Budgetary Control: Meaning, Objectives, and Advantages

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.

Budgetary control, as the name suggests, is about controlling the budget. It guides a business toward its financial goals by setting a financial route, monitoring progress, and adjusting for unexpected expenses or changes in revenue. This ensures the business stays on track and efficiently manages its resources.

Table of Content

• What is Budget?
• What is Budgeting?
• What is Budgetary Control?
• Steps in the Budgetary Control Process
• Objectives of Budgetary Control
• Advantages of Budgetary Control
• Tips to Minimize Limitations of Budgetary Control

What is Budget?

The budget is a blueprint of the projected plan of action expressed quantitatively 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 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. 

What is Budgeting?

Budgeting is the art of planning. It is the process of making a plan to spend money. This spending plan helps companies determine whether they have enough money to do what they need or want 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.

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.

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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.

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 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. Depending on the organization’s size and needs, this can be done monthly or quarterly.

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.

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 organizational departments and units. 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.

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 understand their financial performance well and are managing their resources effectively. This can lead to improved access to capital and lower borrowing costs.

Limitations of Budgetary Control

• Budgets are based on estimates of future income and expenditures. These estimates can be inaccurate, especially in a rapidly changing business environment, leading to unrealistic and unattainable budgets.
• 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.
• Developing and maintaining a budgetary control system can be time-consuming and expensive. This can be especially challenging for small businesses.
• 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.
• 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 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 organizations remain agile and responsive to changing circumstances, optimizing their financial resources.