Budgetary control and its use in large enterprises

Meaning of budgetary control

A budget is a plan for a future period expressed in quantitative, usually monetary, terms: for example, the sales, production, expenses and cash expected next year. Budgetary control uses those budgets as yardsticks: each manager has a budget for his or her area, results are checked against it as the year goes on, the reasons for any gap (variance) are found, and something is done about it, so that the organisation's objectives are met. It links planning and controlling: the budget is the plan, and the comparison with it is the control.

Steps in budgetary control

1. Organisation for budgeting. A budget committee and a budget officer are appointed, and a budget manual sets out procedures and responsibilities.
2. Budget period and key factor. The period (often a year, divided into months) and the limiting factor (such as sales demand or plant capacity) are fixed.
3. Preparation of functional budgets. Sales, production, materials, labour, overheads, capital expenditure and cash budgets are prepared and combined into a master budget.
4. Recording actual performance for each budget centre.
5. Comparison and variance analysis. Actual figures are compared with budgeted ones and significant variances are analysed by cause and by the person responsible.
6. Corrective action and revision. Managers act on adverse variances, and budgets are revised if conditions change.

How budgets ensure effective control in large enterprises

1. Responsibility accounting. The enterprise is divided into responsibility centres, cost, revenue, profit and investment centres, each with its own budget, so every manager knows what is expected and is held accountable.
2. Coordination of departments. Because functional budgets are linked (sales determines production, production determines purchases and labour), budgeting forces large, separated departments to plan together; departmental budgets are tied into the overall budget.
3. Control by exception. Top management of a large firm cannot watch everything; it attends only to significant variances reported regularly.
4. Delegation with control. Managers of divisions can be given authority within approved budgets, so decentralised decisions remain under overall control.
5. Cash and capital control. Cash budgets prevent shortages and idle funds; capital budgets ensure that large investments are approved and monitored.
6. Flexible budgets. Budgets adjusted to the actual level of activity give a fair basis for judging performance when volumes change.
7. Zero-base budgeting. Requiring each activity to justify its spending from zero every year checks the growth of unnecessary costs in large organisations.
8. Performance evaluation and motivation. Budgets act as targets; achievement can be rewarded, and participation in preparing them builds commitment.

Example. A retail chain with 200 stores gives each store a monthly sales and expense budget. Head office reviews only stores whose sales fall more than 5 per cent short or whose costs overrun, and regional managers act on them.

Limitations

Budgets are only as good as the estimates behind them; they can become rigid; managers may pad budgets to make targets easy; and the system involves cost and paperwork. Top-management support and participation reduce these problems.

Conclusion

Budgetary control turns plans into measurable targets for every manager and makes deviations visible, which is essential in large enterprises where top management cannot supervise directly.