IS YOUR BUDGET UNDER CONTROL?
A budget is a plan expressed in financial terms, prepared and approved prior to execution, and designed to outline expected revenues, expenditures, and the capital to be utilized. Budgets should not be developed in isolation from the broader control environment, as they constitute a key component of what is known as the budgetary control system. This system ensures the proper formulation of the budget and the establishment of clear controls, followed by effective communication and coordination across the organization.
It is essential to align and standardize the concepts of budget adherence and budget variance between the finance function and the CEO on one side, and the board of directors on the other. Furthermore, the CEO and CFO must be fully clear on the authorities granted to them by the board when addressing budget variances. They must also ensure that all relevant individuals and departments understand how to appropriately manage budget deviations when they arise.
Budgeting Process
1. Strategic Planning Process
(Defining Objectives and Strategies)
2. Developing a Long-Term Plan to Achieve the Strategies
3. Preparing the Annual Budget Within the Context of the Long-Term Plan
4. Monitor actual results
5. Addressing Any Deviations From the Plan
Budgetary Control
Budgetary control involves establishing a budget that links executive management responsibilities to policy requirements, along with the continuous comparison of actual results against the planned figures. The absence of effective budget control has a direct negative impact on net profits, as the budgeting process loses its purpose when it fails to manage spending or adjust expenditures during periods when the organization experiences lower-than-planned revenues.
In a recent study conducted by LOGIC across 158 leaders of family-owned businesses, findings revealed that 53% of companies do not have any mechanism in place for budgetary control.
A budgetary control mechanism must ensure that spending priorities align with business objectives and that it remains flexible enough to address scenarios of both excess and shortfall in revenue collection. Monitoring budget spending through a robust system also provides a foundation for effective budget review and adjustment.
