What is a budgetary control system and what are its main benefits?
A budgetary control system is a system of management control in which planned income and spending is compared with the actual income and spending, this allows for a business to see if the planned actions are being followed and whether those plans need to be revised to improve profitability. Such a system is crucially important to a healthy business; it is a method of observing and regulating expenditure and income. It is an important tool for a business; it can control the flow of cash since a good system monitors cash inflow and would flag-up any probable shortfalls so that corrective action could be taken.
Such a system would also ensure that cash was always available for vital business purposes like buying raw materials for production.
A budgetary control system comes with the following benefits:
- Budgets act as a controlling device to correct any anomalies. This means that if the expenditure of a given activity surpasses the selected budget at any point, it will indicate an abnormality from the prearranged course, therefore requiring action from management. For example, a manager of a department is given a budget of £1,000 per month for specific supplies; he would in a situation where he could control and monitor the expenses made for those supplies.
- Budgeting can help lower-level managers to see where the organisation is going and where they fit in the organisation. Such budgets assist junior managers to be accustomed to the organisational goals and priorities and their own responsibilities and how their tasks relate to other departments within the organisation.
- The budgeting process encourages the management to shift attention to future operations since budgets are a part of the planning process, managers are forced to predict and anticipate the changes and trends in the external environment. For example, in the door manufacturing industry, when allocating budgets, it must be kept in mind that future changes in the price of wood and metal would affect the industry.