Budgeting control

Budgeting control refers to the process a company uses to track actual spending against planned budgets. Not only does this help keep spending under control, but businesses are able to create more accurate budgets and maximize their profits.

When a budget is produced, it’s important to follow up and ensure your actual performance matches up to the original plan. Strong budgetary control lets you track and measure expenses against the initial forecast. This system also encourages taking action against any variance to keep your company running cost-efficiently.

Budgetary control is an ongoing process, but manual reviews can occur monthly, quarterly, or annually. Alternatively, automated management accounting will prompt decision-makers as and when action is required.

The budgeting control process

The outcomes of this system let your business react to real-time data and better stay on top of spending. So, it’s important to know how to exercise budgetary control. Here are they.

Set budget goals

Individuals can take responsibility for budget targets, but there may be some company-wide budgeting goals that are also required. Departmental heads are typically responsible for this decision-making.

Trigger rewards

Typically, businesses will offer incentives as part of budget controls. When those goals are met, automating a rewards process is important to provide a positive feedback loop.

Flag variances

Variances should be highlighted when goals are not met (or are forecasted to be off track). For example, when actual expenditures do not match budgeted figures. This too can be automated and should give warning in advance.

Take action

The individual or team responsible for the variance should take corrective action. This may mean you adjust spending to remedy the forecasted and actual budget match, and approach the future period from a stronger standpoint.

The importance of controlling your budget

Budgeting control is an integral part of the accounting process and the overall functioning of your business.

1. Data-based decisions

Budgetary control removes the need to make emotion-based decisions, leading to more level-headed and thoughtful action. By relying on the data, you get an extremely accurate overview of company expenditure at a macro and micro level.

Moreover, the data is updated constantly. This means that you are sensitive to real-time changes and expedites the entire adjustment process. Data-based budgetary control enables you to get capital expenditure back on track quickly, without mistakes.

2. Improved allocation accuracy

Typically, business budget allocations are based on historical spending trends as part of a top-down approach. This means that departments who traditionally get a large proportion of the resources may be incurring wastage with a ‘use it or lose it’ attitude. Other departments may be held back from growth if they don’t receive sufficient funds, which can halt the development of the entire business.

However, this version of budget preparation moves closer to a ‘zero-based budget’ style. By acting like resources are scarce, every single expense has to be justified. This helps with controlling costs and creates a 'cash budget' mindset- departments are only granted the exact budget amount. It also ensures that resources are allocated more accurately and wastage is reduced.

3. Better communication

One of the most prominent features of budgetary control involves taking opinions and feedback from different departments. This fits with a bottom-up approach; whereby teams communicate what they need, and their requests can either be approved, denied, or revised.

By working with budgetary control, your business unit can avoid miscommunication. It improves overall coordination between departments, and everybody is on the same page. Budgetary control facilitates a ‘buy-in’ culture; in turn, making every employee feel responsible for hitting expenditure and revenue targets.

4. More optimum spending

By exercising budgetary control, you put your business in good stead to set ongoing habits and produce glowing financial statements. Of course, unexpected or emergency expenses are uncontrollable. But the mechanisms of a good budgetary control system allow you to build from a floor of data.

Not only does this financial management system help control deviations, but it naturally leads to better systems and processes in regard to expenses. The budget committee can optimise spending, conserve funds and maximise profits.

Budgeting control challenges

There are some common threats to your budgetary control process that need to be addressed in order to make the system smooth and efficient:

Inaccurate or delayed data

Unfortunately, as your company grows, it will become harder to access data that is both accurate, and up-to-date. Consequently, this can lead to poor decision-making due to proxy information, instead of actual results.

An operating budget should be just that; a budget that matches your current, real-time operations. There are a number of budgeting software and tools to ensure that information remains up-to-date. Then, in order to analyse this accurately, a range of ordination techniques should be used across the entire chart of accounts.

Lack of solution implementation

So, you've highlighted a variance, now what?

Many businesses can fall into the trap of spotting a problem but failing to implement a solution. Sometimes, this is down to an unwillingness to change spending habits. Other times, there is no obvious solution altogether.

Establishing budget responsibility is a good way to combat this. By creating a budget officer for each expense category, you generate ownership over the budgeting process.

For example, one team is responsible for sales budget, another on production budget, and a third controls the procurement costs associated with raw materials. This makes finding and establishing a strategic solution more likely.

No clear timeline

The fastest way to threaten your bottom line?

A rushed budget.

The top management teams will plan well in advance of the actual budget period and ensure that monthly or quarterly forecasts fit into the long term company financial plan, too. Fortunately, there are many free accessible templates and formats online to aid you in planning the budget ahead of time.