Financial and budgetary control

Managers need to be able to exercise control over the organisations that they manage - i.e. to make sure that the organisation is keeping to plan and that necessary actions can be taken to put it back on track when needed. In the same way that a thermostat will regulate and control the temperature of your central heating, system managers need to have control tools to make sure that financial plans and targets are being achieved.

Managers will regularly create budgets - for the whole organisation and its constituent parts. The budget is a plan set out in numbers, which enables managers to exercise control.

A budget might set out the planned income and expenditure of a food manufacturing business like Kraft for the next twelve months. Managers are then able to check whether sales are living up to budget expectations (on a weekly or monthly basis).

Variance

The difference between what is budgeted to happen and what actually happens is termed a variance. A favourable variance is one that enables a business to increase its profits - for example if sales revenue is higher than budgeted. An adverse variance will reduce profits e.g. if costs are higher than budgeted. By spotting adverse variances managers are able to take control actions - e.g. by cutting out waste to reduce costs, or increasing advertising/promotion when sales are less than expected.

Control is the process through which managers are able to keep their business on track. Managers create various financial and budgetary planning tools, which they then monitor at regular intervals. When variances are spotted appropriate management actions are required to put the business back on plan.