Advantages & Disadvantages of Budgetary Control
Budgetary control is a process businesses use to control their finances. It involves comparing budgets to actual financial results. Because budgets are theoretical and results are concrete, budgetary control seeks to compare a budget with results that cover the same time period to identify overages or underages and gain information that will be useful in near-term spending decisions as well as future budgets.
One of the biggest advantages of exercising budgetary control is the opportunity to make changes going forward and keep a business on track to succeed. Budgetary control identifies discrepancies between projected costs and revenue and the actual numbers. If budgets are continually incorrect in one area, business leaders can make adjustments to their expectations or probe deeper into the cause for the issue. Budgetary control helps financial officials make corrective decisions before budget issues grow and become more difficult to address.
Reliance on Numerical Data
One of the drawbacks of budgetary control is that it relies heavily on numerical data, sometimes at the expense of other useful information. For example, a department head who operates under her budget for the quarter may appear successful in a budgetary control analysis. However, if she saved money by reducing her staff and terminating skilled workers, the action may have a more negative, intangible effect on the business as a whole. Decisions based on budgetary control can ignore long-term factors outside the scope of a given budget or disregard intangible successes and problems.
The costs of compiling data and analysing budgets is another disadvantage of the budgetary control process. Other forms of corporate control rely more directly on the opinions and judgment of senior officials. Budgetary control seeks to moderate this type of human judgment by introducing quantitative arguments, all of which come at a cost. When a business uses its existing operating budgets and financial statements to perform budgetary control, the cost is reduced. However, when leaders commission new financial reports, these costs rise, especially if they require hiring new employees to assist the accounting department.
Budgetary control gives a business a clear means of tracking its progress internally. Analysing budget data allows leaders to identify responsibility centres, or organizational departments, where managers routinely spend beyond their budget allowances or manage to operate below their budgets. Leaders can also make more efficient decisions about how to allocate resources and improve coordination among departments.