An authorization generates a commitment - an obligation to pay for products or services solicited. Commitments should reflect what has been budgeted, but for control purposes, commitments should be tracked separately. Without having clear up-to-date information on outstanding commitments, it could be easy to overspend the budget, or disrupt a projected cash flow. A budgeted expenditure is planned, and a forecasted cash flow is projected, but a committed expenditure is a real obligation that will be realized.
Many companies have a formal system for tracking commitments. This could be in the form of a commitments log. This log may consist of different types of registers, or they may all be combined into one single log. The basic components would include:
Contract log
Contracts for recurring services that are billed on a monthly, quarterly, annual or other basis
One-time contracts, for specific projects or jobs
Purchase order log
Work request log
Some of the advantages to be gained by establishing and using a commitments log include the following:
It can be used to report on the status of the budget – total original budget, amount committed to date, budget remaining.
It can serve as the basis for the disbursement side of cash flow projections:
Due dates for contracts with recurring payments
Payment schedules for contracts for specific projects or jobs
Delivery dates and payment terms on purchase orders
It can be used for verification of invoices and progress payments on contracts.
It can be used as a tool in determining and following up on timelines of progress on projects or business operations.