What is Budgetary Control
- Budgetary Control Is the process by which financial control is exercised within an organization. Budget for income/expenditure are prepared in advance and then compared with actual performance to establish any variances
What is the purpose of Budgetary Control?
- Budgetary Control helps with planning, coordination between departments, decision making, monitoring of operating results and motivation of personnel to achieve business objectives.
The Process of Controlling Budgets In Several Steps
1. Establish Actual Position
- To establish an actual position the budget holder will need to examine and understand the financial information available. They will need to know how the current information is and adjust it for any outstanding transactions. These may include debtors and creditors. The budget holder will also need to know if any part of their budget has been omitted.
2. Compare with actual budget
- The difference between an actual and budgeted income/expenditure is called a variance. Variance analysis is a very important technique in the budgetary control process
3. Calculate variances
- If the variance is negative it will represent overspending. There are various methods of calculating the variances that can help assist the budget holder to control the budget
4. Establish reasons for variances
- There are several reasons that can account for differences such as, incorrect figures entered into the system, delays in entering information, little consideration given to initial budget preparation and unplanned changes such as introduction of a new law. This process is critical as it will allow you to take corrective action.
5. Take action
- Budgets can only be controlled if corrective action is taken in response to the variances. Taking action can mean redefining objectives, changing the nature of service and how it is delivered or using contingency funds.