What is Budgetary Control?

Budgetary control is a system of procedures used to ensure that an organization's actual revenues and expenditures adhere closely to its financial plan. The system typically involves setting personal goals for managers that are based on the budget, along with a set of rewards that are triggered when the goals are attained. In addition, budget versus actual reports are routinely issued to anyone having responsibility for a line item in the financial statements; they are then expected to take action to correct any unfavorable variances. Further, the results of the business are closely monitored by a budget committee, which provides feedback to managers whenever actual results threaten to fall below expectations. The budget may even be loaded into the purchasing and payables software, so that purchases are immediately flagged if they exceed the budgeted amount.

Advantages of Budgetary Controls

There are multiple advantages to the use of budgetary controls, which is why they are installed in most larger businesses. Here are the key advantages:

Cost reduction. By adhering to a system of planned costs, managers can spot unfavorable variances and remediate them as soon as possible. Also, tight control over capital budgeting ensures that major cash outlays are only made on those fixed assets included in the underlying plan.
Goal clarification. The presence of budgetary controls is a good way to clarify with employees exactly what management believes to be the most important goals of the organization. This is because funds are directed at what are considered to be the most important goals, while funding is restricted elsewhere.
Performance measurement. A system of budgetary controls establishes a baseline of expected revenues and expenses, against which actual results can be compared. This represents a good tool for senior management, which can review budget-versus-actual reports to determine where the business is matching expectations and where it is not.
Profit enhancement. By maintaining tight control over costs, a system of budgetary controls keeps excess expenditures down, which tends to drive profits up. Further, budgetary controls tend to emphasize efficiency, which also tends to improve profits.