What is budget control?Posted on: August 15, 2023
by Ben Nancholas
Budget control refers to the process of managing, monitoring, and adjusting a company’s budget and cash flow to ensure that the business remains on track to meet its financial goals and deliver on the organisation’s objectives.
The budget itself – which illustrates estimated revenue and expenses over a specific period of time – is an essential part of business planning, allowing companies to make informed decisions during financial planning activities. Budget planning should take several things into account, including fixed costs, such as office rental payments, as well as variable expenses, such as the cost of raw materials.
Budget control, meanwhile, is an ongoing process that supports the budget and helps achieve its wider financial aims. Budget control requires:
- Reviewing budgets regularly to track business spending, expenses, and performance against the budget’s figures.
- Identifying reasons for variance, which occurs when actual spending and business expenses are higher than budgeted.
- Taking quick corrective action where variance is identified. This may include reducing expenses, increasing income, or both, to ensure business performance remains on track.
Common principles of budgetary control
Methods used for budget control can vary from organisation to organisation, but there are a few guiding principles that apply across the board:
- Set realistic budgets. A budget should be achievable and built on accurate data from previous years or comparable information.
- Be flexible. Adjustments may be necessary due to changes in the market or business environment, so budgets – and businesses – need to be able to adapt as needed.
- Communicate. Everyone within a business should know how their role helps deliver on the organisation’s budget. In fact, budget control relies on two-way, collaborative communication with staff.
- Monitor progress. Budgets need to be monitored regularly to ensure that any issues are identified as early as possible.
- Take corrective action. Any variances should be addressed straight away to ensure that spending and expenses get back on track.
Budget control in the public sector
Within the public sector, the intergovernmental Organisation for Economic Co-operation and Development (OECD) outlines 10 principles to govern budget activity:
- Manage budgets within clear, credible, and predictable limits for fiscal policy.
- Closely align budgets with the medium-term strategic priorities of government.
- Design the capital budgeting framework in order to meet national development needs in a cost-effective and coherent manner.
- Ensure that budget documents and data are open, transparent, and accessible.
- Provide for an inclusive, participative, and realistic debate on budgetary choices.
- Present a comprehensive, accurate, and reliable account of the public finances.
- Actively plan, manage, and monitor budget execution.
- Ensure that performance, evaluation, and value for money are integral to the budget process.
- Identify, assess, and manage prudently longer-term sustainability and other fiscal risks.
- Promote the integrity and quality of budgetary forecasts, fiscal plans, and budgetary implementation through rigorous quality assurance, including independent audit.
The benefits of budgetary control
Whether they’re a new business, a start-up, or an existing corporation, businesses that prioritise budget control improve their chances of achieving the financial goals in their business plans. This is because a well-functioning budget control system can help businesses to:
- Avoid financial problems by identifying potential problems early on.
- Make better, data-driven decisions about how to allocate resources.
- Improve efficiency and productivity.
- Increase profitability.
- Control spending and expenses.
- Create more accurate budgets.
The budgeting process: a step-by-step guide
When implementing a budget control system, there are a few key steps to follow.
Step one: set budgets
In addition to the wider organisational budget, individual budgets for departments should also be set. These budgets should be based on estimates about the resources that department heads require to deliver their activities and initiatives, meet their targets, and achieve their goals.
Step two: track spending
It’s crucial that businesses understand how much money they are actually spending. By regularly tracking financial statements, expense reports, and so on, they can effectively gauge their performance by comparing spending against their budgeted amounts. Tracking can be performed manually at scheduled points, or businesses can use automated systems to detect and alert variances.
Step three: take corrective action
Wherever variances occur, they must be addressed and rectified as soon as possible to ensure that organisational finances stay on target.
Understanding the different types of budgets
There are several different business budgets, all of which help track business finances and financial performance. A few examples include:
An operating budget documents all of the accounts payable expenditures and accounts receivable revenues that a business expects as part of its daily operations during a specific window – for example, in the coming year or quarter, or the next fiscal year.
A cash budget documents a company’s projected cash inputs or inflows and outputs or outflows. This budget may look at short-term estimates with a monthly cash budget, or it may consider longer-term estimates with an annual cash budget.
A capital budget documents the allocation of funds for buying or maintaining fixed assets. These assets can include buildings, land, equipment, and so on.
There are also working capital budgets, which subtract the amount of current liabilities from the amount of current assets to generate a working capital total.
Budgetary control tools
There are a number of different tools and techniques that can be used in budgetary control and budget management. These include:
- A budget variance report. This report shows the differences between actual and budgeted spending within an organisation. It can be used to highlight variable costs, identify potential problems, and to track the effectiveness of corrective action.
- A budget control system. This system should include procedures for setting budgets, tracking actual expenditure, and taking corrective action.
- Bookkeeping and accounting software. Software such as QuickBooks can help with automated budget control, and can generate reports and data to assist with financial decisions. However, small business owners may choose to track figures manually using tools such as Excel or Google Sheets, or make use of online templates for budgeting.
- Balance sheet. A balance sheet summarises a business’s financial position and can support budget control activity.
Learn how to manage and control budgets
Explore budget control in depth with the University of Sunderland’s 100% online MSc Management programme. This flexible master’s programme has been developed for working professionals who want to advance their careers in leadership and management while continuing to work, so you can study around your current commitments and earn while you learn.
One of the core modules on this programme covers financial management and control, so you will have the opportunity to examine:
- internal systems for financial management
- risk management
- measures that ensure financial resources – and other resource types – are used in regular, ethical, economical, and effective ways that benefit a business and support its objectives
- how financial management and control direct and control finances, and ensure that they support business success.