A budget refers to a written document detailing the ways an organization will allot its money. As the head of the business, you must decide if budgetary control will rest with you or with your managers. There are four applications of budgetary control, as noted by Michael Armstrong in "A Handbook of Management Techniques: A Comprehensive Guide to Achieving Managerial Excellence and Improved Decision Making."
The budget document is created through a system of planning. If you develop the budget by yourself, you can start with last year's budget. Your budget will need to include all the income that you project and how you will spend it. Part of the planning stage requires prioritizing different business needs. You might have to make tough choices, such as hiring an extra person this year and affording higher energy costs. Your budget document must reflect all aspects of your planning and prioritizing. If you leave out important budget considerations, you could face a shortfall during the budget year.
Once the budget document is finalized, managers of each department are responsible for discretionary spending, such as supplies, printing costs and payroll, while keeping to their budget allocation. You need a financial system for tracking expenses by each line in the budget. The ability of each manager to stick to his budget will affect your profitability and financial position as a company.
Using the measurement system, you get to compare actual spending with budgeted expenses by going line by line in the budget document. You must determine if there is any overspending, and where in the company it occurs. It could be that certain departments overspend, and they need to have their budgetary control adjusted, or it could be that managers of those departments can justify instances of overspending by explaining unexpected costs, such as a supplier increasing prices during the business year.
You have to take action once you have studied how each department is spending within or over its allocated budget. Any action you take to get a department to increase or decrease its spending equates to control. In extreme circumstances, such as when you cannot get managers to rein in spending and stick to their budget, you can take away budgetary control. All spending that is conducted according to the annual budget document helps a firm maintain its focus on strategic goals.
- budget report image by TEMISTOCLE LUCARELLI from Fotolia.com