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Budgetary Control as a Management Tool

 

Budgetary control has become a fundamental tool of management for costs and maximizing profits. It may be appreciated as one of the utmost examples of rationality in management. It is a useful management tool for comparing the current performance with pre-planned performance with a view to attain equilibrium between ends and means, output and effort. It corrects the deviations from pre-planned path through the media of observation, research planning, control and decision- making and thus helps in performance of future activities in an orderly way. It uncovers un-economies in operations, weaknesses in the organization structure and minimizes wasteful spending. It acts as a philosopher, friend, and guide to the management. Its advantages to management can be summarized as follows:

  • It brings efficiency and economy in the working of the business enterprise.
  • It establishes divisional and departmental responsibilities. It thus prevents ‘buck-passing’ when the budget figures are not met.
  • It coordinates the various divisions of a business, namely, the production, financial, marketing and administrative decisions.
  • If guards against undue optimism leading to over-expansion because the targets are fixed by executives, after cool and careful thoughts.
  • It acts as a safety signal. It shows when to proceed cautiously and when manufacturing or merchandising expansion can be safely undertaken. It serves as an automatic check on the judgment of the executives as losses are revealed well in time which is a caution to the management to stop wastage.
  • Budgetary control acknowledges variations of actual performance from budgeted performance. The variations point to the root of inefficiencies enabling management to consider only the items that do not go according to plan and leave the others, i.e., to concentrate on exceptions.
  • It is a powerful means of pre-determining when and to what extent financing will be necessary avoiding the possibility of both over and under capitalization.
November 28, 2014

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