP, is the manager of support operations for EG&G Security Services at Kennedy Space Center in Florida. He is a member of ASIS.
COPYRIGHT 1993 American Society for Industrial Security
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Investigations
Author:Jenkins, C. Gordon
Publication:Security Management
Date:Jul 1, 1993
Previous Article:The three factors of fraud.
Next Article:End-of-day security checks.

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