You probably know about budgeting and its role in ensuring that your money gets used for the right purposes and that the available amount of money gets allocated in the most useful way possible. Whether you are a business owner or use budgets for your reasons, having a budgetary control system in place is the next step in ensuring that your budget is not only adhered to but is effective.
Firstly, let’s define budget vs budgetary control, although most if not everyone should know what these are:
A Budget is a formal statement of the financial resources set aside for carrying out specific activities in a given period. It helps to coordinate the operations of the business.
Examples would be;
- Marketing budget,
- Operations budget,
- Capital expenditure budget,
- Revenue/sales budget.
Budgetary control is a technique whereby actual results gets compared with budgets.
Moreover, any differences (variances) should be the responsibility of responsible individuals (cost or revenue centre manager – these are a subset of responsibility centres) or business owner, who can either exercise control action or revise the original budgets.
Budgetary control means tracking and controlling your budgets, principally it is the continuous comparison of actual with budgeted results, either to evidence that you are on track to meet your objective, or to provide a basis for its revising the original budget, also called re-forecasting.
Let us break this down, budgetary control is the process of monitoring and controlling your expenditure to keep it in line with your original budget. Since sometimes actual spending may be more or less compared to the budgeted figures, it also helps note the various variances between the estimated and the actual costs incurred.
Once the deviations are pointed out, you can then take steps to find out why they occurred, and how you can control this in future. Sometimes, of course, you may find that the variances are necessary and that the actual is the amount that you should have budgeted for in the first place. In such cases – your difference can be adequately explained and justified!
Before doing budget control, you need to have a proper and realistic budget.
Budgeting is one of the most critical business activities and therefore, requires extensive and detail attention.
How to have a good or successful budget – a reasonable budget is a budget that takes into consideration the following:
- First, you need to have a specific timeline for your budget. The best time to gauge your spending is by using a monthly schedule since there are many recurring monthly expenses.
- Calculate your closest estimate of recurring monthly expenses, or expected monthly payments. Using past monthly expenditure as a gauge is a good idea. Once you have all recurring monthly bills, create some room for other necessities or emergencies, depending on money available versus expenses. If your budget is annual, ensure that you still break it down to monthly timelines.
- Determine the income available -this will depend on the sources of income available. Add all the revenue to get the total income available.
- Deduct the expenses from the income. Is there any surplus? That means you have some money to save or invest, and probably pay off debts (you should add recurring payments to the expenses above). Are the costs higher than the income? It means you have a budget deficit. It is time to make some adjustments to your expenses. Start with the “least necessary” expenses. You will find that some costs cannot just be cut off on a whim.
- Now it is time to apply some budgetary control techniques. Track your spending against your planned budget, and see where you are spending more or less in comparison to your budget. Are the additional expenses of extreme necessity? Are you taking steps to stick to your budget?
- Sometimes it may not be possible to stick to the budget, but ensure that such cases are justified. If you have to meet an expense outside the budget, try to see how you can balance the costs at a later time to avoid too significant a variance. It is therefore essential to do a continuous budget analysis.
How to Control Your Budget – If you are experiencing the following problems with your spending, you may be experiencing some budgetary control issues.
- You have reached your credit limit, and can no longer access credit or loans.
- Your credit cards have been exhausted.
- You have recurring debts and never seem to stay debt-free.
- Your monthly expenses exceed your monthly income.
- Every time your income rises, your expenditure goes up as well.
- You seem to have a spending bug, and spend money as soon as you get it.
If you are experiencing the above, you need to take some acute budgetary control measures. These may include the following:
- Keep records. A record of all income earned and all expenses for the month makes it easy to keep track of expenditure, and to ensure you make a constant comparison between revenue and spending.
- Have a list of all recurring bills and all additional commitments for the month. Have a record of all income available for the month.
- Track your spending and note all variances.
- Keep some reserves/savings for investment or emergencies.
- Do not use credit cards unless when necessary.
- Avoid impulse spending.
- Find out how much you spend on leisure and entertainment. These may be the simple expenses to cut. You can find some other recreation or a cheaper option. For instance, it may be easier to rent a video for home use than go out with friends to watch a movie. It may be cheaper to watch a football game on TV than booking a ticket to the venue.
- Give preference to spending the cash in hand as compared to using cards and other modes of spending. Cash spending is easier to control and, unlike cards and credit, rarely attracts interest and hidden charges.
- Give preference to cash buying rather than credit purchases. Credit purchases sometimes make you spend more than you can afford or more than the money available for that specific time. Credit purchases, therefore, influence you to spend beyond your budget.
- Have some financial goals. Financial goals help you avoid unnecessary expenses, as cash available is only allocated to the costs related to that goal. The target may be a future investment, college fees, and so. Goals require a certain level of discipline. A friend of mine was saving for a business, and included something he referred to as “business expenses” in his budget every month, and saved for that future investment with dedication. He had a goal, and he took extra steps to achieve it. He treated his future business as if it already existed.
- Have designated places for your income. An account for expenses, for savings, for an existing or future business, for emergencies. In this way, you will always know where to go when you need money for a specific purpose.
- Always try to justify your spending with questions like: is this necessary? Do I need a new car right now? Is there a better you can spend this money? Can I do without it? Does this expense improve my life or lifestyle or work?
Advantages of budgeting and budgetary control
- Compels the management to think about the future, which is probably the essential feature of a financial planning and control system.
- Forces management to look ahead, to set out detailed plans for achieving the business targets.
- Promotes coordination and communication – as budget should be set by gathering estimates from those who are likely to be incurring the costs
- Clearly defines areas of responsibility. Requires managers of budget centres to be made responsible for the achievement of budget targets for the operations under their control.
- Budgetary control Provides a basis for performance appraisal (variance analysis).
A budget is a yardstick against which actual performance is measured and assessed. A control review is exercised by comparing actual results against the budget. Departures from the budget can then be analysed, and the reasons for the differences broken down into controllable and non-controllable factors.
- Enables you to take remedial action as variances emerge.
- Motivates employees by participating in the setting of budgets.
- It Improves the allocation of scarce resources.
- Economises management time by using the management by exception principle.
Understanding Variances in Budgets
Variance in a budget refers to the difference between the budgeted expenses or revenue and the actual amount or amounts incurred. If the actual cost is less than the estimated, the budget may be said to be favourable (or if the income is higher than the budgeted income).
Budget variances related to expenses are usually easier to control than differences related to revenue – this is because some costs can be easily cut or reduced, while extra income may be harder to raise.
You can group some expenses into one arrangement at a lower cost. For instance, if a business has several insurance policies, they can be replaced with one or two insurance that covers most of the risks. If there are too many telephone lines or offices, one can take steps to reduce these expenses.
When calculating a budget variance, subtract the budgeted figure from the actual amount incurred.
Divide the negative or positive result by the estimated amount, and multiply by 100 to get the percentage variance – This formula is an excellent tool for budget analysis, regardless of the budget size.
It is also easy on the memory. Using the percentage format helps in budget comparison as well as a comparison of various budget expenses.
How to correct Budget Variances
Since a budget variance means that you have incurred more expenses than you budgeted for or your income is less than expected, you need to analyse your budget. In positive variances, the results are better than anticipated, which can be good news.
Actual costs are lower than expected, or revenue is higher than expected (or both). However, In a negative variance, the outcome is not so good – costs may be higher than expected, or income may be less than expected (or both scenarios). A budget variance does not mean that you are making a mistake.
Most businesses experience budget variance. Nearly all companies do. What you do with the deviations is what matters.
- Keep in mind that an increase in revenue creates a positive variation, and is a favourable outcome for the business.
- Keep in mind that a decrease in expenses/expenditure creates a negative variance, and is also good for business.
- Ensure that your records are accurate and that the difference is not a result of omissions or errors.
- Find out the cause of the variance. Is there an increase in the price of an item? Has there been an increase or decrease in sales in comparison to the budgeted figure?
- Is the variance beyond your control? For instance, has there been an increase in the price of raw materials? You may need to adjust the budget figure.
- Is the variance within your control? Perhaps the sales volume has decreased. What can you do to increase sales?
Setting better budgets and forecasts.
Here some steps to ensure that future estimates are more accurate and are more realistic – it is essential to consider the following:
- Do not keep fixed budgets. Always ensure that your budgets are flexible. Do a constant budget analysis. The price of products, raw materials, other costs or income source may change and affect the actual figures.
- Keep your budget realistic, always.
- Make the necessary provisions for such things as tax, depreciation of assets, fluctuation in market rates, and so on.
- Keep the bigger picture in mind always. By having a focus or a plan, it is easy to ensure that your budget fits into your planned activities and that the budget objectives tie in with the desired target or outcome.
- Keep track of all changes and adjustments made in various departments that may affect the budget in future.
- Make a provision for emergencies.
- Compare past with current budgets to ensure continuity and successful tracking of changes and improvements.
Budgetary control is, therefore, of extreme importance in any business (or in personal finances). After all, it is one thing to create a budget, but quite another to ensure that you stick to the budget. The latter becomes much easier when you have proper budgetary control in place.
For assistance or coaching in creating budgets for your business – email firstname.lastname@example.org.