To ensure effective budgetary control, budgets must be effectively monitored and managed. Although the difference between monitoring and managing budgets is not clearly defined, there are certain characteristics that set them apart.
The two can be broadly distinguished as follows:
|Monitoring budgets||Managing budgets|
|Checking accuracy of actual income and expenditure reported; comparing “actuals” with budgets; calculating variances; identifying trends; highlighting variations to the person managing the budget.||Taking the necessary action, based on the monitoring results, to ensure the budget remains within control.|
The budgetary control process ensures funds are being utilised in accordance with the level and quality of output required from the allocated resources.
The process of controlling budgets can be broken down into several steps:
- Establishing actual position
- Comparing actual with budget
- Calculating variances
- Conducting variance analysis – establishing reasons for variances
- Taking action to exert control
Step 1 - Establish Actual Position
All organisations have some form of an accounting system which records their income and expenditure. Depending on the system, budgets will be identified by some form of budget code. Income and expenditure is then recorded against the budget code. This enables budget holders to identify their actual budget position at any point in time.
This information is normally provided in the financial management report. The style and content of the report will vary from one organisation to another and will be dependent on the financial system used.
To establish the actual position, the budget holder will need to examine and understand the financial information available. They will need to know how current the information is and adjust it for any outstanding transactions. These may include debtors and creditors. The budget holder will also need to know if any part of their budget has been “committed” – i.e. if goods and services have been ordered but not yet received.
Therefore, establishing the actual position may require information from several different sources depending on the organisation.
Step 2 - Compare Actual with Budget
After completing Step 1, the information gathered needs be compared to the budgeted figures set at the beginning of the financial year. This comparison should be simple if the actual income and expenditure headings match those of the set budgeted income and expenditure.
The difference between the actual income and expenditure and the budgeted income and expenditure is called a “variance”. Variance analysis is an important technique in the budgetary control process.
Variance analysis is discussed in detail in some of our other resources, like our book “Managing the Devolved Budget”. We also have a very good online course on the UDEMY platform called “Managing Budgets in the Public and Non Profit Sector” which explains variances clearly...