In continuation of our knowledge series please find attached an update on "Budgets and Budgetary Controls". In light of the current humanitarian and possible economic turmoil, it becomes imperative for us to have an effective budget and controls for the same. This would ensure we stick to our expenses envisaged at the start of the year and exercise great control over our costs.

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Budgets & Budgetary Control
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S&A Knowledge Series
Prepared by Muskan Jain Article Assistant
Vetted by Atibhi Rastogi Assistant Manager (Advisory Solutions)
www.sethspro.com info@sethspro.com New Delhi | Lucknow | Coimbatore
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WHAT IS A BUDGET AND BUDGETARY CONTROL?
A. Budget is an estimation/statement of financial resources set aside for carrying out
specific activities in a given period in an organisation. An example would be a Sales
Budget or an Advertising Budget.
B. Budgetary Control is a control technique wherein the actual results are compared
with the budgeted figures and any differences arising out of the same are dealt with
by either taking corrective measures or revising the original budget.
WHY IS BUDGETARY CONTROL EXERCISE IMPORTANT?
1. Compels management to plan for the future and clearly defines responsibility of
various stakeholders for achievement of the budget targets
2. Provides basis for evaluation of performance of individuals and the organisation
3. Improves allocation of scarce resources
4. Makes ‘Management by Exception’ possible by highlighting weak areas of business
which need management attention
5. Acts as a motivating factor for employees by defining their performance targets
6. Corrective measures taken on timely basis assist in Cost Reduction thereby,
improving Profitability
BUDGET APPROACH
(A) The Top Down Approach or Imposed Style Approach
Budget is prepared by the senior management, taking into consideration the organisation
goal and other comprehensive factors that affect the organisation as a whole.
Senior
Management
• Prepares a High-Level
Budget considering the
Macro factors
Department
Managers
• Prepares a detailed
budget on the basis of
the funds allocated to
their department
Operational Staff
• The budget is finally
rolled out to the
operational staff for its
execution

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BENEFITS
1. Such budget focuses on the overall
growth of the organization
2. Saves time of department managers
and prevents Inter-departmental
disputes
3. It makes the various departments
aware of the management’s expectation
from them
4. Preparing a single organization-wide
budget is less tedious
LIMITATIONS
1. Lesser participation of department
managers leading to lack of
motivation amongst them in
implementing the budget
2. Possibility of unrealistic budgets
since senior management in not
aware of day to day operations and
related issues.
3. May lead to under/over allocation
of resources
(B) The Bottom Up Approach or Participative Approach
Unlike top-down approach, bottom-up budgeting begins at department level and moves
up-to top management. The departmental heads/managers prepare their budget based
on present information and past experiences and present it to senior management which
then compiles it into a Master Budget for the organisation.
BENEFITS
1. It gives a sense of ownership &
responsibility to subordinates when
they are valued.
2. Budgets are usually more accurate
since they are based on operational
data and experience.
3. Subordinates cannot blame
unrealistic goals as an excuse for not
achieving the budget expectations.
LIMITATIONS
1. Subordinates may lack the practical
knowledge required to formulate a
budget.
2. Time consuming since a lot of time
will be wasted in arguing & agreeing
on common terms.
3. Subordinates may artificially inflate
the proposed budget so that they can
attain cost targets easily.
Budget Holding
Staff
• Prepares budget for
themselves.
• Submit to
Departmental
Managers
Department
Managers
• Quantify the resources
required.
• Submit the Budget to
Senior Management
Senior
Management
• If rejected,returns back
to department
managers.
• If accepted,allocate
budget to subordinates.

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which are very frequent. The above is purely for academic reading and general
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WHETHER TO INCLUDE SUBORDINATES IN THE BUDGET
SETTING PROCESS OR NOT?
The ‘Ease of Implementation’, amongst other benefit, makes Participative Approach more
suitable for all organisations. If used in the right circumstances, it has an outstanding
potential for motivating managers towards achieving the organisational goals.
However, there is testimony that Imposed Style Approach has been preferred in the
following circumstances:
1. Where the personality characteristics of the participants may limit the benefits of
participation, such as tendency of artificially inflating the budget estimates.
2. Where the firm has large number of homogenous units operating in a relatively stable
environment
3. Where the processes in the organisation are highly programmable with a stable and
clear input-output relationship
PRE-REQUISITES OF EFFECTIVE BUDGETARY CONTROL
If an organisation wants to establish an effective budgetary control, it must consider the
following points:
1. A serious attitude of the management is required towards the system.
2. There should be clear demarcation of areas of managerial responsibility so that in
case of errors only the concerned manager can be penalised.
3. The budget targets should be reasonable & achievable otherwise it demotivates the
operational staff.
4. There should be established techniques for data collection, analysis & reporting.
5. Variance reports should be prepared timely so that the deviations can be reported on
a periodic basis, typically a month.
6. In case of material variances, corrective action shall be initiated in order to minimise
loss to the organisation.