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Budgets and Expense Allocation

Budgets and Expense Allocation

Most organizations implement critical strategies through some form of spending. Typically, this spending comes in the form of the purchase of capital equipment or the hiring of additional staff and their accompanying support materials and services. It may also be reflected in larger spending on new product development or through additional marketing and advertising. All of these are strategic efforts that are usually implemented through procurement.

A budget can be viewed as an organization's spending plan. Usually, budgets are allocated (or funded) to specific departments or functional areas, cost centers, or projects, and incoming goods and services are charged against those accounts. To a large extent, an approved budget may be the final authorization to proceed with expenditures.

Because adherence to an established budget can mean the difference between profit and loss in a business organization, or the continuation of operations in a nonprofit, management takes the budget seriously and pays close attention to individual areas of conformance. This may explain the sensitivity that internal users often manifest when ensuring that business expenses are charged to the correct cost code.

The Finance Department usually manages the control and allocation of expenses and is responsible for categorizing and reporting actual expenditures. Finance is also responsible for paying suppliers and requires that specific criteria be met prior to disbursing the organization's funds. For materials, accounting practice typically requires that a duly authorized PO and a Receiving Document, along with the supplier's invoice, are in place prior to payment. (In the case of services, usually a sign-off on the supplier's invoice by the budgeting manager or department head indicating satisfactory completion of the service is required in lieu of a receiving document.) This is commonly referred to as a three-way match.

Business expense policy, along with internal and external auditors, verifies that purchases are made in accordance with approved policies and procedures. To the extent that Procurement implements (or at least touches in some significant manner) most of these procedures in its dealing with suppliers, it becomes an instrument of the organization's financial apparatus and undergoes periodic audits to ensure proper conformance.

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