Budgets and Budgetary Control

International Accounting

Budgets and Budgetary Control

Wednesday, 30th November 2011

Budgets can be defined as strategic plan where expected short time results are established. The main purpose is to help companies keep their focus and in line with their long-term objectives.

The budgeting process appeared around the 1920’s, as a need of large industrial organizations to manage their cash flows and operational costs. It was only around the 1960’s that it became a tool to set goals and to analyse the company’s performance. As a result, its improvement relied on financial target and incentives, instead of benchmarks such as productivity and marketing effectiveness. With the entry of foreign manufacturers into domestic markets and the consequent growth of competition by the 1980s/1990s, companies started focusing on meeting sales targets rather than satisfying customers (Hope & Fraser: 2003).

We can identify five core benefits regarding the use of Budgets. One of the benefits of establishing budgets is that it helps to “promote forward thinking and the possible identification of short-term problems” (Atrill & McLaney 2008: 312). Its close monitoring of processes enables the identification of potential production problems such as shortage of production capacity, which if picked up early enough are easier to overcome. Additionally, they can facilitate the co-ordination of various departments of the company; ease the control of the business through the comparison of planned performance with the actual one, and allow the creation of a system of permission for managers to spend up to a particular limit. At last, it can be perceived as a key to motivate managers by defining a certain level of achievements (Atrill & McLaney: 2008).

Despite the clear benefits of using a budgeting process, the changes in the business environment have had a clear impact on its effectiveness. The first difference is...