Budgets & Budgetary Control
WHAT IS A BUDGET AND BUDGETARY CONTROL?
A. Budget is an estimation/statement of financial resources set aside for carrying out specific activities in a given period in an organisation. An example would be a Sales Budget or an Advertising Budget.
B. Budgetary Control is a control technique wherein the actual results are compared with the budgeted figures and any differences arising out of the same are dealt with by either taking corrective measures or revising the original budget.
WHY IS BUDGETARY CONTROL EXERCISE IMPORTANT?
1. Compels management to plan for the future and clearly defines responsibility of various stakeholders for achievement of the budget targets 2. Provides basis for evaluation of performance of individuals and the organisation 3. Improves allocation of scarce resources 4. Makes ‘Management by Exception’ possible by highlighting weak areas of business which need management attention 5. Acts as a motivating factor for employees by defining their performance targets 6. Corrective measures taken on timely basis assist in Cost Reduction thereby, improving Profitability
(A) The Top Down Approach or Imposed Style Approach
Unlike top-down approach, bottom-up budgeting begins at department level and moves up-to top management. The departmental heads/managers prepare their budget based on present information and past experiences and present it to senior management which then compiles it into a Master Budget for the organisation.
WHETHER TO INCLUDE SUBORDINATES IN THE BUDGET SETTING PROCESS OR NOT? The ‘Ease of Implementation’, amongst other benefit, makes Participative Approach more suitable for all organisations. If used in the right circumstances, it has an outstanding potential for motivating managers towards achieving the organisational goals. However, there is testimony that Imposed Style Approach has been preferred in the following circumstances: 1. Where the personality characteristics of the participants may limit the benefits of participation, such as tendency of artificially inflating the budget estimates. 2. Where the firm has large number of homogenous units operating in a relatively stable environment 3. Where the processes in the organisation are highly programmable with a stable and clear input-output relationship
PRE-REQUISITES OF EFFECTIVE BUDGETARY CONTROL If an organisation wants to establish an effective budgetary control, it must consider the following points: 1. A serious attitude of the management is required towards the system. 2. There should be clear demarcation of areas of managerial responsibility so that in case of errors only the concerned manager can be penalised. 3. The budget targets should be reasonable & achievable otherwise it demotivates the operational staff. 4. There should be established techniques for data collection, analysis & reporting. 5. Variance reports should be prepared timely so that the deviations can be reported on a periodic basis, typically a month. 6. In case of material variances, corrective action shall be initiated in order to minimise loss to the organisation.