Budgeting is a powerful tool in financial management that helps businesses plan, monitor, and control their financial resources. It acts as a roadmap, guiding organizations toward achieving their objectives by forecasting revenues, expenses, and resource allocation. Budgetary control, on the other hand, ensures that actual performance is compared with the budgeted figures, enabling corrective actions wherever necessary.
Download UNIT 5 – Budgeting and Budgetary Control in Financial Planning Notes
Get simplified revision notes for this unit:
Download Unit 5 Notes PDF
Meaning and Objectives of Budgeting
Budget: A financial plan expressed in monetary terms, prepared for a specific period.
Objectives of Budgeting:
Planning future operations effectively.
Controlling costs and ensuring efficient use of resources.
Coordinating between different departments.
Evaluating performance and identifying variances.
Assisting in decision-making and long-term financial stability.
Types of Budgets
Fixed Budget
Prepared for a single level of activity.
Does not change with variations in actual output.
Best suited for businesses with stable conditions.
Flexible Budget
Adjusts according to different levels of activity or output.
Useful in industries with fluctuating demand.
Helps compare actual performance with budgeted costs under changing scenarios.
Zero-Based Budget (ZBB)
Every budget period starts from a “zero base,” meaning past data is not automatically carried forward.
Managers must justify every expense afresh.
Encourages cost-efficiency and elimination of unnecessary expenses.
Preparation of Budgets
Simple Budgets: Prepared for a single activity or department, such as a sales budget, production budget, or cash budget.
Performance-Based Budgets: Link financial planning to performance outcomes. They focus on efficiency and effectiveness, measuring results against financial inputs.
Budgetary Control
Budgetary control is the process of comparing actual performance with budgeted figures, identifying deviations, and taking corrective measures.
Steps Involved:
Preparation of budgets.
Recording actual performance.
Comparison of actual vs. budgeted figures.
Analysis of variances (favorable or unfavorable).
Corrective actions and revisions if necessary.
Conclusion
Budgeting and budgetary control are essential pillars of financial planning. While budgeting provides a clear plan for the future, budgetary control ensures that the plan is executed efficiently. By using tools like fixed, flexible, and zero-based budgets, businesses can achieve better cost control, resource optimization, and long-term financial stability.