How to control a budget

Checklist

  1. 1 Make sure the budget you have prepared includes all the key indicators you wish to control.
  2. 2 Give responsibility for budget items only to individuals with the authority to control the outcome.
  3. 3 Schedule regular reviews of budget performance.
  4. 4 Review budgeted figures to identify cashflow or other problems which can be anticipated and tackled in advance.
  5. 5 Compare margins, working capital and other key ratios with historical figures to identify how performance is expected to improve or deteriorate.
  6. 6 Carry out a sensitivity analysis to see what effect different outcomes could have on performance.
  7. 7 Focus on controlling items which could have a significant effect on overall business performance.
  8. 8 As figures become available, compare actual sales to budget and identify reasons for this sales variance.
  9. 9 Determine how fixed costs differed from budget and whether any changes are likely to be permanent.
  10. 10 Analyse the extent to which variances in variable costs reflect sales variances, or whether prices or efficiency have changed.
  11. 11 Identify to what extent variances in income or expenditure reflect differences in timing rather than performance.
  12. 12 Take action to sort out underperformance which can be controlled.
  13. 13 Capitalise on unexpected favourable changes.
  14. 14 Revise future budgets in the light of the information you now have.

Cardinal rules

Do:

  • focus on key indicators which have a significant effect on performance
  • use budgets to anticipate problems
  • regularly review performance and find reasons for variances
  • use budget control as a prompt to action
  • revise budgets as more up-to-date information becomes available

Don't:

  • confuse changes in timing with permanent changes to the levels of income or expenditure
  • ignore favourable variances without finding an explanation