Importance Of Budgetary Control

e budget is a document which allows an organisation to estimate income and expenditure over a certain time period usually the previous year and altered to accommodate any foreseeable changes. Many organisations, individuals plan their financial activities by preparing budgets. For an organisation to be successful, its crucial to plan its financial activities in the future well in advance. It is important to estimate its income and expenditures (Ibid, 2005) using data from past events and allow for anticipated future trends.

Budgetary control is not just a financial plan that sets forth cost and revenue goals but a device for coordination, control, communication, motivation and measuring of performance. In a business environment it is most valuable as a tool to control the flow of cash because a good system would monitor cash inflow and flag up any projected shortfalls so that corrective action could be taken, for example if some consumers were not paying promptly or there was a sudden and unusual need for expenditure. Additionally, such a system in place would also ensure that money was always available for essential business purposes like for example buying raw materials.

Managers will regularly create budgets for the whole organisation and its components parts. The budget is a plan set out in figures, which enables managers to exercise control, coordination and communication. (Horngren et al., 2005). The difference between what is budgeted to happen and what actually happens is a well known term of a variance. A favourable variance is one that enables a business to increase its revenue and profits, for example if a sales revenue is higher than budgeted. An non favourable variance will reduce the number of profits e.g. if spen...

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...erformance management. Standard Costing and Budgetary Control are equally important as actual performances are measured and compared against targets set for control purposes. Thus enabling corrective measures where necessary.

The performance of the business can be determined by looking at the budgetary numbers and helps to highlight any weaknesses and strengths in areas that are doing well. As discussed throughout, there are many other ways to achieve performance, however it is clear that the use of budget establishes the best practice from a financial perspective.

When there is a budget to follow, managers are able to keep control of spend, plan and forecast effectively leading to a successful business. Therefore businesses using budgetary control methods will enable them to plan well in advance on the budgeted numbers against actual performance of the business.