A budget is a particular amount of money available for a specific purpose and should be spent. It is a plan used to decide the amount of money that can be spent and how it should be spent. In the organizational system or the government, a budget is an official statement from the government or the organization’s management about how much it plans to spend during a particular period and how it will be paid. As an individual or an organization, when you’re planning to spend your money and you do not have a budget, then there is a high possibility that you might pay much more than you bargained for. Let’s take this scenario between John, who went to the grocery store with a budget and Jane, who went to the supermarket.
John has a list of things he needs to get from the grocery store, and his budget is $150. He walks into the grocery store and picks his list, and simultaneously goes to each stand of what he wants after checking his list. He picks one until he picks everything he wants, and everything on the list is a total of $100. John’s budget was $150, but he could complete his list even without getting to his budget.
On the other hand, Jane goes into the supermarket to get what she needs for the week and has no budget or a laid-out list for what she wants. She walks into the supermarket and picks anything, including what she wants and does not want at the time. She had no list, and at the end of the day, she ended up picking so much that it even exceeded the amount of money she had. Jane will either have to pay with her credit card or drop some things back. One person made do with budgetary control between John and Jane while the other failed to understand that you need to control your budget. Like John and Jane, some organizations end up like John and others like Jane due to a lack of study of budgetary control.
Limitations to the study of budgetary control
In as much as budgetary control has its significance, there are also some limitations to it that organizations should be aware of, and they are;
- Budgetary control is a costly process for small and medium concerns.
- It is based on estimates, so the budgetary system’s strength or weakness largely depends on the accuracy with which assessments are made. Any error in budget estimates may lead to far-reaching effects.
- It is a plan that lays down what is to be done and how it should be done. It reduces the freedom of action and innovation of executives.
- It uses expensive instruments or tools that involve installing and operating a budgetary control system that requires expert staff and involves other expenditures. Minor concerns may find it challenging to adopt this expensive system. However, the cost of the budgetary control system must be commensurate with the benefits derived from that place.
- It is a plan of action for a specific future period. Budgets may become unsuitable due to changes in the conditions foretold.
- There can be a danger of rigidity because budgetary programmes must be dynamic and continuously adapted to fit changing circumstances. Budgets will lose much importance if they acquire rigidity and are not revised with the constantly changing business conditions.
- Budgetary control itself will not bring success which depends upon the efficiency of the management.
- Such success of budgetary control relies on the cooperation of all the concerned people.
Impact of the study of budgetary control in an Organization
Budgetary control as a proven management instrument helps organization management and enhances any economy’s improved performance in various ways. The primary function of fiscal control is to serve as a guide in financial planning, and it also helps establish limits for departmental excesses. Budgetary control allows administrative officials to analyze all existing operations carefully, thereby eliminating, restricting, expanding, and justifying the present practice. Budgeting and control encompass a disparate pattern of decisions in an organization that can determine its goals, purposes, objectives, and how all of these things are achieved by bringing into fruition plans and principles.
Different research on budgets and budgetary control has vividly shown that organizations’ management needs to pay serious attention to the financial processes and rules.
Companies are underwhelmed in the new age and time because they lack effective and efficient budgets and a budgetary control system to sufficiently allocate resources to meet organizational goals. At an early stage, some firms sense the weakness of their budgetary analysis but choose to see them as individual problems other than systematic deficiencies. Their efforts have been misdirected, which produces a significant level of frustration. Due to this fact, corporate strategy and capital allocation become misaligned, and it remains so despite disapproving financial performance.
Various organizations ranging from small-scale to large-scale businesses often fail to recognize the power of budgets and budgetary controls over performance outcomes. Some business organizations do not even know the connection between financial management and performance despite all of these. This act of ignorance usually negatively affects their performance. Budgetary control is vital, especially in an organization, because it keeps track of the organization’s performance and helps compare the present results of the present study with past results of the past research. Budgetary control should be planned since it compares and manages income and expenses in an organization. It is necessary because it helps identify any monetary problem in the organization, answering and providing answers to perplexing issues. Budgetary control in the performance of an organization study should be devoid of false statements and must be comprehensive because organizations are structured into different departments to help improve performance in the organization.
For budgetary control to have an impact on the performance of an organization study, it requires processes and these processes are;
- Going through the financial information available to understand the actual income and expenditure of the organization. This needs going through the current information and adjusting it in case of any outstanding transactions.
- After this is done, the financial data gathered will be compared to the money budgeted at the beginning of the year.
- Calculation of Variance: Variance is the difference between the actual and budgeted income.
- Account for the differences between the substantial and budgeted income. If the reason for the variances was a delay in entering information on the system, entering wrong figures on the system or poor budgeting.
- Take action; For budgetary control to impact an organization, action must be taken. If action is not taken, then variances might likely occur again.
Objectives of the study of budgetary control
In budgetary control, some facts need to be considered if they are meant to be carried out, and every organization intends to know these objectives. Categorically, the budgetary control is carried out in this format;
In the first paragraph of this article, the budget was defined and in every ramification, it was described as a plan. In other words, a budget is simply a plan, and this involves drawing up detailed plans which relate to different functions. In reality, when plans are made in advance, problems are anticipated and dealt with long before they even arise. So as an organization, to be able to use Budget control to a great end, then PLANNING has to be done, which involves budgeting.
The organization must be coordinated, which involves every aspect and segment of the organization. Coordination is defined as the process by which different sectors of a business function towards the goal of the business or the organization. Every factor of the organization must be in order during this process.
Budgetary control makes control possible by comparing the original performance against planned performance and taking complete action on the fixed pattern or system of variations between the two versions.
Effective involvement of capital in budgetary control
In budgeting control, the budget’s capital will need to be available. Capital means the resources required for achieving the organization’s objectives.
Responsibility and Accountability
Every company individual is assigned a responsibility, and they must be accountable for anything that happens within this period.
Significance of the study of budgetary control on the performance of an organization study
Budgetary Control in an organization study is pivotal in many ways, and organizations should be able to know how important it is to their performance. Here are just some signs of budgetary control in organizations;
- It forces the management to plan for the most economical use of men, machines and materials
- It motivates employees to achieve the given goals
- It helps in planning as it enables organizations to foretell future operational problems and difficulties and arrange for corrective actions in advance.
- It increases production efficiency, eliminates waste and controls the cost.
- It aims at the increase of profits through wary planning and control
- It inputs the habit of timely and careful thinking into all levels of management.
- It creates requisite conditions for the introduction of a standard costing system.
- It encourages cost management through the fixation of responsibility and communication of the targets to be achieved by various executives, making every executive and worker cost-conscious.
- A budgetary control system promotes cooperation and coordination among the multiple functionaries and departments of the business concerned. All persons and departments engaged in production, sales, personnel, finance, service., work as a team in harmony and coordination to realize a common objective. Every person in the organization thinks as a group and not as individual.
- It directs capital expenditure on the most profitable channels
- The budgets provide incentive and motivation to work with greater vigour and vigilance for attaining the budget targets, increasing overall efficiency and productivity.
The study aims to assess budgeting systems in the organization, provide guidance for members of the organization and help the organization allocate money on only the right things.
It helps in controlling systems that affect tools for financial planning in the organization because the budget is the essential management tool in your financial planning. Organization study studies how individuals construct tasks towards achieving organizational goals. Budgetary control is an organization that helps in avoiding future problems or cases. Budgetary control plays a significant role in analyzing costs and revenues.
Since budgetary control is a system whereby the budgets are used as a means of planning and controlling costs, budgeting lays down as to what is to be attained and how it is to be achieved while control ensures that the objectives are realized, and actual results do not deviate from the planned course more than necessary.