How to Use Budgeting & Budgetary Controls as a Tool of Management

How to Use Budgeting & Budgetary Controls as a Tool of Management
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A budget shows what a company can afford to spend and expects to bring in financially during a given period. It is an essential tool of business operations; a company cannot operate unless it knows how much money it has and what its costs are. Company leaders must use some form of budgetary control to stay on track. A budgetary control is simply a technique, usually a comparative analysis, that lets a business see whether or not it is accomplishing its financial goals.

Divide the business into sections based on the functions they serve. Categorize each section into one of four primary budget centers: revenue, expenses, profit and investment.

Look at the company's goals — that is, review what the company hopes to achieve. Conduct market research to determine what it will cost to reach each of these goals. If the company opts for traditional budgeting, some data can be pulled from the budget for the previous budget period. Prepare new, individual budgets for each budget center based on company objectives and assign managers to oversee those budgets.

Consolidate the individual budgets for each budget center to present a comprehensive budget for all company activity that corresponds to company objectives.

Gather data from operational and strategic management systems, as well as professional analysis, to determine whether objectives have been met and what income and expenses the company had during the budget period.

Analyze data to determine which budget centers had differences between the adopted budget and actual spending and income.

Schedule a budget meeting with managers who had some level of control regarding handling of the budget for each budget center.

Present data and point out key areas where budget variances happened. Ask the managers responsible for those areas to explain the variances. In some cases, budget variances are legitimate; for example, if the overall market cost of supplies rises. In other cases, the variances reflect poor managerial decisions; for example, if the person(s) responsible for investing company funds fails to address the risks of investing in particular stocks or bonds. A good budget is flexible enough to accommodate legitimate variances but does not accommodate a lack of responsibility.

Brainstorm on ways to reduce or eliminate the variances noted in the analysis. Note the suggestions so they can be presented as motions during upcoming board of directors meetings.

If necessary, amend the budget for each budget center, as well as the overall budget, if evidence shows that it is not possible to meet objectives given the budget that was adopted. If required, amend the company's objectives. This is a much more drastic managerial step, as it points business operations in a new direction; but if managers are doing all they can to stay within budget and cannot reach presented goals, it may be necessary.

Enforce any discipline that may be warranted given the variances present in the comprehensive analysis. For example, you might withhold performance bonuses if budgets are not met.