As Business Owner, Are You Losing Your Sleep Over Issues Concerning the Direction Of Your Business For Growth?
Such grave issues may touch upon:
- Revenue forecasting
- Estimation of expenses
- Cash flow projections
- Debt servicing schedule
And what not!
Probably to enjoy a sound sleep, it is imperative for you to adopt a system of faultless Budgetary Control in your business. Then see for yourself, how clear and concise is the path to profit.
Understand the Nuances
- Budget is a blue print of a plan expressed in quantitative terms.
- Budgeting is technique for formulating budgets.
- Budgetary Control denotes the principles, procedures and practices of achieving given objectives through budgets.
Connotation of Budgetary Control
Budgetary control is a system of controlling cost.
- Preparation of budget.
- Coordinating the departments.
- Establishing responsibility centres.
- Comparing performance with budgeted targets.
- Acting upon results to achieve the maximum profit.
Fundamental Principles of Budgetary Control
- To establish plan and target performance for coordination of all activities of business.
- To record actual performance.
- To undertake continuous comparison of actual vis-a-vis planned performance.
- To ascertain variances and analyse the reasons.
- To take remedial action.
Major Objectives of Budgetary Control
- To ensure planning for future by setting up various budgets.
- To co-ordinate the activities of different departments.
- To operate various cost centres and departments with efficiency and economy.
- Elimination of wastes and increase in profitability.
- To anticipate capital expenditures for future.
- To centralize the control system.
- Correction of deviations from the established standards.
- Fixation of responsibility of various individuals in the organisation.
Characteristics of Good Budgeting:
- A good budgeting system should involve persons at different levels while preparing the budgets
- There should be a proper fixation of authority and responsibility. The delegation of authority should be done effectively.
- Targets of the budgets should be realistic..
- A good system of accounting is also essential to make the budgeting successful.
- The budgeting system should have a whole-hearted support of the top management.
- The employees should be imparted budgeting education.
- A proper reporting system should be introduced.
- The actual results should be promptly reported so that performance appraisal is undertaken.
Budgetary Control Incorporates the following Features
- The objectives are set for preparing budgets.
- The business is divided into various responsibility centres for preparing various budgets.
- The actual figures are recorded.
- The budgeted and actual figures are compared to ascertain he performance of different cost centres.
- If actual performance fails to conform to the budgeted norms, a remedial action is ensured immediately.
3 Cardinal features of budgetary control are:
Techniques for Budgetary Control
Budgetary Control is a system for monitoring an organization’s process in monetary terms.
Types of budgetary controlling techniques are:
- Financial Budgets.
- Operating Budget.
- Non-Monetary Budgets.
- Cash budget
- Capital expenditure budget
- Balance sheet budget
- Sales or revenue budget
- Expense budget
- Project budget
- Fixed and variable budget
Pre-requisites for Effective Budgetary Control System
A good budgetary control system depends upon the following conditions:
Support from top management
The effective implementation of the budgetary control system depends upon the attitude and perception of management.
If the top executive takes the budgeting as a mere routine job and does not take any interest in its implementation, it will turn out to be a futile exercise.
Quantification of organizational goal
Organization goals should be clearly expressed and quantified leaving no scope for any misconception.
Creation of responsibility centre
The entire organization should be divided into sections and subsections with a clear assignment of responsibility.
Clarity on organizations goals
The goals of each department or responsibility center should be spelled out towards the attainment of the overall goals of the organization.
The functional goals and the organizational goal should go hand in hand.
The target to be set in the budget should be fairly attainable to sustain the motivation of every employee.
All the key employees should be made involved in the preparation of the budget to elicit total commitment.
Good accounting system
The accounting system should be so designed to ensure the comparison of the actual performance of various responsibility centers with the set target.
Creates environment conducive to budgetary control
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.
Seminars, lectures, executive development programs, etc. help the cause.
Co-ordination is an important requirement” of budgetary control.
It brings in common thinking, mutual trust, and confidence amongst various departments.
A budget should be amenable to change if so warranted.
The actual performance vis-a-vis the target should be continuously reported to the
Stages of Budgetary Control
It is essential to identify the budget centers in the organization and budgets will have to develop for each one of them.
Budgets are developed for functions like purchase, sale, production, manpower planning as well as for cash, capital expenditure, machine hours, labour hours, etc.
Recording Actual Performance
There should be a proper system of recording the actual performance achieved.
This will facilitate the comparison between the budget and the actual.
Comparison of Budgeted and Actual Performance
The objective of such a comparison is to find out the deviation between the two and provide the base for taking corrective action.
Taking appropriate corrective action based on the comparison between the budgeted and actual results is the essence of budgeting.
A budget is prepared for the future. There may be a variation between the budgeted results and actual results.
Process for Preparation for Budgetary Control
For complete success, a solid foundation should be laid down, and given this, the following aspects are of crucial importance.
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.
However, in a large size organization, there is a need for a budget committee consisting of the chief executive, budget officer, and heads of main departments in the organization.
The main functions of the budget committee are:
- To get the budgets prepared and then.
- To scrutinize the same.
- To lay down broad policies regarding the preparation of budgets.
- To approve the budgets.
- To suggest for revision.
- To monitor the implementation.
- To recommend the action to be taken in a given situation.
A budget center is a group of activities or a section of the organization for which a budget can be developed.
Budget centers should be defined clearly so that preparation becomes easy.
The period for which a budget is prepared is decided in advance.
It may be prepared for three years, one year, six months, one month, or even for one week.
Preparation of an Organization Chart
There should be an organization chart that shows clearly defined authorities and responsibilities of various executives.
The organization chart will define clearly the functions to be performed by each executive relating to the budget preparation and his relationship with other executives.
The organization chart may have to be adjusted to ensure that each budget center is controlled by an appropriate member of the staff.
The budget manual is a schedule, document, or booklet, which contains:
- forms to be used.
- procedures to be followed.
- organization details.
- set of instructions to be followed in the budgeting system.
Principal Budget Factor
A principal budget factor also called constraint must first be assessed to prepare the functional budgets.
- In general way, sales are the principal budget factor.
- However, other factors like production, purchase, and skilled labour may also be the key factors.
- In all conditions, the key factor is the starting point in the process of preparation of budgets.
Establishment of Adequate Accounting Records
The accounting system must be able to record and analyze the transactions involved.
A chart of accounts or accounts code should be maintained which may correspond with the budget centers for the establishment of budgets and finally control through budgets.
Budget and Budgetary Control: A Distinction
How to Improve Efficacy of Budgetary Control
Budgetary control can be made effective if an organization ensures:
Setting appropriate standard
Many budgets fail for lack of such standards At times the upper-level managers hesitate to allow subordinates to submit budget plans for fear that they may have no logical basis for reviewing budget requests.
Ensuring top-management support
Budget-making and administration must receive the whole-hearted support of top ‘management.
Participation by users in budget preparation
The concerned managers at lower levels should also participate in budget preparation.
It may be worthwhile to give department managers a reasonable degree of latitude in changing their budgets and in shifting funds, within the overall ambit of budget perspective.
Providing information to managers about performance under budget
For successful budgetary control, managers need ready information about actual and forecast performance under budgets by their departments.
Such information must be so designed as to show them how well they are doing.
Budgetary control is an important device for making the organization an important tool for controlling costs and achieving the overall objectives.
Benefits of Budgetary Control
- Ensures economic working of a business enterprise.
- Establishes coordination among budget centres.
- Delineates specific responsibilities.
- Ensures optimum utilisation of resources for production and profit.
- Serves as a base for installation of standard costing.
- Ensures continuous evaluation of performance.
- Forces management to visualise and plan ahead.
- Budgeting involves formulation of plans for a given future period in numerical terms.
- Budgets may be created for units, departments, divisions, or the entire organization.
- The usual period for a budget is one year.
- It is generally expressed in financial terms.
- Budgets are the foundation of most control systems.
- They provide yardsticks for measuring performance and facilitate comparisons across divisions, between levels in the organization, and from one period to another.
- It is evident that Budgetary Control helps the business enterprise substantially in directing.
- It places the scarce resources to most productive and profitable use.
Ultimately, it succeeds in ensuring overall efficiency of business.