Budget summaries and reports

A widely used control of overall performance takes the form of a summary of budgets. A budget summary, being a resume of all the individual budgets, reflects company plans so that sales volume, costs, profits, utilization of capital, and return on investment may be seen in their proper relationship. In these terms it shows top management how well the company as a whole is succeeding in meeting its objectives.

For the best control through a budget summary, a manager must first be satisfied that total budgets are an accurate and reasonably complete portrayal of the company’s plans. The manager should study the budget reports and any material accompanying them to determine whether the comparison of budget and actual costs shows the real nature of any deviations. For example, a company head criticized his factory manager for being considerably over his labor budget in a month when the labor force had been materially reduced and the temporary increase in expenses was due to severance pay.

Minor discrepancies should receive appropriately little attention. The purpose of a control system is to draw attention to important variations, and both the budget reports and the attention paid to them should reflect this. Above all, a manager should never forget that a budget summary is no substitute for profitable operation. Budgeting is never more perfect than the planning behind it, and plans – especially long range plans – are subject to the imperfections caused by change and uncertainty. There may even be times when a manager must forget the budget and take special action to meet unexpected events. Budgets are meant to be tools, and not masters of managers.

On the other hand, managers should not underestimate the value of budget summarizes in providing an effective means for overall control in situations of decentralized authority. Budget summarizes furnish a means whereby enterprise objectives can be clearly and specifically defined and departmental plans can be made to contribute toward such objectives. Should the budget summary and the reports of actual events indicate that the enterprise as a whole is not tending toward its objective top managers have a convenient and positive means of finding out where the deviations are occurring. The summaries thus furnish a useful guide for corrective action.

Profit and Loss Control

The income statement for an enterprise as a whole serves important control purposes, mainly because it is useful for determining the immediate revenue or cost factors that have accounted for success or failure. Obviously, if it is first put in the form of a forecast, the income statement is an even better control device in that it gives managers a chance, before things happen, to influence revenue expenses and consequently profits.