Control is an integral part of any company and when it comes to money it assumes even more importance and that is the reason why budgetary control is a very important concept. Budgetary control refers to the process by which company sets budgets for the company as well as for various departments of the company and then compares actual performance with the set budget to see how much variance is there between planned budget and actual budget. In order to understand more about budgetary control, one should look at the advantages and disadvantages of budgetary control –
Advantages of Budgetary Control
Helpful in Planning
The biggest advantage of budgetary control is that it is helpful in planning because once a company has put plans from paper to reality than it requires to have proper budget allocation so that the plans get executed and the company does not find itself in that situation where its budget is less or more than required. In simple words, budgetary control in a way complements planning and hence helps the company in achieving the desired objectives.
Helpful in Reducing Inefficiencies
Another benefit is that it helps in reducing inefficiencies and wastage by finding out the areas where variances in the planned and actual budget are high. It can be better understood with the help of example suppose your kid gets good marks in all subjects except mathematics than you will not consider him or her weak in all subjects rather you focus on improving his or her mathematics, similarly in case of companies if budget is overshooting than not all departments can be blamed for it rather budget overshoots due to one or two departments and budgetary control finds that one or two departments.
Profit Maximization
Companies exist to make profits and budgetary control by controlling costs helps the company in achieving the objective of profit maximization because the lower cost of production implies a higher profit margin for the company. Hence in a way, budgetary control indirectly helps the company in achieving the profit maximization objective.
Disadvantages of Budgetary Control
It can be too Rigid
The biggest disadvantage of budgetary control is that it can be too rigid which results in a lack of flexibility for the department’s heads. Hence for example, if the company has set a budget of $10000 for marketing department but due to stiff competition marketing department requires $20000 then it will not be able to do marketing property due to budget control resulting in a loss for the company.
Uncertainty of Future
Another problem with this type of control is that budgets are made keeping future in mind but we all know that the future itself is uncertain which puts a question mark on the validity of having budgetary control in the company.
Not helpful in Generating Business
Budgetary control requires a substantial amount of time, money and effort on the part of the company and unlike other activities of the business which contribute towards bringing more business to the company, budgetary control acts only as a controlling tool. Hence in simple words, budgetary control only helps in controlling expenses and as far as revenue generation is concerned it has no role to play.
As one can see from the above that budgetary control has advantages as well as disadvantages and that is the reason why any company thinking of adopting should consider the above points and then take the decision accordingly.