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Budget and Budgetary Control are the key components of any business and its decision making process. A business is an organization usually set up with an aim to attain success and bring some change in the society. However, in case of any business the success is determined by the profit or the value it added to the organization at the end of an year. Therefore, the calculations of the sales and expenditures are the basic concepts of any business.
As mentioned, a business is set up with a goal to attain success and thus, as a prerequisite of attaining success one organization needs to be properly aware of all its operations and should also be capable of foresee its future operations. Farsightedness has often been described as a primary means to attain success. Thus, the success of any business is quite dependent on its predictions about future course of actions. In this case, predictions relate to the organizational turnover, business trends during a time period, expenditure patterns etc. All these needs to be put together to determine an organizational strategy which will help the business sustain is growth or attain further growth. Further, in today's world business relates to funds and capitals raised through different sources, examples: bank loans, venture capitalists, investors etc. All these people are interested in looking at the facts and figures that depicts the organizational success and a successful future course of actions. The facts and figures, mentioned herewith, needs to be properly computed and presented in a form of statement. This document depicting the future of any business is known as budget.
Budgetary control can be described as complimentary concept defined by the budget. Budgetary control depicts different types and aspects of business expenses and ways of controlling the same. It concentrates on the expenditures and makes sure that all the departments and its activities acts accordingly and follow the budget properly. The budget stream-lined the expenditure pattern and helps an organization to carry on its activities smoothly.
BUDGET - GLIMPSE ON THE DIFFERENET ASPECTS
A budget can be described as a financial plan for a business that has been prepared well in advance to demonstrate and dictate the future course of work of a business.
A budget may be set in money terms, for eg. a sales budget of an organization for the month of May, 2011 is £500,000 or it can be expressed in terms of units, for say, a purchases budget determining the number of units to be bought during the month of April, 2011 is to be 5,000 units. Budgets can also be put across in the form of income budgets for money received i.e. sales budget, or expenditure budgets for money spent, i.e. a purchases budget. However, a major emphasis has always been on the cash budget which combines both income and expenditure in estimating the business working capital, cash in hand and bank balance during a course of work or a time period.
The budgets are usually prepared for the following financial years (budget period), and are usually broken down into shorter time periods in order to emphasize on the figures and their attainment/fulfillment. The periods are usually monthly or quarterly, determined based on the level of activities and its operations. This ensures budgetary control to be exercised over the budget; the actual results can be monitored against the budgeted figures. Incase, of better performance the organizations announce bonus, give increments to its employees however, incase of unfavorable figures, the discrepancies between the two can be investigated and corrective action can be taken accordingly.
BENEFITS OF BUDGET AND BUDGETARY CONTROL
Budgets provide benefits both for the business, and also for its managers and other staffs:
i) The budget assists planning - Once the business objectives are set and formalised through a budget, it can b ensured that the other business plans are also achievable. It also helps in taking the output decisions of various goods and services and to make sure that everything is available at the right time.
ii) The budget communicates and co-ordinates - A budget is agreed by the business, and helps the different department and sections within work towards a same end. It helps in maintaining a discipline throughout and in assuring that all departments play in their own part in achieving the goal. The budget once set also helps in resolving any anticipated problems and other areas of potential confusion get clarified.
iii) The budget helps in decision-making process - as already own a budget helps in planning ahead and thus allowing the business to think an foresee ahead of time, they cannot only decide the form of goods and services to be served but also the purchase decisions which can help it in manipulating its prices.
iv) The budget can be used to monitor and control - The most important benefit of a budget preparation is helping a management to have budgetary control to monitor and compare the actual results. This further helps in adapting various actions in modifying the operations of the business as time passes, or possibly to change the budget if it becomes unachievable.
v) The budget can be used to motivate and control - A budget often acts as a motivating factor since provides the managers and other staffs a predetermined goals. This not only helps the business but also helps its employees since on fulfilment of the predetermined targets most of the organizations declare various types of bonuses and increments for its staff.
LIMITATIONS OF BUDGET & BUDGETARY CONTROL
Though there are various benefits to the fact of budget and budgetary control, however, there are few limitations also and these are described below:
i) Benefits of producing a budget should exceed its cost
Budgeting is fairly a complex process and for some businesses especially the small ones it may pose too much of a burden in terms of time and other resources, with only limited benefits. Nevertheless, most of the lending organizations such as banks etc. in today's era often require the budgets as part of the business plan in order to further proceed with their lending or investment decisions. In these cases, as a general rule, the benefit of producing the budget must exceed its cost.
ii) Budgets are often not accurate
Budget deals with estimations and predictions relating to future based on the figures of the past and the present. Therefore, a great risk is involved with it tending the figures to be wrong. A business highly dependent on budgets may found it difficult to succeed with wrong details put across. Therefore, great care needs to be taken with estimation of various facts and figures. Budgetary control is used to compare the budget against what actually happened - the budget may need to be changed if it becomes unachievable.
iii) The budget might demotivate
Employees at the ground level who do not possess any managerial rights or does not take part in agreeing and setting on to a budget might felt to be imposed upon them and thus might act as a demotivating factor. Instead of encouragements it might pose a threat to employees since a non-attainment of the target might bring in some sort of difficulty for the employee.
iv) Budgets might lead to dysfunctional management
The targets might pose in a threat with employees in one department of the business achieving more than their budgeted targets and create problems elsewhere. For example, a production department might achieve extra output that the sales department finds difficult to sell. The might create a chaotic situation and to avoid such dysfunctional management, budgets need to be set at realistic levels and linked and co-ordinated across all departments with proper informations.
v) Budgets might be set at too low levels
Budgets being prepared by individuals can be prepared at low achievable rates since, the budget where too easy to achieve, will be of no benefit to the business and may, in fact, lead to lower levels of output and higher costs than before the budget was established. Budgets should make it sure, the best use of the resources available.
Budget being an integral part of any business is often prepared well ahead of time and usually a concerned department works on preparing an accurate budget and has got planning regarding its successful preparation:
Budget Manual provides a set of guidelines as to who is involved with the budgetary planning and control process, and how the process is to be conducted
a budget committee, which organises the process of budgetary planning and control; in order to be the most effective, brings together representatives from the main functions of the business - eg production, sales, administration and is headed by a budget co-ordinator whose job is to administer and oversee the activities of the committee
In this report, an attempt has been made to put across a detailed analysis of budget and budgetary control. The objectives of its preparation, benefits and limitations mentioned above should be capable enough to put across a picture whereby, all the informations about budget and budgetary control are easily available. Though, I tried my best to put across a brief overview on the whole concept, however, it's not absolute, and is limited to the fact of knowledge, time and resources.
However, after the brief analysis it is evident that besides having its various limitations also budget and budgetary control is an integral part of any business.