The two budgetary objectives are planning and control.

Planning takes place at different levels within a firm leading to many different budgets. Here we have strategic decisions being taken at the top of our company. These look far into the future, and it may be that the company wants to produce high quality, luxurious products. Further down, middle management make tactical decisions. They're going to be working out how do we produce these high quality, luxurious products. Maybe it's by using only the finest materials and the most expert labor. And then finally, our operational decisions need to be made. Now let's get purchasing materials from suppliers. Now let's get employing people from recruitment firms. All of these will have a budget, and the budget at the top will help determine that. At the bottom, budgetary control keeps the system working steadily or enables it to change safely. If we start at the top of this diagram, you firstly determine your objectives. I want to produce high quality products, but at a reasonable cost that then helps us set the budget for our costs. We then try and operate in line with those objectives. And finally, we compare actual with budget. Let's say our actual costs have come in less than budgeted. That's fantastic, but have we met our objectives? No. Unfortunately, we haven't managed to produce very high quality products. So I can now either change the objectives or change the budget going forward. So budgetary control keeps us operating in line with the objectives of the company.

Let's have a look at the interlinking of budgets here. We've got an example from a manufacturer. The manufacturer has worked out its sales budget. He thinks it's going to sell a thousand units this year. We may need to produce though 1,005 just in case we have some spoilage. So that determines our production budget. But our production budget then helps us work out our labor budget. How many hours of work needed and our overhead budget, maybe how much electricity will we need. That then helps us work out our materials usage. Budget. Producing 1,005 units helps me work out how much materials I need to use. Maybe I need to use 10 tons of materials to produce those units, but then that helps me work out my materials. Purchase budget. In order to use 10 tons, maybe I need to buy 11 tons due to off cuts. All of these budgets are interlinked. Another example could be done for an investment bank. At the top, you may have the deal flow budget. How many deals are in the pipeline for this year that we need to work on? That will then help us work out our headcount budget. If there are lots of deals, then we need to hire more people.

That then impacts on the HR budget and the recruitment budget. Both may need to go up with lots of new joiners. We may need to increase our training budget and our IT budget 'cause every new joiner needs a computer. Lastly, that'll impact on the facilities budget and support Budget because we've got lots more people in the office who now need to be working at desks, at photocopies may need secretarial support. So working on budgets is key for planning for the future, but also controlling our costs. Lastly, who keeps control of all of these different budgets? Well, that's your budget committee. Budget committees coordinate the preparation and administration of budgets.