Simplify the budget model

The typical budget model starts as a relatively uncomplicated spreadsheet, and then gains complexity over time to reflect the increasing complexity of a business, or because management wants to include more information in the model. Over time, these additions can result in an overly cumbersome budget model that is difficult to use and laced with formula errors. For example, a budgeted balance sheet may not be used in the original model and is added at a later date, along with manual adjustments to make the balance sheet balance correctly. If not properly monitored, it is entirely likely that the balance sheet will not balance or will yield absurd results.

There are several ways to avoid complexity in the budget model. Consider the following actions:

  • Schedule an annual review of the model, with the express intent of simplifying the formulas and reducing the level of information that it contains.
  • Document the reasons why various parts of the model are being used, and which parts require updating. Having to document these items may keep the budget analyst from including them in the model. Or if a section must be retained, at least it is properly documented.
  • Have a third party review the model from time to time, to suggest alternative ways to simplify the model.
  • Periodically review the need to swap out the in-house model for a commercially-available budget model, for which the risk of modeling errors is much lower.

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Capital Budgeting