This report is a discussion on the different tools used in budgetary control, their advantages and disadvantages. The discussion also considers the effectiveness of each planning tool and how they solve financial problems to achieve sustainable success of the business.
Blocher, stout and Cokins (2010) define a budget as “a detailed plan for the acquisition and use of financial and other resources over a specified period of time, typically a fiscal year”. It is easy for companies to meet their targets and business objectives in an environment that facilitates budgeting. Budgetary control on the other hand focuses on how budgets are made and compared with the actual performance to find out variances.
The two types of budgets are capital and operational budget.
- Capital budget: Is concerned with allocating money for the organisation to acquire capital assets such as land, machinery, buildings among others. Without those fixed assets, the organisation may not sustain its business operations and hence fail to achieve business goals. A capital budget is therefore gives strategic direction to the organisation. It also ensures that the company’s capital assets which also comprise of factors of production are safeguarded and efficiently utilised to achieve business objectives.
- Operating budget: Is concerned with allocating money needed for day to day operations. It makes projections on expenses, costs and income. Keeping track of the company’s expenditures is important for management to achieve business objectives. Managers are guided by the operating budget to ensure that the right procedures are followed and there is no wastage of resources. Some of the operational expenses and costs include wages, advertising, utility payments, sales and distribution costs.
Advantages of Budgeting as a Tool of Planning
A budget is a vital tool in planning because it keeps managers on course of achieving the company’s objectives, they can easily detect deviance and act swiftly. For example, managers at the Bread Factory can use the budget to know how much they spend on materials, labour and utilities to produce a given quantity of bread.
It is a motivating tool to both managers and employees. It gives them confidence that organisation has enough financial resources to spend on the key aspects that will lead to achievement of business goals.
Coordination among different business units is crucial for achieving the company’s goal and budgets facilitate just that. For example, what goes on in the production department is dependent on the activities of the purchasing department. The human resource department should ensure that labor requirements for every department are met.
A budget is an important tool in ensuring that the company does not waste resources. Only what is needed is budgeted for. Reducing wastage increases profitability hence organisational success.