Study notes

Budgets - Introduction

A budget is a financial plan for the future concerning the revenues and costs of a business. However, a budget is about much more than just financial numbers.

Budgetary control is the process by which financial control is exercised within an organisation.

Budgets for income/revenue and expenditure are prepared in advance and then compared with actual performance to establish any variances.

Managers are responsible for controllable costs within their budgets and are required to take remedial action if the adverse variances arise and they are considered excessive.

There are many management uses for budgets. For example, budgets are used to:

  • Control income and expenditure (the traditional use)
  • Establish priorities and set targets in numerical terms
  • Provide direction and co-ordination, so that business objectives can be turned into practical reality
  • Assign responsibilities to budget holders (managers) and allocate resources
  • Communicate targets from management to employees
  • Motivate staff
  • Improve efficiency
  • Monitor performance

Whilst there are many uses of budgets, there are a set of guiding principles for good budgetary control in a business.

In an effective budget system:

  • Managerial responsibilities are clearly defined – in particular the responsibility to adhere to their budgets
  • Individual budgets lay down a plan of action
  • Performance is monitored against the budget
  • Corrective action is taken if results differ significantly from the budget
  • Departures from budgets are permitted only after approval from senior management
  • Unaccounted for variances are investigated

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