Budgetary Control: Meaning, Objectives, and Advantages

Budgetary Control: Meaning, Objectives, and Advantages

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Chanchal
Chanchal Aggarwal
Senior Executive Content
Updated on Feb 15, 2024 19:34 IST

Budgetary control is a systematic process that helps organizations monitor and manage their financial performance by comparing actual results with planned budgets. It allows businesses to track expenses, identify variances, and take corrective actions to meet financial goals.

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Think of budgetary control like navigating a road trip with a GPS. Just as a GPS guides you to your destination, setting the best route and adjusting for traffic or roadblocks, budgetary control guides a business towards its financial goals. It sets the financial route, monitors progress, and adjusts for unexpected expenses or changes in revenue, ensuring the business stays on track. 

Table of Content

What is Budget?

The budget is a blue-print of the projected plan of action expressed in quantitative terms and for a specified period. The budgets put the plan in a concrete form and follow up action to see that the plan adheres to complete the system of control. It shows income and expenses plan of spending. It shows how much money you will earn and spend over a while.

Creating a budget is to manage personal or organizational finances effectively. It predicts future financial activity and sets spending limits. This tool helps you track your spending, identify areas where you can save money, and make informed investment and saving decisions. Businesses and organizations prepare their budgets monthly, quarterly, or yearly. 

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What is Budgeting?

Budgeting is the art of planning. It is the process of making a plan to spend money. Making this spending plan helps the companies determine whether they have enough money to do the things they need or would like to do.

If your expenses exceed your spending, you can use the planning process to prioritize the more essential things. It involves making a comprehensive list of expenditures or focusing on a few categories. Some companies use to prepare budgets using spreadsheets, while others use budgeting apps.

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What is Budgetary Control?

“The establishment of budgets, relating the responsibilities of executive to the requirements of a 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”

The Chartered Institute of Management Accountants,
London

In a budgetary control system, performance and costs are controlled in different parts of the business:

(i) by setting budgets

(ii) by comparing actual results against the budgets; and

(iii) taking corrective action and remedial measures (if necessary).

Budgetary control is a management accounting technique that continuously compares actual results with the budgets. This comparison helps identify variances or deviations and promptly take appropriate remedial actions. This system controls budgets by coordinating with various departments and establishing and comparing them with the actual results.

It implies regularly comparing actual expenses with the planned income and expenses. Preparing aims to ensure corrective measures in case of any variances. The essence of budgetary control lies in its ability to provide a proactive framework for financial management. It ensures that an organization remains on track to achieve its financial and operational goals.

Gain a deeper understanding of accounting principles and practices, enrol to accounting programmes from the top colleges, explore online accounting courses, and make a career in this highly rewarding field.

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Objectives of Budgetary Control

The main objectives of budgetary control are to:

  • Plan for the Future: Budgetary control helps organizations plan for the future by forecasting future income and expenditures. This allows organizations to recognize potential problems and develop strategies to address them.
  • Coordinate Activities: Budgetary control helps to coordinate the activities of different departments and units within an organization. As a result, everyone works towards the same goals and resources are not duplicated.
  • Control Costs: It helps organizations control costs by setting targets for spending and tracking actual performance against those targets. This allows organizations to identify areas where costs are overspending and take corrective action.
  • Improve Efficiency: It helps organizations improve efficiency by identifying areas where resources are ineffective. This can lead to changes in processes and procedures that can save the organization money.
  • Increase Profitability: Budgetary control can help organizations increase profitability by using their resources efficiently and effectively. This can lead to higher revenues and lower costs, which in turn can boost profits.

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Example of Budgetary Control in Management Accounting

Imagine an Indian IT company sets an annual budget for a project at ₹50 lakhs. The budget allocates ₹20 lakhs for software development, ₹15 lakhs for marketing, and ₹15 lakhs for operational costs. Mid-year, they find software development has already cost ₹22 lakhs due to unforeseen complexities.

To maintain budgetary control, they adjust by reducing marketing spend to ₹13 lakhs and streamlining operations to save ₹2 lakhs, ensuring the total expenditure remains aligned with the initial ₹50 lakhs budget.

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Steps in the Budgetary Control Process

 

 

 

 

 

 

 

 

 

 

 

 

 

Set Financial Objectives: The first step in the budgetary control process is determining the organization’s financial objectives. This might include increasing revenue, reducing costs, improving cash flow, or increasing profit margins.

Develop a Budget: Once the financial goals have been identified, a comprehensive budget should be developed that outlines expected income and expenditures for the budget period. The budget should be broken down by department, product, or project, and it should be realistic and achievable.

Implement the Budget: Once the budget has been developed, it must be implemented within the organization. This might involve communicating the budget to employees. Everyone should understand their role in achieving the budget goals and how their spending will be monitored.

Track Performance: The final step in the budgetary control process is monitoring performance against the budget. This might involve comparing actual expenditures and revenues to budgeted amounts, tracking cash flow, and reviewing financial reports. This can be done monthly or quarterly, depending on the organization’s size and needs.

Taking Corrective Action: If the organization is not meeting its budgeted targets, it may be necessary to take corrective action. This might involve reducing expenditures, increasing revenue, or changing the budget.

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Advantages of Budgetary Control

  • Improved Financial Performance: Budgetary control can help organizations improve their financial performance by ensuring that they are using their resources efficiently and effectively. This can lead to enhanced revenues, lower costs, and improved profitability.
  • Better Decision-Making: Budgetary control provides organizations with a better understanding of their financial performance. Companies can use this information to make better decisions about where to allocate resources, how to grow the business, and how to manage risk.
  • Increased Accountability. Budgetary control helps to increase accountability within an organization by setting clear and achievable goals for individuals, departments, and the organization. In addition to motivating employees to work harder and smarter, this can help identify and address performance problems early on.
  • Improved Coordination and Communication: Budgetary control helps to improve coordination and communication between different organisational departments and units. The reason is that everyone is working towards common goals and is aware of the budget and how their performance will impact the organisation’s financial performance.
  • More Efficient Use of Resources: Budgetary control enables organizations to identify areas to reduce or eliminate costs. Thereby helping them use resources more efficiently. This can lead to savings that the organization can reinvest in other business areas or use to improve profitability.

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In addition to the advantages listed above, budgetary control can also help organizations to:

  • Reduce Waste and Fraud. By tracking actual performance against budgeted results, organizations can identify areas where waste and fraud may occur. This can lead to savings and improvements in efficiency.
  • Improve Customer Service. By using budgetary control to ensure that resources are allocated efficiently, organizations can improve their customer service by offering customers the products and services they need when they need them.
  • Enhance Investor Confidence. Organizations can enhance investor confidence by demonstrating that they have a good understanding of their financial performance and that they are managing their resources effectively. This can lead to improved access to capital and lower borrowing costs.

Limitations of Budgetary Control

  • It is based on estimates: Budgets are based on estimates of future income and expenditures. These estimates can be inaccurate, especially in a rapidly changing business environment. This can lead to budgets that are unrealistic and unattainable.
  • It can be inflexible: Budgets are typically set for some time, such as a year or a quarter. This can make responding to unexpected events, such as a recession or a natural disaster, difficult.
  • It can be time-consuming and expensive to implement: Developing and maintaining a budgetary control system can be time-consuming and expensive. This can be especially challenging for small businesses.
  • It can be difficult to motivate employees to support the budget: Employees may not be motivated to support the budget if they feel it is unrealistic or unattainable. Therefore, it is important to communicate the budget to employees and explain how it is aligned with the organization’s strategic goals.
  • It can lead to conflicts between departments. Departments may compete for resources and blame each other for budget overruns. It is important to create a culture of cooperation and collaboration between departments.

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Tips To Minimize Limitations of Budgetary Control

Here are some tips for minimizing the limitations of budgetary control:

  • Use Realistic Assumptions: When developing budgets, use realistic assumptions about future income and expenditures. This will help to ensure that the budgets are attainable.
  • Build in Flexibility: Build flexibility to budgets so organizations can respond to unexpected events.
  • Communicate the Budget to Employees. Communicate the budget to employees and explain how it is aligned with the organization’s strategic goals. This will help to motivate employees to support the budget.
  • Create a Culture of Cooperation and Collaboration. Create a culture of cooperation and collaboration between departments to minimize conflicts.
  • Review the Budget Regularly. Review the budget regularly and make adjustments as needed.

Conclusion

Budgetary control is an indispensable tool in the realm of financial management, serving as a compass that guides businesses towards their financial and operational objectives. It's not just about setting budgets; it's about the continuous process of monitoring, comparing, and adjusting based on actual performance. This dynamic approach ensures that organizations remain agile and responsive to changing circumstances, thereby optimizing their financial resources.

FAQs

What is budgetary control?

Budgetary control is the process of setting, monitoring, and adjusting budgets to ensure that actual financial results align with the organization's objectives.

Why is budgetary control important?

Budgetary control is important because it helps organizations to plan for the future, identify potential problems, allocate resources effectively, and improve decision-making.

What are the benefits of budgetary control?

The benefits of budgetary control include improved financial management, better control over costs, increased accountability, more efficient use of resources, and improved decision-making.

What are the key components of budgetary control?

The key components of budgetary control include setting budgets, monitoring performance against budgets, analyzing variances, taking corrective action, and adjusting budgets as necessary.

What are some common challenges of budgetary control?

Common challenges of budgetary control include inaccurate forecasting, unexpected changes in the business environment, inadequate communication and collaboration, and resistance to change.

How can organizations improve their budgetary control processes?

Organizations can improve their budgetary control processes by setting realistic goals and targets, involving all relevant stakeholders in the budgeting process, regularly monitoring and analyzing financial performance, using technology to automate and streamline processes, and fostering a culture of accountability and continuous improvement.

About the Author
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Chanchal Aggarwal
Senior Executive Content

Chanchal is a creative and enthusiastic content creator who enjoys writing research-driven, audience-specific and engaging content. Her curiosity for learning and exploring makes her a suitable writer for a variety ... Read Full Bio