The control of financial resources as they come into and out of the organization and as they are held by the organization. Any company needs to know how to be financially responsible in order to secure a profit and survive in todays economy.
Budgetary Control
A budget is a plan expressed in numerical terms: dollars, units of output, time, or any other quantifiable factor. Budgets provide a method for measuring performance across different units within the organization. Budgets have four primary purposes: helping managers coordinate resources and projects, helping define the established control standards, providing clear guidelines about the organization’s resources and expectations, and enabling organizations to evaluate the performance of managers and units.
Types of budgets:
Financial budget – shows the sources and uses of cash.
Operating budget – shows what quantities of products or services the organization intends to create and what financial resources will be used to create them.
Non monetary budget – expresses planned operations in non financial terms such as units of output and machine hours.
Developing budgets:
Many organizations now allow all managers to participate in the budget process.
Strengths and weaknesses of budgeting:
Budgets facilitate effective control and coordination and communication between departments. But budgets may be applied too rigidly; the process of developing them can be time consuming; and they may limit innovation and change.
Other Tools of Financial Control
Budgets are the most common means of financial control, but there are other useful tools: financial statements, ratio analysis, and financial audits.
Financial statements:
A profile of some aspect of an organization’s financial circumstances is a financial statement. The two most commonly used financial statements are the balance sheet and the income statement. The balance sheet shows a snapshot profile of the organization’s financial position. The income statement summarizes financial performance over a period of time.
Ratio analysis:
Financial ratios compare different elements of a balance sheet or income statement to one another. Ratio analysis is the calculation of one or more financial ratios to assess some aspect of the financial health of an organization. Five commonly used financial ratios are liquidity, debt, return, coverage, and operating.
Financial audits:
Audits are independent appraisals of an organization’s accounting, financial, and administrative procedures. An external audit is a financial appraisal conducted by experts who are not employees of the organization. An internal audit is an appraisal conducted by employees of the organization. The objective of these audits is to verify the accuracy of financial and account procedures. Internal audits also assess these procedures for efficiency and appropriateness.
Management Tools 