Budgets and Budgetary Control

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Budgets and Budgetary Control

• Prepared and Presented
• By
• Gladstone K. Hlalakuhle

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INTRODUCTION

• A plan expressed in monetary terms, prepared and
  approved prior to the budget period and which
  shows income expenditure and the capital
  employed. It may be drawn showing incremental
  effects on former budgeted figures or complied by
  zero budgeting.

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• Budgets are therefore not prepared in isolation
  and then filed away but are concrete components
  of what is known as a budgetary control system.
  Such a system essentially ensures communication,
  coordination and control within an organization.
  The basic functions of management are allocation
  of resources, planning and control.

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BUDGETARY CONTROL

• This is the establishment of a budget relating
  the responsibilities of executive management to
  the requirement of a policy and continuos
  comparison of actual and budgeted results.
• Control should ensure that actions are accordance
  with the objective of the policy in question
• Also provides a basis for its revision.

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ELEMENTS OF BUDGETARY CONTROL

• Setting up budgets i.e. planned targets on
  revenue, expenses, assets and liabilities
  relating to the activities concerned.
• Measuring actual results against the budgets on a
  continuous basis
• Identifying and analyzing deviations from budgets
  and modifying both actual operations and
  subsequent budgets.

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MAIN AIMS OF BUDGETARY CONTROL

• To establish the degree of progress to the
  achievement of short term plans
• To allow delegation to occur without losing
  overall control
• To provide a measure for allowing flexibility in
  operations
• To establish short term plans and aid the
  organizations planning process

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PURPOSE OF A BUDGET

• Co-ordination- Important for the achievement of
  organization goals e.g.
• Coordinate inputs and outputs in order to ensure
  balance of efforts and effects.
• Coordinate budget lines within the organization
  to ensure effective implementation of plans and
  monitoring of results.

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• Coordinate responses to economic trends and
  challenges posed by the environment within which
  programmes and activities are undertaken.

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PREPARATION OF THE BUDGET

• 1. Identify objectives
• 2. Gather data about alternatives
• 3. Select alternative courses of action
• 4. Discuss the plans/activities and allocate the
  budget.
• 5. Establish monitoring mechanisms.
• 6. Respond to problems encountered in the
  previous budget.

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PURPOSE CONT.

• Communication The budget is used to communicate
  plans and to control information. Once formulated
  the aspects of the plan having a bearing on a
  particular division of the organization are
  communicated to that division.
• Motivation The budget seeks to motivate managers
  to achieve objectives and thereby establish
  control within the organization.

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PURPOSE CONT.

• Performance Evaluation a budget is used to
  evaluate the capability of managers to achieve
  targets.
• Good performance is associated with achieving
  better performance targets set on costs of
  operations and benefits to the organisation.

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PURPOSE CONT.

• Authorization The budget is used to authorize
  expenditure or to pursue certain initiatives once
  a budget is approved
• it becomes a permission to spend.
• acceptance that either a project or activities
  should commence.

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DATA FOR BUDGET PROCESS

• Internal information
• Production and operational information
• Financial information
• Research and development information
• Personnel information
• Sources of internal information-expected outputs
  - performance targets, control and monitoring and
  evaluation mechanisms.

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EXTERNAL INFORMATION

• Market and competitors
• Economic conditions
• Industrial structure
• Political factors
• Technological change
• Demographic trends and social factors
• Government statistics, commercial data, banks.
• Media coverage, business trips, conferences.

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BUDGET COMMITTEE - FUNCTIONS

• Co-ordinate the preparation of budgets which
  includes the issue of the budget manual
• Issue timetables for the preparation of
  functional budgets
• Allocate responsibilities for the preparation of
  functional budgets

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• Provide information to assist in the preparation
  of budgets
• Communicate final budgets to the appropriate
  managers
• Compare actual results with budget and the
  investigate variances
• Continuously assess the budgeting and planning
  processes, in order to improve the planning and
  control functions.

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CONTENTS OF BUDGET MANUAL

• Foreword
• The purpose of budgetary planning and control
• The objectives of various stages of the budgetary
  process
• The importance of budgets in the long term
  planning and administration of the enterprise

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• Organizational structures and responsibilities
  including an organizational chart and a list of
  individual holding budget responsibilities.
• Principal budgets and relationships between them
  explanation of key budgets and outline of main
  budgets and their accounting relationship
• Administrative details of the budget preparation
  membership and terms of reference of the budget
  committee, the sequence in which budgets are to
  be prepared and a time-table.

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• Accounting procedures name and terms of
  reference of the budget officer, sample/specimen
  forms and instruction for completing them,
  specimen reports and account codes.
• Timetable for accounting procedures production
  of reports and closing dates.