What value has a budget if there isn’t any budgetary control process established? No value at all. Well, maybe some but surely it is far away from being at high level.
The aim of a budgetary control process is to measure the level of budget deviation, take action, track action and eventually provide insight to adjust a budget value (see also the article budget vs actual for more information about key benefits of variance analysis).
An efficient budgetary control process can easily be set up following these easy five steps:
Define control intervals
First of all, you should think how often a comparison between actual values and budget makes sense. Keep also in mind that you actually need to be able to collect the relevant data. For example, a weekly financial comparison could be impossible if figures are only published on a monthly base. A common interval is monthly.
Define comparison values
You should then define against which plan version your actual figures are compared to. You could use the budget for the fist some months and then switch to a forecast version or stay with the budget for the whole year. Your comparison values really depend on how the company you work for is set up. As a rule of thumb, compare to what managers get measured at.
Set up a standard report
After you know your intervals and the comparison values, you should set up a standard report for your budgetary control process (point 2 of our lean finance article addresses exactly this topic). Design your report and make sure you can replicate it without hassle for all your intervals. This could mean you initially spend some time preparing it but it will save you of repetitive creation later on. The article how to design a variance analysis report assists you producing an easy to understand report.
Define audience and means of communication
After all, you should consider who should receive your report. Depending on your comparison you may include one to several people. Make sure the report goes only to those people who have a real interest in it. On top of that, figure out the best means of communication. Do you simply send an email with your report or is it more efficient to arrange meetings. If results are not completely clear or measures need to be decided, a meeting is more promising than written communication.
Nowadays, communication is an essential skill for every management accountant. You can find more details about this topic in our article about recent developments in the field of management accounting.
Track agreed actions
Don’t forget to note down, initiate and track any measures that were agreed on. This part is essential for a successful budgetary control process. Make sure that at the next control interval you discuss the progress towards the agreed actions and their impact.
And the budgetary control process is set up
The five steps above will help you setting up an efficient control process and thus add value to the business. Keep in mind that your result depends on the quality of the used plan values. If the plan was of low quality, your control won’t be promising neither.
Let me know how this works for you. Feel also free to share your way of creating a budgetary control process.