Introduction:
Budgetary control is a term that is regularly used within management accounting. There are a number of definition that can be used to define budgetary control, however, Financial Times Lexicon describes the system as ‘A system of management control in which actual income and spending are compared with planned income and spending, so that you can see if plans are being followed and if those plans need to be changed in order to make a profit’ (lexicon.ft.com, 2018). Even though the budgetary control system is adapted by a number of organisations, there are various arguments discussing whether or not budgetary control is sill relevant and reliable in today’s current unpredictable environment. There are both pro’s and con’s to adapting and using a budgetary control system in the current unpredictable environment which I will discuss in further detail throughout this essay.
Budgetary control features, objectives and different types:
Budgetary control systems are a helpful tool that can used by management in order to make informed decisions about their business. As previously mentioned, this is by the budgetary control system providing management with comparison between actual and planned figures to allow the manager to see if current plan that is implemented is effective or whether corrective action is necessary to achieve the desirable results. The system has a number of important functions that it will need to perform, this can include (accountingnotes.net, 2018):
• To set different budgets and ensure that there is a successful implementation of the system.
• To show the difference between actual performance and budgets for the cost control.
• A contingency plan implemented to correct undesirable outcomes.
The diagram below illustrates the cycle in which the budgetary control system will take and implement within an organisation. This image shows how the budgetary control system is a repetitive cycle which will continuously link round in order to be successful.
Diagram 1 – cycle of budgetary control (AS Accounting AQA, osbornebookshop.co.uk, 2018)
As well having crucial features in order to be successful, the main objective of the budgetary control is ensuring management has all the relevant information in order to run the business in an efficient and effective manner (Businessmanagementideas.com, 2018). This objective is also accompanied by a number of specific objectives which are important, these include (businessmanagementideas.com, 2018):
• Planning – budgetary control can allow various levels of the organisation to think ahead in advance a number of activities that need to be completed to meet budget.
• Control – Budgetary control will alert management of the variations between the budgets and the actual performance, this can then allow the organisation to determine areas which may be wasting organisations resources.
• Coordination – Budgetary control system includes the master budget, therefore, this will force and ensure that senior management will work as one organisation to make plans to be effective.
• Increase efficiency – budgetary control includes consideration of all areas including sales, costs and overheads for the internal and external environment. This will ensure that all the different departments attain full efficiency over all their resources.
• Financial planning – as the budgetary control will be in financial terms, this can allow the organisation to plan cash flow and ensure that there is always enough capital within the organisation.
Advantages of Budgetary Control Systems.
There are a number of advantages that budgetary control systems can bring to an organisation in today’s current unpredictable business environment. Budgetary Control Systems can be extremely effective for an organisation if it is implemented and operated correctly, as previously mentioned, this is due to the features that it has. A budgetary control system can increase effectiveness and efficiency of the company because all of the reports are able to be altered for an individual rather than the organisation as a whole. (McLaney & Atrill, 2005?) This will therefore lead to an increase in effectiveness because it will reduce the amount of time analysing pages of reports which may not be necessary and allow the individual to read the parts of the report that are relevant to them.
As well as increasing the effectiveness of the analysis of business reports, budgetary control systems can allow an organisation to implement a contingency plan and take corrective action if the actual results are not near the budgets or what the company expected. (McLane & Atrill, 2005) This therefore means an organisation is able to take corrective action in order to ensure the difference between the variables will not occur again in the future, this feature is extremely important for an organisation in the current unpredictable business environment. Even though an organisation is never going to be able to plan extensively and in large amounts of details due to the environment, the ability to have some levels of preparation when moving forward can be extremely beneficial to management, employee’s as well as organisation as a whole.
Another advantage of a budgetary control system in an organisation is that it can increase the levels of performance and job satisfaction within the employee’s. (McLaney & Atrill, 2005). This can be due to the fact that the individual will have a goal in which they will work towards this can increase the levels of performance as the employee’s can be driven and determined to ensure that they achieve the budget set for them. Therefore, if the employee consistently hitting and overachieving in regards to their budgets this will lead to job satisfaction as the individual will feel that they are achieving something that is beneficial to the organisation.
Disadvantages of Budgetary Control Systems:
Even though, previously discussed how budgetary control can be a positive impact on the organisation. Especially with regards to that it can increase the levels of performance and job satisfaction (McLaney & Atrill, 2008). It can also have the opposite effect on an organisation and could in fact lead to job dissatisfaction, unmotivated staff and potentially dysfunctional behaviour. If the budgets that are set for management or the employees are too high and unrealistic this can lead to the individual feeling de-motivated. In addition, it could lead to the individual in having dysfunctional behaviour in terms of making their results look better than they actually are which therefore will be giving a false interpretation of data. In terms of the budget with regards to the unpredictable environment, even if the budgets set are accurate and realistic at the beginning of the financial year for the organisation, as the year goes on this may not be the case still. The business environment is extremely dynamic and is consistently changing, for example, if a B2B business is making sales with European companies, Bruit will play a major role in whether or not these sales will be completed. This will have a negative impact on the budgets on the individual which leads to the organisation as a whole. Therefore, when budgets are set management levels will never be able to completely take everything into consideration due to a dynamic business environment organisations operate in, leading to potentially unrealistic budgets.
If budgets are too unrealistic or not fairly set between teams in the organisations, this can lead to conflict internally between departments. High levels of conflict will lead to high levels of demotivated staff as well as potentially high labour turnover of knowledgeable staff. This will lead to a larger issue for the organisation, as high levels of conflict can make the workplace a hostile environment. In addition, having unrealistic goals between departments can lead to high levels of competitiveness and could lead to a lack of focus on the overall goals of the organisation as the employee’s and management may become too focused on hitting their budgets or outperforming other departments within the organisation. This will have a negative impact onto the organisation as everyone may become selfish and not do what is in the best interest for the organisation. For example, a sales representative may just complete at a high discount rate in order to hit more of their budget. This can have a negative impact on the organisation due to the fact that they would have made a loss on the product which was sold by the sales representative.
Conclusion:
Overall, like any other business system within an organisation, there are positive and negatives to budgetary control systems. Even though, if the budgetary control is implemented correctly it can lead to high levels of effectiveness and cause a positive impact on the organisation. In spite of this, I believe that the budgetary control system can in fact cause more damage to an organisation in the long term. As previously discussed, management are unable to predict what will happen with the future business environment this means that they are likely to set unrealistic goals for their employee’s, leading to high levels of demotivation and potential high turnover of staff. As the environment is now so unpredictable, it may be argued that the budgetary control system is in fact an old fashion way of comparing budgets and actuals as it does not take into consideration the external factors. Budgetary control will always be relevant within an organisation in order to track performance, however, it should not be the sole focus of an organisation. In today’s dynamic environment, a number of other factors need to be considered in order to ensure that the performance of the organisation is high as well as that employee’s are motivated and feel levels of job satisfaction.