You must be familiar with the term Budgetary Control if you are a part of any business firm. It is a very common term that is used in every business organization small or big. If you are a part of the accounts department of any organization then you will not only have to have a great deal of knowledge about budgetary control but also have to take active participation in the whole process.
If you do not have any idea about the term and you are aspiring to join any enterprise as an accountant then you have landed the correct place. In this article, we are going to discuss in details about budgetary control and various factors related to it. Budgetary control is a very important term of Accounting and demands a good deal of attention. Therefore, you should go through this article very nicely and try to grab as much information as possible.
What is budget?
Before moving forward to the term budgetary control, you must have a clear idea about what is budget. Without having detailed knowledge about budget, you can never understand budgetary control properly. Budget is an official statement that holds the accounts of all the resources and finance related to the firm that is kept aside. This statement is used for the capital planning of the organization strategically.
Budget of any company is solely related to the capital of its business. There are also various kinds of budgets that are listed in any enterprise. These budgets include sales budget, production budget, marketing budget, investment budget, etc. Experts in accounting do all of these budgeting jobs and they need to possess a good deal of understanding of budgetary control.
Different types of budgets
Budget can be categorized in many ways.
Based on flexibility, budget can be divided into fixed budget and flexible budget.
As the name suggests, the fixed budgets are the budgets that are meant to be fixed. They remain strictly constant under every circumstance. These budgets will never change according to the scale of operation of the business. The other name for this kind of budget is Static budget. For example, salary of the employees falls under the category of fixed budget. It will not change with any alteration in sales.
This kind of budget is not at all fixed and is subjected to constant change. They can alter with the change in the scale of the business. If the business sees upraise then this budget can increase and if there is a downfall then this budget will decrease accordingly. It can be safely termed as dynamic.
This type of budget is subjected to easy modifications. They are completely based on factors that are highly variable. For example, the budget for sales is decided after checking on future scenarios. They cannot remain fixed throughout. The sales budget is subjected to regular changes.
Based on the operations of any business, budget can be termed as Master budget, which can be categorized further.
The master budget is regarded as the overall budget of any business. It comprises of all the individual budgets that are put together in a single category. The master budget includes all the small and big budgets that are made in any business and brings them together in a single column.
The master budget can be further categorized into:
- Production budget-
Production budget is the figure that has been decided by the management of any business and shows how much that company needs to produce to meet their future needs. This budgetary statement includes their estimated value of raw materials required for production, work force to be employed and other expenses that are related to the production process. All these estimated values together form their production budget.
- Sales budget-
This budget displays the estimated value of the sales of the company in the upcoming year. It projects the target of the business that it should meet.
- Marketing budget-
Marketing forms a very vital part of any business today. Many amounts are invested to get the perfect marketing done. Therefore, the marketing budget, as the name suggests, is the amount of money that is allocated for the marketing of the business.
- Cash flow budget-
This category of budget is used to evaluate the flow of money within a business. The expected income and expenditures come under this category of budget. They are enlisted in details in the statement of cash flow budget.
- Investment budget-
The estimated amount of money or resources that are allocated for the purpose of investment is termed as investment budget.
- Financial budget-
Financial budget of any business is all about gathering the capital that is required for the business. It holds all the details of how to raise the money and whom to approach for it. The budget also holds the details of the plan of action to use the capital raised.
The term Budgetary Control is used as a tool in the management level of a business. It is used to make proper quantitative planning within a firm. In plain and simple language, Budgetary Control shows how nicely the managers implement the budgets to evaluate and control the various costs involved in any operation. The budgetary control is evaluated for a given period of time, which is termed as accounting period.
Budgetary control is a process by which the management of any company decides financial limits and sets performance target for its business. They compare original results with their target and manoeuvre performance as required. Managers use the budget that has been decided from beforehand and checks out all diversities that have taken place. Then they make changes as needed.
At first, any company decides its budget and then they keep a track of final performance. After tracking down final performance, the managers of that company compares both of them. Wherever they find a lot of variation, they make the required modifications to keep the whole budge intact. This type of mechanism is especially applicable for fixed budgets.
This comparison is very helpful for any company as it helps to control major discrepancies. A company can take necessary remedial steps if they can make a good study of the budget and find out all major variations. This will help them to stay with their pre-decided budget and spare from spending those extra resources that are very important for any business. This will also help them to make proper investment and get a good return.
Things involved in Budgetary Control
There are certain things that are directly involved with budgetary control. They are:
- Various objectives and goals are made clear by chalking out a budget
- Different departments of a business are given different responsibilities for making different budgets
- After budget is prepared, managers keep a track of the actual figures
- Comparison is done between budget and actual figures to evaluate the performance of various departments
- If there is any deterioration in performance then some alternative method is used to heal the loss
What is the objective of preparing budgetary control?
Budgetary control is a very important factor that is directly involved with planning of policy of any company and controlling its course of action. It is used to coordinate various factors within a business. Budgetary control has various objectives. It can help in planning for future goals by drafting budgets. It can help to make an estimate of required resources and the expected profit that any particular business firm can make.
Budgetary control helps in functioning of various departments related to expenditure and performance. It is capable of removing various business hazards and increasing the credibility of any company. Budgetary control of any business can also give a good idea of all future expenditures that are awaiting that company.
Budgetary control also helps in bringing controls of various departments under a single entity. It can control the unexpected variations noticed in actual recorded figures and save a company from huge loss. This evaluation is also very helpful in assigning various employees with their perfect duty. Every employee has their assigned set of responsibilities, which they can work upon.
Advantages of preparing Budgetary Control
Budgetary control has multiple advantages. Preparing an accurate budgetary control can save any organization from big losses and buy profits for it. Below are some important advantages that Budgetary Control brings along with it.
- Budgetary control allows a business to maximize its amount of profit
- It can help in reducing the expenditure on various fronts
- On reducing cost it can maximize profits to many fold times
- It can be very helpful in impressing the stockholders of the company
- Budgetary control helps in the formation of various plans
- It can make various estimations for future
- It can help a business to get an overview of any future possibility
- Budgetary control can provide advanced protection to a business
- It helps a business to get ready for any future mishap and act accordingly
- Budgetary control prepares a business to sustain future losses if any
- The performance of a business can be nicely monitored by taking help of budgetary control
- It can evaluate the performance of each and every employee
- It helps in leading a comparison between estimations and actual recorded performance of a business
- Budgetary control makes sure that each employee is working efficiently towards the goal of that business
- It is a very helpful tool to differentiate various weak points in any business which would otherwise stay coveted
- It can chalk out the inefficiencies of an employee
- It is also very helpful in instilling consciousness about expenditure within an employee
- Budgetary control is very helpful in rectifying all incorrect decisions within a business
- It can drive a manager towards achieving his goal perfectly
- It can find out various weakening factors of a business
- Budgetary control points out all the weak links present in an organization
- It can act as a connecting link between various departments within a business
- This interconnection can benefit the business from various aspects, all thanks to budgetary control
Placed where Budgetary Control fails to perform
Budgetary control is a very important medium that can help a business grow and flourish beyond boundaries. However, like any other thing, it too has some limitations. There are various places where budgetary control fails to perform and show its wonders. These places are:
- No employee can concentrate fully on his or her personal objectives
- Budgetary control solely concentrates on the performance of a business
- Personal goals of an employee are given a miss which can agitate him or her
- It only concentrates on the quantitative features of a business
- Budgetary control completely overlooks the qualitative prospects of a business
- It can prove to be a major drawback for business as the quality is not taken under consideration
- As it only focuses on the future, various present situations get missed from consideration
- It cannot be an accurate statement as the numbers in business keep changing from time to time
- Budgetary control is an indefinite entity
- It can cause conflicts between various departments within an organization
- Employees can contradict on various terms and policies involved with budgetary control
Therefore, you can now understand how important budgetary control is and what its limitations are. If it is implemented perfectly then it can bring about a world of changes for any business. Therefore, you must have a good knowledge of budgetary control if you have a dream of becoming a successful Accounting Officer.
Bharat N. Anand is the author of this article. He is an PhD in economics from Princeton University. Anand has a working experience of 10 years. He is presently working in the post of a Senior Accountant in a world-renowned firm in the US. Anand is a fantastic online tutor and helps students with their assignments. If you need any assistance in studies then you can surely approach him.