Essentials of effective budgetary control (or) Preliminaries for the adoption of budgetary control system are listed below.
Essential elements of effective budgetary control
1. Support of Top Management: Generally budgets are prepared for one year. On the basis of the budgets, the employees are changing their working methods, habits and even their inter-relationship also. Hence, there may be a resistance to change on the part of employees. It leads to the preparation of every budget with top management support.
2. Formal Organization: An employee can understand his scope of authority and responsibility with regard to budget. In a formal organization, duties of every employee are clearly defined and assigned. If so, they can know their authority and responsibility that are highly useful for control through budgets.
3. Preparation by Responsible Executives: The involvement of employees in budget preparation helps the management for easy implementation of budgets. This practice is followed subject to the approval and control of Budget Director and Budget Committee.
4. Clear Cut Objectives: The success of budgetary control programme depends upon the clear-cut objectives of the organization. Hence, the management before framing the objectives should take care. Moreover, objectives are unambiguous.
5. Attainable Objectives: If the objectives are not attainable, the budgetary control system cannot succeed. On the other hand, if the objectives are easily attainable, there is no need of special efforts and there is no challenge to anybody. Hence, attainable objectives are framed for effective implementation of budgetary control system.
6. Budget Committee: A budget committee is formed to prepare and implements the budgets. The budget committee consists of functional managers of business organization. The committee should be presided over by one of the top management personnel, to be called the Budget Director.
7. Adequate Accounting System: Budgets are prepared on the basis of historical data. Hence, accounting records should be properly maintained. Moreover, actual costs and revenue are periodically compared with those of budgeted figures. The accounts are classified in terms of authority and responsibility that facilitates the introduction of responsibility accounting system.
8. Periodic Reporting: There should be a proper communication in an organization for effective budgetary control. Each employee of an organization should know about what is going on? and what has been achieved so far with regard to budget? For which, the management can make an arrangement through which information about budget performance can be communicated periodically. The employees can understand the variances through this system. Moreover, it is highly useful to get communication for corrective actions.
9. Budget Education: A budget can be implemented very successfully with the active participation of line managers and their sub-ordinates. For which, there is a need of showing interest by the line managers and their subordinates. The budget director should take steps to create interest among the line managers and their sub-ordinates through budget education.
The objectives of framing each budget, potentials of an organization and its employees and techniques of budgeting are covered in the budget education. Moreover, the budget director should create a close relationship with the line managers and their sub-ordinates on the floor; discuss with them problems relating to the budgets and its implementation and receive suggestions from them for improving budget procedures.
10. Appreciation Uses: Every employee of an organization should understand the uses of every budget. No one should have the feeling that the budget is imposed on him. Nobody can participate mechanically in the budget preparation and its administration regardless of whether he likes it or not.
11. Limitations of Budgeting: The management should disclose not only the uses of budgets bud also the limitations of every budgets. Everyone should realize that budget is only a managerial tool in capable of managing itself.