Budget as a Fundamental Axis in Financial Control
Starting in 1820, the budget was used as the axis in financial control, when the public administration felt the need for an element that controlled public spending and guaranteed the efficient functioning of government activities. It was after the First World War that the private sector tested the benefits of using the budget to obtain profit margins in operations, especially in controlling expenses and allocating resources.
Currently, the budget is considered an important part of the managerial and administrative process, planning, acting, and controlling. So it is never seen as an isolated element, it is usually linked to financial planning, so it is necessary to have a clear idea of its role and its
What is a budget?
It is an integrating and coordinating plan oriented towards the future, regarding the operations and resources of a company in a given period, it is expressed in financial terms, to achieve the objectives set by management. Whose main objectives are:
- Establish an action guide.
- Allow us to compare the actual results with what was planned.
- Evaluate the performance and performance of the company.
- Optimize the use of economic resources.
- Work in advance in order to prevent events.
According to these objectives, the function of budgets is related to the financial control of the organization. In this sense, there is a process called that allows discovering the results of what is done and comparing it with the corresponding budgeted data, to measure achievements and differences.
Budget action items
- Integrator: It takes into account all areas of the company and the activities carried out in them.
- Coordinator: Joint plans are prepared and coordinated for the entire company.
- Operations: Determines the course of operations, especially the income that is intended to be obtained with full knowledge of the expenses that will be incurred.
- Resources: Know future income and expenses to plan your allocation.
The budget planning process
It is a process that varies depending on the type of organization, however, it can be said that it consists of a sequential process of future actions and plans to achieve economic goals and objectives. It consists of the following phases:
- Definition of general guidelines: Objectives are set and general instructions are transmitted to each area so that they can design their plans and budgets.
- Preparation of plans, budgets, and programs: Based on the guidelines received, each person in charge will prepare an action plan that must be followed in order to meet the. It is important that several alternatives be considered, considering possible variations that may occur in the environment.
- Negotiation: It is a process that goes from the lowest areas of the company to the highest, in order to consolidate these plans through interaction with the different hierarchical levels in the chain of command.
- Coordination: Process by means of which the coherence of the plans and programs is verified, in order to adjust the changes that were necessary and achieve the balance between the areas.
- Approval of budgets: Corresponds to the general management, in addition to taking into account establishing the necessary forecasts.
- Follow-up: Once the actions have been approved and launched, it is necessary to carry out a control of the evolution and compare it with what is planned. This will allow correcting in unfavorable situations.
It is the process that allows monitoring and evaluating the performance and performance obtained, establishing comparisons between what has been done and the objectives set out in the budgets.
For what budgeting and control are considered to be complementary processes, the first defines the objectives, which will have value when a plan is activated that facilitates their achievement, while budget control is methodically comparing programming and execution.
The backbone of budget control focuses on information on the desired performance level, the actual level, and the deviation. But in addition, through action, it sets plans in motion and modifies the activities to be carried out.
The implementation of any control mechanism through the budget ensures the financial success of the project since when analyzing and comparing the results with the programs, it allows to see the non-coincidences, find the causes and propose the corrections.
To effectively exercise this control, the following considerations must be taken into account:
- Everything that has been programmed must be controlled.
- Any deviation between what is programmed and what is executed has a reason which must be analyzed to detect whether it is due to a programming failure, poor execution, or both.
- Any deviation requires careful analysis, preferably carried out by the specific manager.
- Any deviation requires correction measures, the purpose of control is to convey confidence to managers, make them see the deficiencies, and suggest corrective actions.
Organizations are part of an economic environment where uncertainty reigns; the greater the uncertainty, the greater the risks to be assumed. To stay in the competitive market, organizations must plan their activities and monitor their behavior.
Budgets are a modern tool used in planning and control, they can reflect the economic, administrative, and financial behavior of the company. Being of great help and importance due to:
- They minimize the risk in the organization’s operations.
- They maintain a plan of operations with reasonable limits.
- They serve as a mechanism for analyzing policies and strategies, allowing them to be redirected if necessary.
- They quantify and present the financial terms of the action plan.
- They serve as control guides during the execution of programs, once the plans are completed they serve as a point of comparison for future plans and programs.
- They induce management to think about the total needs of the company.
- They function as a means of communication between the different hierarchical levels of the company. By exerting a little pressure for top management to define the objectives appropriately.
- They promote the definition of an adequate organizational structure, delegating and determining responsibility and authority to the different areas that make up the organization.
- Maintains a reasonable data.
- They help the optimal use of inputs.
- They are a tool that puts creativity and professional judgment into practice, in order to improve the company.