Control and Delegation through Budgets

Abstract

Once plans have been made and budgets prepared, they can be used to control and monitor the performance of the business. They allow the owner to adopt ‘management by exception’ by comparing actual results to his budgets on a timely basis, and investigating the reasons for deviation from the budget. This can save him time and allow him to concentrate his effort in the areas where there are problems, where things are not going according to plan. The differences between actual results and the budget, called ‘variances’, can be analysed in such a way as to give indications of the causes of these deviations from plan. In short, the budget provides a framework for controlling the running of a business in an efficient way. It also acts as a better basis for judging actual results than past performance. The fact that sales are better than last year might be encouraging, but it is by no means conclusive as a measure of success, since inefficiencies can be hidden in past performance or factors outside the control of the business might have changed.