The Advantages of a Budgetary Control System

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Budgeting is a key form of financial planning.
Budgeting is a key form of financial planning. (Image: Hemera Technologies/AbleStock.com/Getty Images)

A budget is a formal communication of the capital assets set aside to accomplish specific activities within a certain period. A budgetary control is the development of budgets related to executive responsibilities that aim to achieve an organization's business goals, according to the Institute of Cost and Management Accountants. It involves the systematic comparison of projected budgets against actual expenditures.

Planning

Budgeting and budgetary controls direct executives and managers to think closely about an organization's future. Managers use budgets to evaluate departmental targets and priorities against the overall goals and objectives of the organization. In this respect, view a budget as a detailed performance and financial plan that allocates capital assets to business goals and objectives. The level of planning required to develop a sound budget and budgetary control system can test the skills of the best executives and managers.

Responsibility

Budgetary control systems require systematic monitoring and reporting. Key managers are responsible for achieving budget targets for business operations under their personal control. Generally charged with developing action plans to control budgetary variances, or if there is a basis, key managers can propose to revise the part of a budget they control. Managers must show justification for budget increase requests for business programs or projects. Budgetary control systems compel cost centers to closely monitor departmental expenditures and report budgetary variances.

Notice

Budgetary controls allow a company to understand each department's financial performance. Its continuous monitoring process also helps managers to identify budgetary problems early. Without controls, problems with managing budgets can go unnoticed until it poses a real risk to an organization's financial health. For instance, an unmonitored business project can accrue costs from suppliers that may significantly deviate from budgets. This may not show up as a problem until an invoice arises in 30, 60 or 90 day cycles. A budgetary control that requires pre-approval from cost centers for expenditures over a certain amount can reduce the likelihood of this occurring.

Performance

A budget control measures budgets against actual performance. Use it as a basis for performance appraisals, or variance analysis. Assess budget deviations to uncover the cause for differences. Controllable factors can serve the basis for instituting remedial actions. Budgetary control data also provides the basis for developing future performance goals in areas with high variances.

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