It's impossible to gaze into the future and see all of the variables that could make your company earn or lose money. However, it is possible to use past information to make tentative forecasts and then adjust your information as real-world circumstances unfold. Budgetary control is an important tool and a useful process, but it should be approached with caution because of its limitations, and predictions should be always be treated as scenarios rather than facts.
Budgetary control systems involve laying out financial forecasts for earning and spending and then reviewing these numbers relative to actual accounting numbers.
The Benefits of Budgetary Control
- Setting goals. Budgetary control can be indispensable for short- and long-term planning, helping you to sync day-to-day expectations with big-picture projects. Your numbers should reflect your priorities, such as allocating significant resources for marketing a particular product or investing in worker benefits to improve employee retention.
- Clarifying strategy. By setting a clear budget and working out spending priorities, you position your company to coordinate the activities of different departments to run smoothly in tandem. A budget that allocates funds for researching and developing a new product line charts a path forward and provides clear reference points for spending and staffing. A budget based on tight cash flow forces you to clearly define spending priorities and avoid unnecessary expenditures.
- Reference points. The budgetary control process forces you to review actual outcomes relative to theoretical projections, providing concrete reference points for evaluating success. Measuring your company's performance and its deviation from the budget you set forces you to reflect on the numbers themselves and the situations they reflect. This evaluation process also provides feedback on your forecasting capabilities, showing their accuracy or shortcomings.
Disadvantages of Budgetary Control
- Unpredictability. The significance of budgetary control can be undermined by the fact that there really is no way to anticipate certain outcomes, such as shifts in customer demand that affect sales numbers and shortages that affect the cost of critical materials. Inflation can also influence both revenue and expenditure levels. Budgetary control may create a false sense of certainty and control in situations where it may be more advantageous to accept the difficulty of predicting outcomes and instead maintain maximum flexibility.
- Accounting costs. To practice budget control conscientiously, your company will need to allocate resources and personnel. If you have a dedicated accounting department, this may not be an issue, but if you have a small staff that shares responsibilities, you may have to divert employees and payroll hours from activities such as production that are more likely to directly produce income.
- False sense of security. The budgetary control process may create the illusion that you know what you can expect from future business activities. For example, you may forecast that a new product you introduce will increase revenue by 20 percent and then purchase inventory and equipment based on this projection. If these anticipated sales fail to materialize, you may find yourself in the position of spending funds you cannot recoup.
The Purpose of Budgetary Control
Budgetary control isn't intended to reflect solid, final numbers but rather to provide a useful road map for management decisions. The part of the process that compares actual numbers to projected figures serves as a form of reconciliation, bringing together real circumstances with the vision you have articulated and spelled out in numerical form. This reconciliation process can be both humbling and indispensable, allowing you to reflect on past assumptions while rethinking your forecasts and plans for the future.
The success of your budgetary control process depends on your ability to anticipate the future based on past performance. Although there are some outcomes that you will never be able to predict, the better you learn to recognize correlations and patterns, the more accurate your projections will be.