Every organization needs to plan and consider how to confront future potential risks and opportunities. In most cases, this process is formalized by preparing annual budgets and monitoring performance against budgets.
“Planning is the design of a desired future and of effective ways of bringing it about” (Ackoff, 1981). But a distinction is often made between short-term planning and long-range or strategic planning.
Budgeting is concerned with planning in the short term and it should be closely integrated with the company’s long-terms plans to achieve their implementation.
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“Control involves the making of decisions based on relevant information, which leads to plans and actions to achieve the company’s objectives”. (Sizer, 1989). It is not concerned so much with the rectification of past mistakes as with the direction of the current and future operations, trying to guarantee the realization of management plans.
Budgetary planning and control systems recognize that is people or employees who should be controlled and that by controlling people properly through their participation in the control system, resource control will be achieved more efficiently.
Continuous comparison has to be made between actual results and budgets to assure, through action by the person in charge, the objectives of the company, or to present a basis for a revision of policies. If remedial action is necessary, it may be taken at an early stage, or alternatively the goals may be reviewed.
Budgetary control should assist management in three ways:
- in choosing between a number of alternative plans and in determining whether a particular plan is satisfactory,
- as a guide to the persons responsible for individual segments of the company’s operations, helping management to co-ordinate the activities by clearly defining the responsibilities and aims of each division,
- by measuring performance, since budget deviations reflect either the firm’s failure to accomplish the plan or its ability to improve it. This aids management in controlling the activities of individuals and the overall performance of the company
It is important to set appropriate administration procedures to ensure that budget process works effectively. It is advisable that the company delegates the administrative task to a budgeter officer. A budget committee may co-ordinate and review individual budgets. And finally, a budget manual should be prepared in advance.
A basic rule of budgetary control is that managers develop and accept responsibility for their budgets. A budget provides a standard that under certain circumstances, a manager may be motivated to achieve. But if the budget is imposed from above, it could be perceived as a threat and do more harm than good in the organization.
Budgetary planning and control involves people and, therefore, it is important that the influence of the system on the motivation of individuals is examined.
Once the company has set the budgets for the established period, budgetary control begins, comparing the estimates of revenue and expenditure in the budgets with the actual revenues received and outlays incurred.
The main value of a budget as a control tool will be put into practice via the effective use of reports and meetings to discuss them. Reports should be compiled showing the annual and monthly budgets, actual revenue and/or expenditure, the divergence between actual and budget, and usually the percentage variance. If the comparisons prove significant variations (it is necessary to stipulate in advance what does “significant” mean), comments about their definite or probable causes should be included in order to assist the recipient taking action. The accountant’s reports should highlight the essentials, and point out significant budget deviations and possibilities for improvement.
As a conclusion for this analysis, it is appropriate to make clear that a good budgeting system provides:
- a means of forecasting and planning,
- a method for establishing resource requirements,
- a basis for annual appropriations,
- grounds for external accountability,
- a basis for internal performance monitoring and control,
- a system of authorization,
- a means of motivation, and
- a channel of communication and co-ordination
Therefore, a budgeting system should be immediately integrated in the structure of this company, weighing up the pros and cons of the different variants to choose the best option.
- Ackoff, 1981
- Dibb et all., 2001
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