Essentials of effective budgeting and budgetary control

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The main essentials for an effective and successful system of budgetary control can be given as mentioned below:

  • Support to top management: In order to make the budgeting system successful, it is necessary that it must have the whole hearted support of every person involved in the organizational set up. In this regard, the initiative must come from the top management;
  • Definite and reasonable targets or goals: For the successful operations of the budgetary control system, the targets fixed in the budgets should be definite, realistic and attainable. This feeling should come from the various executives who have been assigned the responsibility of various budget centers;
  • Well defined organization: In order to ensure maximum benefits from budgetary system, well defined budget centers should be created within the organization so that the responsibility of each executive in the organization may be clearly laid down;
  • Well defined policy: The budgets are prepared to establish the responsibilities of executives to the requirements of a particular policy. As such the policy of the business to be followed during budget period should be clearly defined;
  • Active participation by executives: The various executives who are made responsible for different budget centers, should be actively involved in the preparation of the budget;
  • Efficient budget education: The various executives responsible for putting into effect the budgetary proposals, should take active interest in the operation of the budgeting system. It is possible if these executives are constantly educated about the objectives, potentials and techniques of budgeting;
  • Adequate accounting system: Budgeting is closely related to accounting since compilation of budget is done on the basis of historical data provided by the accounting department. These data form the basis for making estimates. As such the accounting system should be designed to the requirements of responsibility accounting;
  • Cost of the budgeting system: The cost of operation of the budgeting system should be within the financial capacity of the business and should not exceed, in any case, the total benefits accruing from it to the organization;
  • Efficient reporting: It is necessary that prompt reports on the comparison of actual performance with the budgeted figures should be made available to the management for ensuring timely action on the points of inefficiency;
  • Flexibility: The budget program of the business concern should not be too rigid, it should be flexible and should provide for possible contingencies;
  • Integration with standard costing system: If the business concern decides to introduce standard costing system, it should be completely integrated with budgetary control system in respect of compilation of budget and analysis of variances.
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Essentials of effective budgeting and budgetary control

This article was published on 2012/03/15