How to Develop a Budget and Stick to It - Case Study Example

BUGDETARY CONTROL INTRODUCTION: Budgeting has always been an integral part of any society. In this fast paced world, every individual needs to plan his activities according to a set of time span. If an individual does not plan or schedule his activities, he gets himself in different troubles. Budgeting is a technique used for the purpose of planning various activities regarding time and money. In organizations, budgets are prepared in order to set goals for achieving a certain level of income and analyzing the expenses. These budgets not only help the organizations in preparing a suitable financial plan but also help in getting integrative control mechanisms for the organizations. Lynch (1991) revealed that any organization working without an efficient budget plan for the business activities may get itself in various troubles regarding control of performance of the organization. Budgeting makes the processes of the organizations run efficiently. So, it is of crucial importance for any business or organization to develop a perfect budget plan which should not only help the organization in achieving desired goals but also in maintaining the financial level of the organization. 2. BUDGET A budget is that kind of financial plan which is articulated in quantitative and money terms for any business or organization. Lawrence (2004) argues that budgets should always be prepared and approved by the authorities before the start of the period. The budgets which are approved by the authorities are then used by the organization for various business operations. Budgets should be derived from the long-term strategies of any company or organization. Reames (2010) states that “its always important to figure out areas of your budget where you tend to spend exorbitant amounts or unnecessarily and cut those out”. If the organization prepares a budget for business and financial activities during the financial period, it may be of no use because all those activities which are to be performed by the organization need a suitable and efficient budget plan before the start of the period in order to be performed effectively. “The money tracker can be the first step towards creating a workable budget that complements your vision, your values and your goals” (Lawrence 2004). Dayananda, et al., (2002) found that a perfect budget plan includes set of regulations regarding capital to be employed, income, and the expenditure. A budget is the most valuable and effective financial management tool for any organization that lists all planned expenses and revenues. Biglefeld and Zoumbaris (2000: 85) state that “it does take careful thought and planning to budget your money”. It is because budget helps in organizing and scheduling all financial activities. A budget plan helps in decision making regarding use of money. Shields (2003) states that “making the initial commitment to live according to your budget is the hardest part”. Budget not only gives a direction for where the money should be spent but also helps in deciding the amount of money to be used in any activity. Budget is always related to that future period for which certain goals have already been laid down by the organization. 3. BENEFITS OF BUDGETING 3.1 Control Budget is that key which enables an organization taking charge of the finances. With the help of an effective budget, the management of any organization can decide when and what to do with the capital. Lawrence (2004) found that budget gives the control of money to us, instead of letting the money control us. It also helps any individual in getting control of money, instead of getting himself controlled by money. Budget gives us control and guidance over use of money. 3.2 Communication Communication is another benefit regarding budgeting. If an organization makes some sort of financial deal with another organization, budgeting is that technique which can resolve the issue related to use of capital between the two parties. Priorities can be set between the two organizations regarding the financial issues. An effective budget would help the organizations in communicating with each other for the purpose of discussing where the money should be spent and how much money should be spent. 3.3 Organization Budget organizes the financial matters in such a way that the funds available for those matters get divided into categories of savings and expenditures. Broppelli and Nikbakht (2000) found that records of all monetary transactions are provided automatically to the management of any company or organization through budgeting. The foundation of filing system for the purpose of organizing bills, financial statements, and receipts can be provided through proper budgeting. 3.4 Financial Analysis Budget also helps the organization in performing the financial analysis. Through budgeting, management of the organizations can know the financial position of the organization. They can know what is actually going on in terms of capital use for business activities. Budgeting helps in providing the management with the information regarding available capital, current financial position, and future expenditures of the ongoing business activities. Through efficient budgeting, the organizations can save money and related expenditures regarding various business activities. Budgets help in cutting off the extra costs and make money available for use in other financial activities. 4. BUDGETARY CONTROL It is evident from the facts that no organization or company can ever be successful without having an effective and efficient budget control regarding financial affairs. Budgetary control is of extreme importance for the survival and success of any organization in a competitive market. Baker and Powell (2005) found that without a proper budgetary control system in operation, no financial activity can be performed successfully; rather it can result in financial crises for the organization. It is because when there will be no check and balance in case of monetary affairs, capital required for the completion of any goal or business activity will get misused. Budgets help the organizations in managing the available capital for various business activities. If an organization wants to achieve some goals, budget help the management of the organization in successful achievement of those goals through controlling the capital which is to be used for the purpose of achieving those goals. Peterson and Fabozzi (2002: 245) state that “capital budgeting is one of the most important, and sometimes most difficult, parts of financing”. Budgetary control helps in continuous comparison of budgeted results with actual results of the financial activities performed by any organization. If the implemented policies produce positive results regarding any specific financial activity, management of the organization keeps those policies with the budget plan but changes those policies if results come other than expected. Budgetary control helps an organization in achievement of financial activities through following a proper set of guidelines regarding capital management. Budget sets out the financial aspects regarding an organization’s goals and plans whereas budgetary control is the analysis of the outcomes of plans and it is closely concerned with the control of capital. So the activities related to the control of business activities with the help of budgets are known as budgetary control. 5. Factors involved in Budgetary Control Talking about budgetary control and its importance in any organization or company, we must also know those factors which are involved in budgetary control. These factors are: Preparation of budgets regarding financial plans of any organization An incessant assessment of actual and budgetary performance, and Change in budgetary policies according to the outcome of any financial matter 6. Budgetary Control and Control of Performance Budgetary control has really proved itself as that kind of management tool which not only helps in organizational management but also helps in increasing organizational performance in a lot of ways. Those organizations which have prepared budgets for their financial plans have achieved huge success in attainment of various goals and objectives effectively. Budgetary control helps an organization in all financial matters, and results in improved productivity and profitability for the organization. Budgetary control not only serves as a guide for various financial planning processes but also sets up limits for departmental excesses. All financial plans of any organization are run in proper guidance provided by the budgetary control and if any financial plan is run differently from those guidelines, it faces several financial and operational difficulties. Through budgetary control, the management of any organization performs proper analysis of all existing operations and financial activities. Then in accordance with the outcomes of those operations and business activities, certain changes are made regarding those activities. These changes include expanding, eliminating, and restricting the existing business activities. So we can say that budgetary control has a deep relation with the performance of any company or organization because it not only manages and controls the business activities but also makes essential amendments in the existing operations of the organizations. And those amendments and improvements result in increase in organizational efficiency and performance. Budgetary control is a mechanism of identifying organizational goals and objectives and then making appropriate policies for successful achievement of those goals and objectives. Budgetary control includes mechanisms for determining the requirements for the achievement of goals. Not only that, it also helps in designing suitable guiding principles and strategies which lead the way towards successful accomplishment of various business operations. Organizations should pay high attention towards implementation of budgetary control in order to improve organizational performance. It is because budgetary control implements such policies regarding the financial and business operations which serve the organization in not only determining flaws in the existing business operating strategies but also help in creating such policies which lead the way towards success regarding ongoing business operations through continuous assessment of actual and the budgetary performance. Budgetary control is an essential part of overall organizational control and its importance in effective and efficient business operations can never be denied. Budgetary control checks the existing strategies regarding business operations and takes various corrective measures in order to successfully achieve the positive outcomes of those business and financial operations. It is evident form the facts that organizational performance regarding business operations and productivity increases due to budgetary control. It is because budgetary control takes into account the decision making processes regarding financial activities which result in continuous improvement of the utilization of the productive assets and services which are accessible to the management of any organization. Effective budgetary control is based on such standards with which definite and actual performance of the organization can be compared. But if an organization has not got any such standards, then it is impossible to measure the actual performance of the organization regarding all types of financial and business activities. These standards for measurement of actual organizational performance are based on quality, quantity, time, value, and complaint. If any of these standards is missing, actual performance can not be measured. Budgetary control not only defines current strategies for the purpose of goals’ accomplishment but also sets up the basis for future business activities through analyzing the outcomes of current strategies and making required changes in order to improve the future performance of the organization. If we say that only finance helps in achieving market domination and increased performance for an organization, we are wrong. Reality is that finance alone can never be able to achieve success without the involvement of people who manage the finance. Budgetary control guides the way towards proper utilization of available resources which results in increased productivity and improved organizational performance. If the organizations do not work in collaboration with budgetary control systems, they face financial crises. It is very important for all organizations and companies to implement a budgetary control system which not only helps them in carrying out current business operations successfully but also helps in making appropriate changes in the strategies of the future business operations. As we know, budgetary control includes various standards which are of critical importance for the successful accomplishment of any desired business operation, so all organizations should make appropriate efforts for the purpose of preparing an effective budgetary control system to successfully achieve the desired outcomes from ongoing and future financial and business operations. To gain success and improved performance, organizations have to work in proper collaboration with budgetary planning and control systems. Regardless of any organizational strategy made for accomplishment of any business activity or financial operations, management of the organization must consider the budgetary control mechanisms in order to get success in those business activities. When an organization fails to recognize the flaws in its existing budget plans, the organization also fails in the successful accomplishment of the business activities. It is very necessary for an organization to implement a budgetary control mechanism which should not only make required amendments in the current budget plans but also help the organization in increasing the performance through applying suitable strategies regarding current and future business activities. In the current economic conditions, organizations from all over the world should adopt new practices regarding their business operations. Flexible and adaptable budgetary control mechanisms should be adopted by the organizations to gain success in the competitive market and to get increase in the organizational performance. 7. Conclusion Summing it up, budgetary control is of critical importance for any company or organization because it not only helps in improving current strategies but also sets up the ways to improve future dimensions of the strategies by continuously comparing the actual and the budgetary performance which results in improved organizational performance and increased productivity. References Baker, H & Powell, G 2005, Understanding Financial Management: A Practical Guide, Blackwell Publishing, Malden, MA. Bijlefeld, M & Zoumbaris, S 2000, Teen Guide to Personal Financial Management, Greenwood Publishing Group, Westport, CT. Dayananda, D, Irons, R, Harrison, S, Herbohn, J & Rowland, P 2002, Capital Budgeting: Financial Appraisal of Investment Projects, Cambridge University Press, Cambridge. Groppelli, A & Nikbakht, E 2000, Finance, 4th edn, Barron’s Educational Series, New York, NY. Lawrence, J 2004, The Budget Kit: Common Cents Money Management Workbook, 4th edn, Dearborn Trade Publishing, U.S.A. Lawrence, J 2004, The Money Tracker: Find the Cash to Get What You Really Want, Advisor Press, Sunnyvale, CA. Lynch, D 1991, Federal Budget and Financial Management Reform, Greenwood Publishing Group, U.S.A. Peterson, P & Fabozzi, F 2002, Capital Budgeting: Theory and Practice, John Wiley & Sons, New York, NY. Reames, P 2010, How to Develop a Budget and Stick to It, viewed 26 February 2010, Shields, S 2003, Successful Budgeting for Students, viewed 26 February 2010, Read More