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S&A Knowledge Series - Budget & budgetary controls

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S&A Knowledge Series - Budget & budgetary controls

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In continuation of our knowledge series please find attached an update on "Budgets and Budgetary Controls".

In light of the current humanitarian and possible economic turmoil, it becomes imperative for us to have an effective budget and controls for the same. This would ensure we stick to our expenses envisaged at the start of the year and exercise great control over our costs.

In continuation of our knowledge series please find attached an update on "Budgets and Budgetary Controls".

In light of the current humanitarian and possible economic turmoil, it becomes imperative for us to have an effective budget and controls for the same. This would ensure we stick to our expenses envisaged at the start of the year and exercise great control over our costs.

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S&A Knowledge Series - Budget & budgetary controls

  1. 1. P a g e | 1 Budgets & Budgetary Control <<<<<< S&A Knowledge Series Prepared by Muskan Jain Article Assistant Vetted by Atibhi Rastogi Assistant Manager (Advisory Solutions) www.sethspro.com info@sethspro.com New Delhi | Lucknow | Coimbatore `
  2. 2. P a g e | 2 WHAT IS A BUDGET AND BUDGETARY CONTROL? A. Budget is an estimation/statement of financial resources set aside for carrying out specific activities in a given period in an organisation. An example would be a Sales Budget or an Advertising Budget. B. Budgetary Control is a control technique wherein the actual results are compared with the budgeted figures and any differences arising out of the same are dealt with by either taking corrective measures or revising the original budget. WHY IS BUDGETARY CONTROL EXERCISE IMPORTANT? 1. Compels management to plan for the future and clearly defines responsibility of various stakeholders for achievement of the budget targets 2. Provides basis for evaluation of performance of individuals and the organisation 3. Improves allocation of scarce resources 4. Makes ‘Management by Exception’ possible by highlighting weak areas of business which need management attention 5. Acts as a motivating factor for employees by defining their performance targets 6. Corrective measures taken on timely basis assist in Cost Reduction thereby, improving Profitability BUDGET APPROACH (A) The Top Down Approach or Imposed Style Approach Budget is prepared by the senior management, taking into consideration the organisation goal and other comprehensive factors that affect the organisation as a whole. Senior Management • Prepares a High-Level Budget considering the Macro factors Department Managers • Prepares a detailed budget on the basis of the funds allocated to their department Operational Staff • The budget is finally rolled out to the operational staff for its execution
  3. 3. P a g e | 3 BENEFITS 1. Such budget focuses on the overall growth of the organization 2. Saves time of department managers and prevents Inter-departmental disputes 3. It makes the various departments aware of the management’s expectation from them 4. Preparing a single organization-wide budget is less tedious LIMITATIONS 1. Lesser participation of department managers leading to lack of motivation amongst them in implementing the budget 2. Possibility of unrealistic budgets since senior management in not aware of day to day operations and related issues. 3. May lead to under/over allocation of resources (B) The Bottom Up Approach or Participative Approach Unlike top-down approach, bottom-up budgeting begins at department level and moves up-to top management. The departmental heads/managers prepare their budget based on present information and past experiences and present it to senior management which then compiles it into a Master Budget for the organisation. BENEFITS 1. It gives a sense of ownership & responsibility to subordinates when they are valued. 2. Budgets are usually more accurate since they are based on operational data and experience. 3. Subordinates cannot blame unrealistic goals as an excuse for not achieving the budget expectations. LIMITATIONS 1. Subordinates may lack the practical knowledge required to formulate a budget. 2. Time consuming since a lot of time will be wasted in arguing & agreeing on common terms. 3. Subordinates may artificially inflate the proposed budget so that they can attain cost targets easily. Budget Holding Staff • Prepares budget for themselves. • Submit to Departmental Managers Department Managers • Quantify the resources required. • Submit the Budget to Senior Management Senior Management • If rejected,returns back to department managers. • If accepted,allocate budget to subordinates.
  4. 4. P a g e | 4 Seth & Associates was established in 1975 and since then it has been providing unparalleled value addition to its client. We are a firm with diverse and rich exposure in various fields. All our partners are full time active working partners looking into specific sector domains such as Corporate Law, Direct Tax, Indirect Taxes, Raising Capital (Bank and Equity), Business Advisory solutions, Forensic and Information Technology audit and many other core sectors relevant to overall growth of the clients. The information herein contained is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is very accurate and considers the latest amendment in laws which are very frequent. The above is purely for academic reading and general awareness of the law. No one should act on this information without appropriate professional guidance which requires a thorough examination of a situation. This content is owned by Seth & Associates, Chartered Accountants and is not to be reproduced without our explicit permission. www.sethspro.com | info@sethspro.com New Delhi | Lucknow | Coimbatore WHETHER TO INCLUDE SUBORDINATES IN THE BUDGET SETTING PROCESS OR NOT? The ‘Ease of Implementation’, amongst other benefit, makes Participative Approach more suitable for all organisations. If used in the right circumstances, it has an outstanding potential for motivating managers towards achieving the organisational goals. However, there is testimony that Imposed Style Approach has been preferred in the following circumstances: 1. Where the personality characteristics of the participants may limit the benefits of participation, such as tendency of artificially inflating the budget estimates. 2. Where the firm has large number of homogenous units operating in a relatively stable environment 3. Where the processes in the organisation are highly programmable with a stable and clear input-output relationship PRE-REQUISITES OF EFFECTIVE BUDGETARY CONTROL If an organisation wants to establish an effective budgetary control, it must consider the following points: 1. A serious attitude of the management is required towards the system. 2. There should be clear demarcation of areas of managerial responsibility so that in case of errors only the concerned manager can be penalised. 3. The budget targets should be reasonable & achievable otherwise it demotivates the operational staff. 4. There should be established techniques for data collection, analysis & reporting. 5. Variance reports should be prepared timely so that the deviations can be reported on a periodic basis, typically a month. 6. In case of material variances, corrective action shall be initiated in order to minimise loss to the organisation.

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