Budget and Budgetary Control

Budget and Budgetary Control

Budget :  Every business no matter how small needs budget

Budget is defined as :

1.     Any financial plan serving as an estimate of and a control over future operations.

2.     Any estimate of future costs.

3.     Any systematic plan for the utilization of manpower, material or other resources.

4.     A budget is a blueprint of plan of action to be followed during a specified period of time for the purpose of attaining a given objectiv

5.     A financial and/or quantitative statement prepared prior to a defi ned period of time, of the policy to be pursued during that period for the purpose of achieving a given objective

Essential features of a budget are as follows:

1.     It is a statement prepared in monetary terms for implementation of a policy formulated by management.

2.     It is laid down before the budget period during which it is to be followed.

3.     It is prepared for a definite future period.

4.     The policy to be followed to attain the given objective is laid down before preparation of the budget.

5.     It is prepared beforehand based on a future plan of actions;

6.      It is related to a definite future period and is based on the objectives to be attained;

7.      It is expressed in financial terms

Objectives of Budget

Planning: A set of targets/goals is often essential to lead and focus individual and group actions. Planning not only motivates the employees but also improves overall decision making.

Directing: Business is very complex and requires more formal direction and coordination. Once the budgets are in place they can be used to direct and coordinate operations in order to achieve the stated targets.

Controlling: The actual performance can be compared with the planned targets. This provides prompt feedback about performance. budget also prevents unplanned adhoc expenditure

Budgetary Control

“The exercise of control in the organization with the help of budgets is known as Budgetary Control”.

Budgetary Control is intimately connected with budgets. 

Budgetary Control as “the establishment of budgets, relating the responsibilities of executive to the requirements of policy and the continuous comparison of actual with budgeted results either to secure by individual action the objectives of that policy or to provide a firm basis for its revision”.

budgetary control means laying down in monetary and quantitative term what exactly has to be done and how exactly it has to be done over the coming period and then to ensure that actual results do not differ from the planned course of action.

Budgetary control system is an excellent system for decentralization of authority without losing control over the operations of the firm. It secures control over performance and cost in the different parts of business. Budgetary control involves the following:

1.         To establish budgets

2.         To compare actual results against the budgeted results,

3.         To take corrective action and remedial measure

Objectives of Budgetary Control:

1.         To use different levels of management in a co-operative manner for achievement of the   objectives of the firm.

2.         To facilitate centralized control with delegated authority and responsibility.

3.         To achieve maximum profitability by planning income and expenditure through optimum of use of the available resources.

4.         To ensure adequate working capital and other resources for efficient operation of the business.

5.         To reduce losses and wastes to the minimum.

6.         To bring out clearly where effort is needed to remedy the situation.

7.         Various activities like production, sales, purchase of material etc. are coordinated with the help of budgetary control.

8.         To see that the firm is not deflected from marching towards its long term objectives without being overwhelmed by emergencies

advantages of a budgetary control system are discussed below:

1.         Budgetary control aims at maximization of profits through effective planning and control of income and expenditure- directing capital and resources to the best and most profitable channel.

2.         There is a planned approach to expenditure and financing of the business so that economy is affected in the utilization of funds to the optimum benefit of the concern.

3.         It provides a clear definition of the objective and policies of the concern and a tool for objecting these policies to periodic examination.

4.         The task of managerial coordination is facilitated through budgetary control.

5.         Since each level of management is aware of the task and is fully conscious as to the best way by which it is to be performed, maximum effective utilization of men, materials and resources can be attained.

6.         It cultivates in the management the habit of thinking ahead- making careful study of the problems in advance before taking any decision.

7.         A budgetary control system assists delegation of authority and is a powerful tool of responsibility accounting.

8.         Budgets are the fore-runners of standard costs in the sense that they create necessary conditions to suit setting up of standard costs.

9.         The method of evaluating performance against budgets provides a suitable basis for establishing incentive system of remuneration by results as also spotting people with exceptional qualities of leadership and management.

10.        Since it involves foreseeing difficulties of various types, it will lead to their removal in time.

Limitations of budgetary control system:

1.         Budgetary control starts with the formulation of budgets which are mere estimates. Therefore, the adequacy or otherwise of budgetary control system, to a very large extent, depends upon the adequacy or accuracy with which estimates are made

2.         Budgets are meant to deal with business conditions which are constantly changing. Therefore, budget estimates lose much of their usefulness under changing conditions because of their rigidity. It is necessary that budgetary control system should be kept adequately flexible.

3.         The system of budgetary control is based on quantitative data and represents only an impersonal appraisal to the conduct of business activity unless it is supported by proper management of personal administration.

4.         It has often been found that in practice that organization of budgetary control system becomes top heavy and, therefore, costly especially from the point of view of small concern.

5.         It is part of human nature that all controls are resented to. Budgetary control which places restrictions on the authority of executive is also resented by the employees.

system of budgetary control certain prerequisites are to be fulfilled. These are as under:

1.         There should be an organization chart laying down in clear terms the responsibilities and duties of each level of executives and the delegation of authority to various levels.

2.         The objectives, plans, and policies of the business should be defined in clear cut and unambiguous terms.

3.         The budget factor or the key factor which will be the starting point of the preparation of the various budgets should be indicated.

4.         For formulation and efficient execution of the plan, a Budget Committee should be set up.

5.         There should be an efficient system of accounting to record and provide date in line with the budgetary control system.

6.         There should be a proper system of communication and reporting between the various levels of management.

7.         There should be a budget manual wherein all details regarding the plan and its procedure of operation are given as also the length of the budget period.

8.         The budgets should be comprehensive, complete, continuous and realistic to attain.

9.         The budget should primarily be prepared by those who are responsible for performance.

10.        There should be an assurance from the top management executives for cooperation and acceptance of the budgetary control system.

11.        For the success of a budgetary control system, it is essential that there should be a sound organization for budget preparation, budget maintenance, and budget administration.

Budgetary control is the process by which budgets are prepared for the future period and are compared with the actual performance for finding out variances, if any. The comparison of budgeted figures with actual figures will help the management to find out variances and take corrective actions without any delay.

Objectives of Budgetary Control

The main objectives of budgetary control are given below:

1. Defining the objectives of the enterprise.

2. Providing plans for achieving the objectives so defined.

3. Coordinating the activities of various departments.

4. Operating various departments and cost centres economically and efficiently.

:5. Increasing the profitability by eliminating waste.

6. Centralizing the control system.

7. Correcting variances from sit standards.

8. Fixing the responsibility of various individuals in the enterprise

Advantages of Budgetary Control

Budgetary control has become an important tool of an organization to control costs and to maximize profits. Some of the advantages of budgetary control are:

1.     It defines the goals, plans and policies of the enterprise. If there is no definite aim then the efforts will be wasted in achieving some other aims

2.     2. Budgetary control fixes targets. Each and every department is forced to work efficiently to reach the target. Thus, it is an effective method of controlling the activities of various departments of a business unit.

3.     3. It secures better co-ordination among various departments.

4.     4. In case the performance is below expectation, budgetary control helps the management in finding up the responsibility.

5.     5. It helps in reducing the cost of production by eliminating the wasteful expenditure.

6.     6. By promoting cost consciousness among the employees, budgetary control brings in efficiency and economy.

7.     7. Budgetary control facilitates centralized control with decentralized activity.

8.     8. As everything is planned and provided in advance, it helps in smooth running of business enterprise.

9.     9. It tells the management as to where action is required for solving problems without delay

Disadvantages or Limitations of Budgetary Control

The following are the limitations of budgetary control:

1. It is really difficult to prepare the budgets accurately under inflationary conditions.

2. Budget involves a heavy expenditure which small business concerns cannot afford.

3. Budgets are prepared for the future period which is always uncertain. In future, conditions may change which will upset the budgets. Thus, future uncertainties minimize the utility of budgetary control system.

4. Budgetary control is only a management tool. It cannot replace management in decision-making because it is not a substitute for management.

5. The success of budgetary control depends upon the support of the top management. If there is lack of support from top management, then this will fail.