There are many uncertainties that prevail in the business world and therefore, for managers and stakeholders to compete favorably or spend wisely in the rapidly shifting conditions, they need proper tools and proven budget control techniques to predict the major changes that are likely to affect them. Budgetary control is proven to be a management tool that helps in the management of resources and thereby enhances improved performance in many different ways. In this article, an in-depth evaluation of budgetary control will be discussed.
What is Budgeting?
To understand what budgetary control means, one has to first understand what a budget and budgeting is. Many organizations have different definitions and interpretations of a budget depending on their objectives. The Chartered Institute of Management Accountants (CIMA) defines a budget as a quantitative statement for a given period of time that includes planned revenues, liabilities, assets and cash flows. It gives an organization direction and aids in the coordination of activities. The Australian National Institute of Accountants (ANIA) on the other hand defines a budget as a comprehensively written plan that is stated in monetary terms outlining the expected financial consequences of the plans and strategies of management used in arriving at the future goals of an organization. It goes on to say that a budget is the blueprint for action in an organization. Budgets are therefore important components within the process of managing an organization effectively. Budgeting on the other hand is the process of preparing, implementing, and operating budget decisions into given financial plans for a specified period of time (Planning and Control 2).
Budgeting and control calls for the designing of a distinct pattern of decision making within an organization. Such a pattern enables an organization to determine its objectives, goals and how they are to be achieved by put in place core policies and plans. Failure or inability to pinpoint the problem and to set a boundary of investigation will however, create a deterrent for successfully implementing the process of budgeting and control. It is a common practice for some organizations to choose narrow ranges of alternatives which they determine basing on their past experiences and the present situation. Some avoid long term planning and budgeting and only concentrate on the present needs making future problems more severe. This means that for budgetary control to be effective there must be proper planning (Akintoye 8).
Budgetary Planning and Control
In order for business organizations to achieve financial and strategic objectives and instill confidence in the management and financial stakeholders, they need to manage well their business performance. Central to this is the proper construction and control of their budgets. To achieve this, a framework of comprehensive financial planning and approval is needed, there should be in place a consistent process for budget construction both revenue and capital, methodologies should be established for evaluating financial impacts of the proposed expenditures. A control system should be set up that clearly shows responsibilities and gives monitoring information that measures performance against budgets. We will therefore have to look at both budgetary planning and control because they complement each other (Budgetary planning and control 1)
Many business use budgeting as a financial planning method for the future. Budgets are usually prepared for the main areas that a business engages in such as sales, purchases and many others. Planning in large businesses is usually very formal while in small businesses it is usually less formal. This planning mostly falls into three periods, which are; short term, medium term, and long term. Different approaches are therefore used for each time scale. Plans for the long-term tend to be less detailed as compared to those for the short-term. In some instances, objectives need not be formally written down as in the case of small businesses. Such business will consider the objectives and discuss them among the owners and managers. Planning helps in taking note of the broader business objectives and gives an outline of how the objectives are to be met using detailed plans that are called budgets. Regardless of the size of the business, it is important to start the planning process before the commencement of the budget period. This will create time for preparation, reviewing, redrafting of budgets before submitting them to owners or directors for approval (Budgetary planning 5).
Budgets that are not used remain just exercises in calculations, but if used, it becomes part of budgetary control. Usually people have ideas of what should be done; they prepare budgets to help in achieving those ideas. Once the objectives have been achieved, they go back and check whether they kept to the budget. This can only be realized through budget control. Budgetary control therefore entails the establishment of budgets to relate the responsibilities of the budget holders to the needs of certain policies. It also involves the continuous comparison of actual outcomes to those that were budgeted for so as to ensure that objectives of the policies in question are achieved, or provide an avenue for changing the initial objectives. Budgetary control therefore is the analysis of the results of the plans and the measures taken to correct any deviations from those plans (Williamson 1).
Common Features of a Budget
It has been shown above that a budget is a blueprint for the actions taken for effective management. Budgets therefore have common characteristics, these are: Budgets are quantitatively stated; the figures used in budgets are usually articulated in monetary terms. These figures are however, supported by non-monetary terms such number of units to be sold or bought. Budgets are usually made in advance; budgets must be prepared prior to the period which they are meant for. Anything done within or after that period may be vital but, will not form part of the budget. This leads us to the third characteristic, which is that budgets only relate to a particular period; in most cases, budgets are prepared on a yearly basis although, there may be two budgets in a year for seasonal businesses. Budgets are action plans; budgets are not just passive acceptance of expected trends in the future, but they indicate the actions that should be taken. They guide managers in their actions. Lastly, budgets estimate or predict the profit potential of a business; budgets usually set out the expenses and revenues needed in a budget period, this reveals the profit potential of such an undertaking (Planning and Control 5).
It is clear from above that budget planning and budget control work hand in hand, they are independent to each other. Budgets correlate planning in organizations enabling the delegation of authority without losing control. It was earlier hinted that the process of budget preparation depends on the structure of an organization. There are many functional areas within the organization; these areas are coordinated through a budget. Budgeting therefore follows two approaches, the bottom-up approach and the top-down or mandated approach.
This is also referred to as participatory budgeting because of the involvement of low level managers in the formulation of the budget. In this approach, budgeting begins at the operational level although; top management may initiate the process by giving general guidelines. Different operational units dictate the development of their respective budgets which are grouped into departmental budgets allowing mid-level executives to add in their contributions along the way. The top management together with the budget committee will eventually receive the overall budget plan which they review for consistency and coordination. The only disadvantage for this type of budgeting is that it is time consuming. However, it ensures commitment and buy-in in all departments of an organization (Planning and Control 5).
This is the mandated approach also referred to as the imposed budget. The upper level management establishes parameters in which the budget is to be constructed. Low level managers are given little or no participation in determining the amount of the budget and in coming up with the organization’s goals to be achieved. Low level management only carries out directives from the top management. This is a disadvantage because the low-level managers may see the budget as dictatorial and bring about resentment. Ethical challenges are also presented by such budgets which may have unrealistic targets. This approach however sees the completion of budgets on time and also they set the tone for the organization. These two approaches can be combined to form the blended approach which is also called the negotiated approach (Planning and Control 5).
It should be kept in mind that budgetary systems do not only encompass accounting, forecasting, and other techniques of management. In order for a budgetary planning and control system to be successful, there must be cooperation from those who are to be involved in its operation. It is possible that not everyone will behave in the best interests of the organization; others will not be willing to work hard enough to achieve the goals set out in the budget. This brings about what is referred to as dysfunctional behavior. Proper budgetary management ensures that such situations are minimized by bearing in mind behavioral aspects of budgetary systems. There are many human aspects that should be considered for effective budgetary control. The most important ones are motivation, communication, and participation (Walker 313).
Budgetary systems will not be successful if those entrusted with its operation are not willing to achieve the set targets in their areas of responsibility. This may be due to lack of motivation which may be brought by not taking into consideration the aspirations of each individual and those of each department or section in an organization. Managers should therefore look for ways to motivate their staff not just in monetary terms, but also psychologically (Walker 314).
Targets that are set out in budgets should be clearly communicated to those who are supposed to achieve them. Management can not expect their staff to perform towards achieving targets they do not know. They should therefore, make sure that targets are understood. Measures should also be put in place to make sure that there is regular and prompt feedback to enable corrections to be made in time where necessary (Walker 314).
Budgetary systems that are participatory usually emerge successful as opposed to those that are dictatorial in which budgets are imposed. Imposed budgets usually bring about dysfunctional behavior. To avoid this, there should be enough consultation about the budgets during the planning stage. Participation also ensures that there is goal congruence where the organization’s goals relate to the individual goals. This is achieved if groups or individuals are given a chance to set their own budgets (Walker 315).
Budget control at Personal level
So far, we have looked at budgeting at the organizational level. How about at the personal level? Budgetary control at the personal level allows an individual to organize his or her finances. Budget control tools can enable one to determine how much income he is receiving, how much is being spent, and how much remains at the end of a given period, say a month. Budget control helps one in monitoring the daily spending thereby preventing him or her from exceeding the present limits. The budget therefore, at both the personal and organizational levels is the best tool that ensures that important resources are assigned to priorities and to results. It enables managers to ascertain when to review and revise their plans. Budgetary control is therefore a very important stage in organizational management because it involves making of decisions based on relevant information that lead to actions which, improve the utilization of productive assets and services that are at the disposal of the organization’s management. Effective budget control should be based on standards on which a comparison of actual performance can be done. Without proper standards, effective measure of attainment can not be done. Effective control is a very important management task that ensures that efforts made at all levels correspond to those needed to ensure that there is long-term effectiveness and success (Akintoye 3).
Budgeting should not be confused for a substitute for effective decision making. Budgets only provide for finances showing where and how they should be spent. Budgets therefore do not provide for people. The human resources think, perform, and have competence. Finances are needed for one to be sure, but without the human resource, finance alone can not be sufficient in achieving the goals of an organization. Human resources budgeting are therefore very crucial in budgetary control. Companies or organizations should align their budgetary planning and control with their overall strategy. What distinguishes successful managers from unsuccessful ones in creating shareholder value is the equality in investment decisions which, largely depend on the quality of the budgetary planning and control system. Managers in many organizations make poor decisions regarding investment leading to myopic investment (Akintoye 4).
Budgeting is the most widely used control system in many organizations and households. From the discussion above, budgetary control involves linking the strategy and plans of a business or the aspirations of an individual with the implementations of a budget for a given period. It involves rational planning of business operations; it entails the management of the organization’s operational activities and the optimizing of the allocation of resources. It also ensures that operational activities of the implementation process are strengthened during the control process. There should also be adequate supervision to ensure that there is effective use of resources. To achieve all these, managers and business operators should pay more attention to their respective budgetary control systems.
Akintoye, Rufus. (2008). “Budget and Budgetary Control for Improved Performance: A Consideration for Selected Food and Beverages Companies in Nigeria.” European Journal of Economics, Finance and Administrative Sciences. 12.1 (2008): 8-17. Print.
Budgetary planning and control. Budgetary Planning and Control. n.d. Web.
Budgetary planning. Budgeting and Budgetary Control. Osborne Books, n.d. Web.
Planning and Control. Introduction To Budget -Planning And Control. n.d. Web.
Walker, Janet. Accounting in a Nutshell: Accounting for the Non-Specialist. New York: Butterworth-Heinemann, 2008. Print.
Williamson, Duncan. Budgeting and budgetary control. Fortune City, 2009. Web.