Budgetary Control Systems can be described as the process by which financial
control is exercised by managers preparing budgets for revenue and expenditure
for each function of the organisation in advance of an accounting period. It
involves the continuous comparison of actual performance against the budget to
ensure the planis achieved or to provide a basis for its revision.
The advantages of such systems are
- Co-ordination - of both functions and activities
- Profit Maximisation - resources put to best use to maximise profits
- Incentive schemes - can lead to the enabling of incentive schemes to encourage the "right behaviour"
- Decision Making - power goes to individual managers (not top down) = more accountable
- Reduce costs - incentives for managers to reduce costs in their areas
- Culture - Employees aware of targets and therefore are responsible for them, building closed ties to the firm and motivating them
- Performance measurement - tools to do these easily
- Better Planning - can take corrective action with better planning
- Control - system in place to review progress
The disadvantages are
- Time consuming - managers may neglect other duties (such as running the business!) due to time required for this
- Cost - setting a system up and running it may be expensive
- Estimates - budgets, and consequent actions, based on estimates which may be inaccurate or just not true
- Rigid - No flex in system may lead to bad longer term firm behaviours (e.g. sacrifice future profit to hit numbers month to month). In addition managers may feel that cannot work outside of the budget which could lead to a loss of innovation and classic "out of the box" thinking
- Demotivating - if budgets are set without managerial buy in, i.e. top down, those trying to achieve them may not be motivated to do so. In addition if they are not met early on in the reporting period they may lose motivation to achieve it for later in year.