Important aspects of budgetary control in companies

Budgetary control includes preventive measures so a company could plan its activities and improve decision making, for example, when there is a need for new purchase contracts conclusion.

Post-control procedures are a standard approach, which is not beneficial to some extent, because we cannot change both fact and plan-fact as soon as we issue them.

The figures of preventive budgeting control are more reliable than such of operational account. NFP experts applied those methods twice, moreover in very opposing fields, like agriculture, plant cultivation and wine-making vs. gold/platinum mining.

Streamlining of processes includes making a list for each type of business resource such as equipment, personnel, materials and machinery. We can also add production volumes, equipment performance, and employees' work to the list. Then we gather data daily and weekly manually. Today the Internet of Things helps to avoid manual data collecting and thus risks of human errors, and by using IoT it would take only one minute per one cycle of data collecting. As a next step on the operational level (up to day) we can perform a cross-checking to measure resources effectiveness and output. This approach reminds of a mathematical derivative as infinitesimal of fact collecting moment to infinitesimal of reaction time (control) and decision making.

Budgetary control comprises five basic processes. We perform refinement and correlation of following monetary commitments (RUB, USD) with the previous from the initial stage to the final. This method is like a truncated cone — limits convert into reserves, and reserves convert into operations requests, which in their turn correlate with execution.

With our implementing experience, we got important aspects of budgetary control, which can be useful for readers.

1. No control is possible if we consider budgetary control solely at the budgetary cash flow level (with no control at the revenue and expense budget and/or purchase budget level). We cannot allow processing of excess payment application, because it is expensive for a company. If we already signed a contract, we cannot resign payment commitments in most cases, moreover on post-payment conditions. Delay of payments leads to strict penalties, reputation losses, and extra commitments.

Preventive budgetary control relies only on the limits/reserves chain of revenue and expense budget, the purchase budget, and the budgetary cash flow.

2. Limits/reserves correction at the revenue and expense budget level should automatically and consistently lead to limits/reserves correction at the purchase budget and the budgetary cash flow level. Such connection is built upon the budget model level in terms of business logic and the impact of:

VAT amounts and other indirect taxes (taxable and nontaxable activity);

Shift of payments (pre/post payment) which correlates with expenses and the moment of purchase.

Practice shows that connections between the revenue and expense budget, the purchase budget, and the budgetary cash flow should be uploaded to the budgetary control contour and we should use it during a correction procedure. Otherwise after many limits/reserves corrections within one cycle, it will be confusing to correlate data on charges and payments.

3. In-house analysts and economists should competently develop business logic to compare limits/reserves corrections at the revenue and expense budget, the purchase budget, and the budgetary cash flow levels in case there are a lot of corrections from different financial responsibility centers, items and accounting periods. Often companies can reconcile each separate correction but cannot perform simultaneous parallel reconciliation of corrections.

4. Limits/reserves balancing as a technical process addresses both IT and business structures. We should set new limits for business plan in the beginning of new fiscal year. In some cases it is possible to update budgets during a fiscal year (some call this process 'expected fact' or 'forecasting') and then re-assign the limits for the remaining accounting periods of fiscal year. The issue here is to choose a right strategy for re-assigning of unspent and overspent limits/reserves of current year to new limits/reserves according to changes in analytics and methodology. For example, changes of item and algorithm settlement in lease standards according to Russian accounting standards and Federal accounting standards confused a lot of companies so they could not evaluate amounts in expense item.

5. Economists should control unspent reserves so 'pushful' financial responsibility centers could not have designs on them.

Many companies do not consider this aspect and realize the importance of it after unpleasant incidents. There is a need to look through limits of previous and current periods (monthly or quarterly), specify their status and address this matter to finance responsibility centers in charge of it, and specify the using sequence with company's management/shareholders. In many cases they can be hidden reserves of a company, compensation resources for losses of other directions.

6. Revenue and expense budget, the purchase budget, and the budgetary cash flow process should start with payment application with fields like date, finance responsibility center, item, period, amount and additional analytics in it. Participants who specified in regulatory documents are to process payment application. We should consider excess applications and not disregard them process them separately, because we cannot perform 100 % of what we have planned. It is important not to become a hostage of budgetary control process itself.

NFP experts provide automation of large enterprises leveraging 1C:Enterprise 8 based solutions. All products have reliable features for launching budgetary control procedures and can tie those processes with operational contour. I should highlight that we should focus on aspects which mentioned above. Companies should develop their own ways to deal with those aspects and deploy automation at a right level in basic supplies through customization (revision).