The 5 Step Budgetary Control Process Financial Management in practice

What is Budgetary Control?

To reap the benefit of a budgetary control system it should cover all the areas organization. As the resources are directed to the most productive use, budgeting helps in reducing the wastages and losses. Budgeting is a coordinated exercise and hence combines the ideas of different levels of management in the preparation of the same.

Budgetary control demands a significant investment of time, money, and effort on the organization’s side. Unlike other business activities that help to increase sales, budgetary control solely serves as a management tool. Therefore, to put it simply, budgetary Management merely aids in controlling spending; it plays no part in generating money. A budget performance report is the comparison of the planned budget with the actual performance for a particular department, project, or event. You can compare present account transactions with the budget values of the same period. Reflecting on your past helps you clarify your future. Budget reporting lets you see the difference between the budget you made versus the actual spending.

Advantages of Budgetary Control:

The budget estimates should also provide for necessary allowance to the made in the budget figures and suggest what the figure should have been with the level of activity actually attained. The influence of the key factor must be assessed first in order to ensure that functional budgets are reasonably capable of fulfilment. It relates to capital expenditure and budgeted investment in fixed assets. It is also related to the capital structure, liquidity, loan capital and overdraft facilities. A budget is prepared for a definite future period of time . To lay a system of comparison of actual performance of each person, section or department with the relevant budget and to ascertain the causes for the variations / discrepancies, if any.

Every departmental head worries for his department goals without thinking of business goal. Every department tries to get maximum allocation of funds and this raises a conflict among different departments. Under budgetary control system the targets are given to every person in the organization. The common tendency of people is to achieve the targets only. There may be some efficient persons who can exceed the targets but they will also feel contented by reaching the targets. So budgets may serve as constraints on managerial initiatives.

The split of organizations’ goals

The process enables financial managers to precisely define how and when budgets are controlled. The functionality facilitates real-time budget checking and thereby, prevents unauthorized deficits. Supported Business Processes are procurement flows, Journal Vouchers, Purchase Invoices and so on. Budgetary Control is an important concept for businesses of all sizes to understand. It involves setting up a budget that is realistic and achievable, then implementing controls in order to ensure the budget is followed.

  • For this reason fixed budget have got only theoretical relevance.
  • As shown in the table below, budget control and budget monitoring are closely related, but vary slightly in their application.
  • Budgetary control settings determine spending limits at the award, task, resource group , and resource levels in a project.
  • A budget is a numerical statement expressing the plans, policies and goals of the enterprise for a definite period in the future.
  • For example, cutting of present advertisement costs may affect future sales.
  • The departments track actual spending to see if they’re running out of money.
  • It also lists out details of the responsibilities of different persons and the managers involved in the process.

A key factor or a principal budget factor is that factor the extent of whose influence must first be assessed to prepare the functional budgets. For the successful implementation of the budgetary control system, there is a need for a budget committee. In small or medium-sized organizations, the budget-related work may be carried out by the Chief Accountant himself. A proper environment should be developed in the organization for the successful implementation of budgetary control. The employees should be educated about the utility of the system. The accounting system should be designed in such a way that c the actual performance of various responsibility centers can be readily available for comparison with the target. Budgets of this type are expressed in non-financial sales or revenues and expenses, i.e. profit.

Operating Budgets

Organizations often acquire such assets by borrowing significant amounts through, say, long-term bonds or securities. A system of budgetary control should not become rigid. The control functions should not be extreme to put personnel under pressure.

  • Budgetary control aims at maximisation of profits through careful planning and control.
  • Historical data form the basis for the budget estimates.
  • Supported Business Processes are procurement flows, Journal Vouchers, Purchase Invoices and so on.
  • This enables budget holders to identify their actual budget position at any point in time.

It shows how well you performed in that subject during the school year. Management can set goals and evaluate the progress. Budgets are an important element of an organization’s control system. It is difficult to imagine an organization functioning without proper budgetary provisions. Budgets coordinate the activities of the entire organization by integrating the plans of its various parts. Budgeting helps to ensure that everyone in the organization is pulling in the same direction.

Budgetary Control Settings

Each one is aware of its task and is fully conscious as to the best way by which it is to be performed. It compels all members of management to participate in the establishment of goals of the organisation. Detailed analysis is needed in case of variances whether they are favourable or unfavourable. Standards are What is Budgetary Control? mainly for production expenses, i.e., elements of cost. The managers, who unnecessarily try to inflate the budget requests, are likely to be caught and exposed. Management accords its approval only to a carefully devised result-oriented package. It does not consider the variances due to change in the volume.

What is Budgetary Control?

Because of future uncertainties, assumed conditions may not prevail necessitating the revision of budgetary targets. The frequent revision of targets will reduce the value of budgets and revisions involve huge expenditures too. The planning of expenditure will be systematic and there will be economy in spending. The benefits derived for the concern will ultimately extend to industry and then to national economy. The national resources will be used economically and wastage will be eliminated.

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