The control stage of budgeting might be stressful to follow through, but it’s an important step to measure your ongoing financial performance. In this article, we are going to delve into how to control budget in business, why it is crucial, and ways to execute a solid budget control strategy.
What Is the Control Stage of Budgeting?
Budget control is defined as a process of monitoring and managing the company’s spending to ensure it stays within the allocated amount. The process is undertaken continuously through the budget period.
When your current budget execution exceeds its predetermined budget along the way, corrective actions may be taken, such as making virements, restructuring, or halting spending where it is controllable.
One budget control example is budgetary control in account payables. In general, controlling the budget for payable management is associated with reserving the funds for expense invoices.
The control stage of budgeting is essential for your whole financial management process as it helps you to:
- Prepare and monitor budgets.
- Assess the budget’s performance
- Prevent wastage and minimize cost overruns.
- Configure a better strategy to optimize your fund’s allocation
- Create your budgeting structure better in the upcoming period.
- Enhance the utility and availability of accurate financial reporting.
- Manage everyday operations while also providing financial guidance required to support long-term organizational goals.
Moreover, Budget controls provide a way for teams or divisions in your workplace to communicate and discuss their needs. It also forms a responsibility and accountability for employees to achieve their targets.
What Are the Budget Control Measures?
There are several measures as to how to control budget in business, which are as follows:
1. Determine the Current Budget Position
The first thing to do in the control stage of budgeting is to understand your current budget position by finding the necessary information available from your accounting system, along with the outstanding transactions that might need to be adjusted.
2. Compare Actual Budgets against Planned
After gaining all the information, you can compare the current budget execution data with the planned budget from the beginning of the period. If the amounts are tallied, your budget is working as planned. In case there are differences (variances), you need to analyze them further.
3. Figure Out Budget Variances
You can easily calculate your budget’s variances through Excel sheets or your accounting system. We can see the example below:
| Month 1 | |||
| Budget Heading | Budget | Actual (to date) | Variance |
| Operating Expenses | $250,000 | $125,000 | $125,000 |
| Month 2 | |||
| Budget Heading | Budget | Actual (to date) | Variance |
| Operating Expenses | $250,000 | $272,000 | -$22,000 |
The variance in Month 1 is positive, indicating the resources are spent less on this particular budget. Meanwhile, negative variance in Month 2 implies that your company has spent more than the budgeted amount.
With Peakflo, you can seamlessly track your budget in real time and compare your assigned and spent budget through the monthly budget report. The report will also display the details of the assigned bills.
4. Investigate the Causes of Budget Discrepancies
Variances in a budget can be caused by several reasons. This has to be investigated as it will become the baseline for determining the corrective action in your budgetary control process.
Reasons can include:
- The budget creator’s use of the wrong figures
- Inaccurate budget calculations and forecasts
- Delayed input of information in the accounting system
- External causes such as the increased price of raw materials.
- Lack of existing historical data to create a budget profile
5. Take Proactive Steps to Control
After you have found out the reasoning behind the variances in your budget controls, you will want to take corrective action in accordance with the reason. Corrective actions might include:
- Realistic budget adjustment
- Implementing an alternative pricing strategy
- Streamlining your operating expenditures
- Increasing income, reducing spending, or lowering costs
- Transfer money from one budget to another, i.e., virements
- Tap into contingency funding.
- Modify, reduce, or eliminate services.
Common Roadblocks in Budget Control
Common challenges to successful budgetary control include:
Delayed Access to Budget Information: Managers often face issues due to not having immediate access to budget data. Waiting for financial updates can result in increased costs, such as delayed production, wasted time and materials, and strained supplier relationships. This not only affects the bottom line but also jeopardizes overall business continuity.
Lack of Timely Insights for Finance Teams: Finance teams and budget committees may struggle with a lack of real-time visibility into actual results. Waiting until a department or project exceeds its budget to address issues is not an effective way to stay competitive or safeguard an organization’s cash flow and profitability.
Isolated Data Handling: The use of separate accounting systems and the need to exchange data in various electronic formats (or, in some cases, manually through paper documents requiring data entry) can make it extremely challenging to address variances or tackle cash flow issues promptly and efficiently.
What Are the 4 Budget Control Strategies?
You can attain your budget control goals more efficiently by implementing proper strategies, such as:
- Establishing a Proper Standard: A robust standard will create less significant problems in your budget controls. This can be done by analyzing the previous budget performance and the current resource constraints.
- Ensure Support From Your Senior Managers: Senior-level management, such as the CFO, is responsible for creating long-term objectives and approving the budget. Therefore, they have a significant influence on the budget process steps.
- Lower-Level Manager’s Participation: You can deploy a participative budgeting strategy by looping in lower-level managers throughout the planning of the budget and budget control. This will enable two-way communication between managers, creating a realistic budget and motivating them to achieve their goals. Knowing the importance of timely approval from top managers and participation from department managers in the control stage of budgeting, Peakflo enables you to:
- Customize approvals workflow encompassing multiple approval levels and amount brackets
- Make strategic decisions through greater visibility of your budget’s movement.
- Keep yourself up-to-date and get notifications when the budget is about to reach its limits.
- Share the Good News: Don’t forget to provide positive feedback to the respective departments when budget control reaches its goals (under budget).
What Are the Factors to Be Considered in Budget Controls?
Based on a study of possible factors in the control stage of budgeting, four conditions may affect the significance of controlling the company’s budget, as follows:
- Budget Participation: strong and stable cooperation between senior managers and subordinates within the budgetary control process could improve the accuracy in making decisions and taking the right corrective actions.
- Firm Ownership: privately owned and joint ventures with foreign partners will utilize a more comprehensive budget control system than state-owned companies.
- Firm Size: smaller companies tend to use less formalized budget control techniques, while larger companies utilize more sophisticated and stricter control because they have to keep track of a more significant amount of income and expense.
- Financing Preference: as budgetary control is associated with top-level managers, a preference for financing (such as through retained earnings or short-term payables) may affect the managerial preference for controlling the budget.
Budget Management Made Easy with Peakflo
With Peakflo’s Budget Management, you can track and control budgets more accurately and efficiently. The solution allows you to:
- Create budgets for any department and projects
- Define budgets based on recurring or one-time spending
- Assign a unique approval policy for each budget
- Track all your company budgets and their status in real-time
- Get month-over-month budget reports and check the overall expenses for each budget
- Track the spend, assigned, unassigned, and the limit of a specific budget for each department and activity
- Get instant notification when the budget is finished or has exceeded the initial amount
The solution helps oversee budgets’ position in real-time and reduces budget recap time by 50%.
