Budgets and budgetary control in a large multiplant enterprise

Budgets as a means of control in a large multiplant enterprise

A budget is a plan stated in numbers: it shows how resources will be obtained and used over a given period. Budgets are among the most widely used instruments of both planning and control and are often called numerical plans; financial or profit budgets usually cover a year, capital budgets for new investment may run longer, and non-financial budgets cover manpower, materials, sales and labour hours. Making a budget involves forecasting, so it is a planning tool; but because it expresses everything in figures, actual results can easily be compared with it, which makes it a control device as well.

In an enterprise with many plants, head office cannot watch every shop floor. Budgets give it a way to control from a distance:

1. One overall budget built from many. Each plant, department or programme has its own budget, usually of expenses and capital spending, and these are tied into an overall budget showing the enterprise's total income, expenses and profit together with cash and capital expenditure. Done well, the budgets support the plans and become the standards against which progress is measured.
2. Coordination. Because every unit's budget flows from the same plan, budgets give a basis for coordinating and integrating activities across the organisation.
3. Delegation with accountability. Under budgetary control more authority to prepare budgets is delegated to subordinates and people at all levels take part, so there is no undue centralisation; indeed delegation is a condition for the system to succeed. A sound control system lets top management delegate and free itself of unnecessary detail.
4. Information fitted to each manager. Controls should be tailored to plans and to positions, since what suits one department head may not suit another; each plant head can be judged on the budget he controls.
5. Attention to exceptions. Head office need not study every figure; it looks at deviations at critical points. A manager may worry if labour cost exceeds budget by 5 per cent but not if postage does so by 20 per cent. Management by exception saves senior managers' time and leaves routine problems to subordinates.

Meaning of budgetary control

Preparing budgets is budgeting; using budgets as the means of controlling activity is budgetary control. It involves measuring performance, comparing it with budgeted figures, working out the variances, fixing responsibility for them, reporting to management and taking suitable action. Budgetary control is one of the traditional techniques of managerial control.

How budgets are used in controlling

Controlling is a process of setting standards, measuring performance, comparing it with the standards, analysing deviations and taking corrective action. The budget supplies the figures for each stage, which must come in this order:

1. Standards. Budgeted cost, revenue, units to be produced and sold, and time are quantitative standards, which make comparison easy.
2. Measurement. Actual results are recorded in the same units in which the budget is set.
3. Comparison. Actual figures are set against budgeted ones to reveal the variances.
4. Analysis. An acceptable range is fixed; only deviations beyond it, especially in key areas, are reported, and their causes are traced.
5. Correction. Action follows, such as training, extra workers or overtime; if a deviation cannot be corrected, the standard itself may be revised.

Two further uses matter in practice. A flexible budget, which adjusts allowed spending to the actual level of sales, keeps control meaningful when volume differs from the forecast. A cash budget sets expected inflows against outflows to show the net cash position, so that enough cash is held without idle surpluses. Budgetary control also makes people conscious of cost and performance, which leads to better use of labour, machines and materials.

Limitations of budgets and budgetary control

1. Cost and effort. Control must be worth its cost, yet weighing the cost of a control system against its benefit is difficult; control in general takes expenditure, time and effort, and a small enterprise may not afford an elaborate system.
2. Resistance. Employees often see control as a restriction on their freedom and resist it.
3. Not everything fits a figure. Where standards cannot be set in numbers, as with morale or job satisfaction, control loses part of its effect.
4. Forces outside the firm. Government policy, technological change and competition lie beyond the enterprise's control; competition can upset sales targets, so budgets based on them have to be revised.
5. Rigidity. A fixed budget based on a sales forecast becomes meaningless as a control if actual sales are far above or below the forecast.
6. Dependence on people. The system works only if authority is genuinely delegated and managers take part in preparing the budgets; a budget, like any plan, achieves nothing unless it is carried out.

Applying this to an illustrative case

Take a hypothetical cement company with plants in Rajasthan, Chhattisgarh and Andhra Pradesh. Each plant head prepares a budget for output, power and fuel, labour and maintenance, which head office combines into the company budget. Every month each plant reports actual figures; head office looks only at items that cross agreed limits, say power cost per tonne more than 3 per cent over budget. When the Chhattisgarh plant overshoots, the cause turns out to be a kiln breakdown, and maintenance is rescheduled. When a monsoon slowdown cuts sales everywhere, the flexible budget lowers allowed spending in line with volume instead of blaming every plant for missing a fixed target.

Conclusion

Budgets let a large multiplant enterprise plan in figures, delegate to plant managers and still keep control from the centre. Their usefulness depends on realistic forecasts, flexibility when conditions change, and the willing participation of the managers who must work to them.