One of the most difficult aspects of accountancy is a product of creating budget reports; advising budget cuts. Large scale cuts put alot of pressure on any size of business, but if it’s the advised course of action then it has to be done. A difference in income and liabilities can lead to some departments becoming underfunded, with analysis needed to know which departments can be downsized. The aim of a budget cut is not malicious, it is to keep a company profitable, or otherwise maximize net worth.
A budget cut for a company usually happens for one of three reasons: less market demand for the product or service, changing business model, or the value of assets lowering. If the product of a company is lowering in popularity, this is usually a gradual process, so budget cuts may be progressive rather than drastic. In this model, the cuts would likely to be slight to every department, as the aims are usually to downsize while keeping the same business model. There are some exceptions to this, such as if a contract is suddenly invalidated through bankruptcy or foreclosure. When this does happen, the budget cuts come suddenly and without warning.
The next reason for budget cuts within a company is that of changing business model; this may be a symptom of a greater problem, or the cause itself. For example, a business which begins as a supplier and manufacturer of a product may migrate to becoming a reseller. This would downsize certain departments, such as production and manufacturing, while increasing the budget for marketing and shipping departments. This change in business model is a form of budget cutting, though the business itself may not suffer.
The final reason for budget cuts is depreciation of assets belonging to a company. This is more commonly seen with large businesses, as their product may have a depreciating market value. For this model, think of a computer manufacturer; if they overstock on certain components, and they become outdated over time, their market value product is diminishing constantly. Assets such as properties and machinery generally depreciate much slower than final product, but only so much can be stored as an asset this way.
An accountant completing a balance sheet or budget report will likely advise which departments be downsized, and by how much. By analysing each department for expenditures and income, it’s simple to see which departments are in the black, and which the red. This doesn’t give a business-sense of how a department is doing, but it gives an indicator at least. For a large business, departments such as support and media may be seen as running a deficit, but they are still integral parts of your company. It should be obvious, but if budget cuts are facing your company, seek the help of an independent financial adviser to audit the company. Having a clear picture of unnecessary expenditures is critical, and money can often be saved by cutting in the least drastic areas.
