Line Item Budget

Line Item Budget is the presentation of expenses in column format, wherein such expenses are grouped according to their category like Advertisement, Canteen Supplies, Transportation reimbursement, etc., and provide the time series comparison of year-wise performance.  It helps the help managers to estimate whether the budget for the current year is in line with the previous year's budget or more.

It is common for small to medium-sized organizations to implement a line item budget table because it can be quickly created and is easy to maintain. It is also used as a comparison metric for previous periods of expenditure. The basic function, however, is to ensure that the total inflow of funds is sufficient to meet the expenses of the company.

A line item budget is a method by which small and medium-sized businesses document and monitor their financial spending. The items within this table are categorized according to the nature of the spending for easy navigation through the report.

An efficiently curated line item budget sample shall help the user navigate through the company's financial aspects, including past and future reports. However, it is majorly used only for financial reporting.

Line Item Budget is straightforward to prepare and maintain. Small businesses that don’t have sophisticated account knowledge can take the help of this budget to check their monthly expenses. Being over the budget doesn’t necessarily mean that cost has shot up; it could be that revenue has increased due to the extra cost. Therefore, this aspect should be kept in mind during the decision-making process

The very fact that curating this report does not require a finance or accounting background gives businesses the ease of creating them without extra costs and time-consuming analysis. In fact, an organization can have multiple such reports department-wise or even product-wise to analyze each of these factors individually.

Let us understand the purpose behind curating a line item budget table through the points below.

• Line item budget is mainly used by small businesses that don’t know about sophisticated accounting systems and don't have the infrastructure and budget to set up one. It doesn't reflect revenue; they only show the expense. So they depend on this simple budget where several categories of Expenses are presented in a line.
• The primary purpose of Line Item is to help managers control their expenses. If in any month, the expense crosses as compared to the previous month, then the manager becomes alert and controls the expense to match the overall yearly budget compared to the previous one. The comparison between the past and present expense figures always signs a warning for the managers.

Let us understand the aspects of an exemplary line item budget sample with the help of an example. This example shall give us a practical overview of the concept and its intricacies.

Mr. X is the budget specialist for a small business that operates in New York. He has prepared the Line budget for January 2020 and is planning necessary steps that should be taken to not deviate from the yearly planned budget.

Solution

So after studying this budget, the manager sees that the Budgeted expense for January was $68,500, and the Actual Expense was $74,000. So the organization has spent more than what was estimated.

Now the manager will check individual expense categories minutely to see where precisely the budget has crossed the estimate and will take necessary measures to prevent that from happening in the next month.

Office supplies need to be checked; as office supplies have crossed the budget, it means more supplies were ordered this month, and it should also be enough for the next month, so the ordering of office supplies for the next month should be below. The salary is in line. So no adjustment is required. Advertising cost has gone up, so it needs to be checked next month.

Canteen Expenses have increased by a small amount, and it is difficult to check as you can’t ask employees to eat less, but you can request them to stop wasting food. So awareness needs to be taught.

Different characteristics come together to form the line item budget table. Let us understand then through the explanation below.

• Line Item Budget is a columnar representation of expenses. Several categories of expenses are represented column-wise, and each category can be compared with the previous year in a single row.
• Suppose it is seen that for a particular category, the expenses are rising year on year. In that case, it may be due to inflation in that specific category, and it should be balanced by reducing expenses in other categories. Several past-year columns can also be created to see whether the trend of expenses is upward-sloping or downward-sloping.
• For the current year column, decide what should be the budget considering inflation and several other economic factors. Decide the budget and fill the column with an approximate budget. After the month has passed, fill in the real expense and see how much you deviated from the projected budget.
• Usually, it is prepared month-wise. It helps managers curtail expenses in case monthly budgets are way out of line compared to projections.

Let us understand the advantages of including an efficient line item budget sample through the points below.

• Creation and understanding of Line Item Budget are straightforward. You don’t require accounting knowledge to understand which item will be debit or credit. You need to fill the actual and projected expenses in tabular format. The difference can be seen in the naked eye and can be compared easily with the previous year's data.
•  If the expense has crossed a stipulated budget in any particular month, it acts as an alarm, and managers become attentive to control the budget for the following months.

Despite the advantages mentioned above and through other sections of the article, there are a few factors that prove to be a disadvantage of implementing a line item budget table. Let us discuss them through the points below.

• The line budget is fixed at the beginning of the year. It requires permission from higher authorities to make changes in the Line Item Budget. So if the manager feels that the prepared budget is not a correct reflection of the estimated expenses due to precise changes, then the manager can't change the budget.
• As it only concentrates on the expenses, it gets difficult for managers to show the exact reason the budget has crossed the estimation. It could be that the salary  payable  has increased due to the appointment of new employees, which has increased revenue. Still, as there is no place to show the change in revenue, salary expense increase is treated as over budget.

Although both a line item budget sample and a program budget provide a financial overview of the business, there are differences in their purpose, fundamentals, and implications. Let us understand them through the comparison below.

Line Item Budget

• The main purpose of this type of report is to incorporate financial accountability. As in, it is to ensure the funds are being spent on things that make the process of the key features of the business more efficient.
• It also keeps a check on the misappropriation of funds and uses formulae such as “fair share” to ensure the budget is more balanced.
• It takes the previous year as a base for comparison with present and future reports of similar nature.
• It requires minimal effort and time of employees to create due to the simplicity of this report and how easy it is to maintain them.
• It makes structures with complexity and conflict easier to deal with as the pattern is self-explanatory and expenditures of similar nature can be clubbed together to curate an effective budget.

Program Budget

• It refers to a budget that is curated to ensure project or program accountability. As in, it checks if the objectives of the project are being achieved and if the funds are used efficiently to deliver the results of a specific project.
• Program or project analysts and managers are the central curators of such reporting structures.
• It requires some sort of expertise to curate the goals, objectives, and action plan of a program.
• Creates a clear link between the budget allocated and the activities fulfilling the objectives of the program.
• It requires significant allocation of resources and there is a considerable chance of conflict.

This article has been a guide to what is the Line Item Budget. Here we explain its examples, advantages, and disadvantages, and compare them with the program budget. You can learn more about finance from the following articles –

• Advertising Budget
• Budget Analyst
• Budget Analyst Careers
• Activity-Based Budgeting
• Prestige Pricing