What Is a Budget Control?
One of the common characteristics of people who are budget conscious is that they are always on the lookout for opportunities to improve the budget. They look at every aspect of their lives, and if there is any opportunity to improve the budget, they take it. This is called budget control. The most popular method of budget control is the monthly or quarterly budget reviews. However, it is also important to look at other ways of controlling budget costs, such as investment, saving and non-budget-based methods.
Budgeting is the procedure of setting up schedules for future dates, calculating the financial consequences of those schedules, determining the funds available for each event, setting up reasonable limitations for expenses and revenues, and allotting funds for specific purposes. In essence, budgeting is the procedure of setting up a plan for accomplishing future goals. Budgeting is done periodically to prepare for upcoming dates. For example, a budget is often set up by an organization for two years in advance for planning purposes. It provides a framework for understanding and planning the organization’s resources, as well as setting up the current budget.
In order to use budgeting successfully, you have to understand the 3 basic budget entry method parameters. These parameters include the baseline, the mid-year level, and the end-of-year target. Most managers use baseline budget entries as the starting point of their analysis. By using the baseline budget entry method parameters, they can decide how much budgeting will be done, what percentage will be done by staff and other staff members, and how to allocate the budgeted funds among the activities for which they are responsible.
End-of-year targets to help make the strategic decisions. For example, a company may decide to increase the share of capital expenditure budgeted by the company every year. The strategic goal is to increase the share of capital expenditures budgeted by the company each year. A good way to achieve this is to use a financial model that incorporates the target with the revenue growth rate of the company over time, in terms of percentage points annual. This ensures that the manager can make the decision to increase the capital expenditure budgeted annually by a specific percentage point on a yearly basis.
To implement the above strategy, the company has to record its capital budgeting, the total amount of expenditure budgeted, and the target percentage. The next step involves setting up the budgetary control process. This is where the staff meets the manager to discuss the objectives and assign the relevant budgetary control method parameters.
Once these parameters are set, the staff prepares a fallback plan that will explain what would happen if the target is not achieved. For instance, suppose that the target is to increase the gross sales by two percent in the current year. If the target is not met, then the first step would be to use a failsafe method wherein the company has to fail funds check once the revenue growth rate is not attained in one year. This would be applicable for a certain number of years until the target is met, and the company has to resume budgets at that time.
Once the company has met the target, the manager may choose to increase the capital expenditure budgeted by six percent in the next year. The first step is again to use a failsafe or target based method where the revenue growth rate is not attained in one year, and the company has to allocate resources to a new target based on the new forecast. This is often used when the number of assets is limited, or when it is difficult to estimate the effect of inflation on the value of the firm. In such cases, the company uses the fixed funds check calculations where the cost resource is estimated based on the current price and a predetermined time period. In the event of under performance, the manager may choose to reduce the available budget for a specific time period up to the first anniversary of the start of the planned investment.
In the example given above, if at the end of the first year there is still insufficient funds available to continue with the investment plan, and the total budget goes down by seven percent, the manager may choose to make some level of cuts and reduce the total budget by six percent for the following year and make a further cut of five percent each year thereafter until the desired results are achieved. One more important rule for budget control is to include all purchases and revenues that are necessary for meeting the goals, but excluding those expenses that are either an outright cost or a drain on the available budget. Also, it is important to exclude the debts, interest payments, and other costs associated with long term investment decisions in the overall statement of funds.