Financial and budgetary
control
A budget
is a forward financial plan.
Types of
budget: Revenue, expenditure & profit.
Imagine
you were a manager of a busy McDonalds. What specific budgets may you have?
Managers need to be able to exercise control over the organisations that they manage - i.e. to make sure that the organisation is keeping to plan and that necessary actions can be taken to get back on track when needed.
Managers need to be able to exercise control over the organisations that they manage - i.e. to make sure that the organisation is keeping to plan and that necessary actions can be taken to get back on track when needed.
Managers
need to have control tools to make sure that financial plans and targets are
being achieved.
A budget might set out the planned
income and expenditure of a branch of McDonald’s for the next twelve months.
Managers are then able to check whether sales are living up to budget
expectations (on a daily, weekly or monthly basis).
Variance
The difference between what is
budgeted to happen and what actually happens is termed a variance. A favourable
variance is one that enables a business to increase its profits - for example
if sales revenue is higher than budgeted.
An adverse variance will reduce
profits e.g. if costs are higher than budgeted. By spotting adverse variances
managers are able to take control actions - e.g. by cutting out waste to reduce
costs, or increasing advertising/promotion when sales are less than expected.
Advantages of Budgetary Control
1.
Budgetary control fixes targets. Each
and every department is forced to work efficiently to reach the target. Thus,
it is an effective method of controlling the activities of various departments
of a business unit.
2.
It secures better co-ordination among
staff / departments.
3. In case the performance is below expectation, budgetary control helps
find out why
4.
It helps in reducing the cost of
production by eliminating wasteful expenditure.
Disadvantages or Limitations of Budgetary Control
1.
It is really difficult to prepare the budgets accurately under inflationary
conditions.
2.
Budget involves a heavy expenditure which small business concerns cannot
afford.
3.
Budgets are prepared for the future period which is always uncertain. In
future, conditions may change which will upset the budgets. Thus, future
uncertainties minimize the utility of budgetary control system.
4.
The success of budgetary control depends upon the support of the top
management. If there is lack of support from top management, then this will
fail.
