Common Accounting Mistakes: Government Edition - Issue #2: Budgeting

Budgets are necessary for any business.  They help develop strategy, control costs, and are a great internal control.   Many small businesses have difficulty developing a budget, especially during their startup or high growth periods.  Budgets may be the most artful part of accounting.  They are a best guess, and a goal to work towards.  Government contractors have an even harder and more dire concern when it comes to cost plus contracts.  Budgets are used to calculate provisional billing rates, which directly affects cashflow.  If the rates are too low, the billing will be low, leading to a reduction in much needed cashflow.  Once incurred cost rates are determined (the final rates of what actually happened after a year closes out) there will be a billing adjustment to address any over or under billing.  This adjustment could happen up to 6-8 months after the end of the fiscal year.  Large variances between the budget and actual expenses can result in money owed to the contractor, or worse, money owed back to the government.  The other issue is timing.  Billing rates can be submitted to the Defense Contract Audit Agency (DCAA) and take a significant time to be approved for use.  Budgets need to be reviewed quarterly and rates adjusted to avoid extended periods with large rate variances between what was charged and what was actually spent. 

Budgets are an internal control that can be useful in avoiding fraud, waste, and abuse which is important at all times, but under even more scrutiny when government (taxpayer) dollars are spent.  Budget variances can identify increased spending or losses resulting from spoilage and waste, error, failure of compliance with policies and procedures, or fraud and theft.  The variances between what was expected and what was spent must be reviewed and researched in order for this process to provide value.  Knowing that there was a variance can help adjust future spending and plans, but knowing WHY there was a variance helps identify issues and initiate corrective action. 

Budgets can take years to finesse to reflect how your business is performing but everyone needs to start somewhere. Though it can seem a bit daunting, over time your budget will become one of your most valuable resources and a powerful tool.