BUDGETING AS A MANAGEMENT TOOL FOR PLANNING, CONTROLLING AND DECISION MAKING

Description

BUDGETING AS A MANAGEMENT TOOL FOR PLANNING, CONTROLLING AND DECISION MAKING

ABSTRACT

The usefulness of budgeting, as a management tool cannot be over emphasized. A good budgeting system could aid management in decision-making, performing the controlling and planning functions. It does seem that this very important implement of work is not efficiently used by many mangers, especially those in the private sector of our economy. The effect is that corporate efficiency has declined, profit maximization opportunity thrown over board, while planning and managerial inefficiency are installed.

Because of the above reasons, this research work was effect looked into budgeting as managerial tool for panning, controlling and decision making with particular reference to Emenite Limited approved budgetary system, in the panning, controlling and decision-making in the company. To carry out this investigation, the researcher carried out a survey through interviews and responses of the fifteen key officials responsible for planning and implementing the budgeting steps.

Based on the investigation carried out, it was noted that Emenite, Ltd, and most companies operate in partnership.

CHAPTER ONE

1.0   INTRODUCTION

THE GENERAL BACKGROUND TO THE SUBJECT MATTER:

The economic concept of resource being scarce relative to demand for them required that every individual prepare a scale of preference, arranging in a certain order how resources are going to be used or apportioned.

This involves to a very large extends some budgeting.

Hand, L. F. (1985) stated that budgeting entails the setting of targets. It is a technique which is widely used in business and which affects all levels of management.

However, in Nigeria the mention of the word budget usually connotes a link with the public sector of the economy.

The government annual budget statement both at the Federal and the State level details the various sources of government revenue and expenditure and this usually affects the economic life of every individual in the country.

This situation has therefore influenced the private sector of the Nigerian economy and most managers have come to view budget as tools reserved for public sectors, which they are supposed to use.

Looking at hand view on budgeting. It is very unfortunate for Nigeria business to hold such negative views of the concept. A budget is simply a financial plan. A household budget itemizes the family source of income and describes how this income will be spent, so much for food, housing, transportation, entertainment, education and so on.

Similarly the Federal budget indicates income sources and allocates funds to defense, transport, agriculture education and the like. By the same taken a company budget is a plan detailing how funds will be spent on labour, capital goods raw-materials, personnel and so on, how funds will be generated for their expenditure.

A budget is therefore an indispensable tool for an individual, household, company and government or its departments that want to spend its resources in the most economic way. However, most private sector businessmen in Nigeria are unaware of the importance of budgets.

This ignorance cuts across all classes of our business community especially within the classes of those without appreciable business education or sufficient knowledge of the rudiments of modern business management.

The resulting effects are that more firms do not prepare good budgets, that is where a budget is prepared at all.

Consequently, the degree of budget utilization and adherence is very low. It is said that if you do not know where you are going, no road would take you there. Budgets are crucial tools in starting a course of operation for a business, and also important in management planning and controlling.

Budgets are essential for controlling in that they enable a firm to check on variations between planned and actual performance achieved. When these variations are systematically analyzed, management gains insight into the cause of the variations and can take positive corrective action.

In Nigeria, most private enterprises can at best be described as medium or small-scale. The importance of budgeting as a planning and effective controlling measure needs to be appreciated by the management of those enterprises.

1.2            PROBLEMS ASSOCIATED

1.3             WITH THE SUBJECT-MATTER:

In spite of the benefits derived from properly made budgets, certain problems arise during budgeting.

There are different budgeting systems, each with its own associated problems. Some systems are more effective than others.

Managers and employees who operate systems also vary in efficiency. Therefore different results and benefits will occur from each system. Moreover, there may be problems.

According to Batty (1976) the following problems are associated with budgeting.

(a).    Absolute accuracy is impossible to attain

and inaccurate figures imposes limitations. If we remember that a budget is a plan, then, we can imagine the impact of inaccuracies.

(b).    Responsibilities for budget heads or items may overlap, example when costs are incurred jointly by more than one department or units.

As far as possible a system should permit putting the appropriate responsibilities squarely on the shoulders of the person responsible

(c)      Inflexible structure may cause problems.

Care should become so rigid that it loses its usefulness; increased efficiency should be the aim, but this will not be forthcoming if the system will not permit plans to be changed.

(d).    There is a danger of excessive administrative costs installing and operating a budgetary control system. Everything possible should be done to keep cost within reasonable limits.

The principles described in budgetary control are also applied to keep down the costs of operating a system of budgeting controls.

1.3     IMPORTANT/SIGNIFICANCE OF STUDY:

It is an acceptable fact that a well-articulated and implemented budgetary system is an effective managerial tool for planning, controlling and decision-making.

A good budget will enhance accountability, productivity, profitability and eventually wealth maximization on the long run. In this vein, it is hoped that Emenite limited will benefit from well-conducted study of this nature.

Hopefully, the exercise will help the management to realize the performance with regards to its periodic planning, forecasting and the corresponding financial results.

This work may be useful to the members of the academic community such as students and future researchers on this subject. They may find something of interest in the whole study. Also the reading public may find the work informative and educative.

However, it is obvious that good budgeting system provides a good framework for evaluation and control.

In any organized company lazy and inefficient managers and officers look at budgeting targets with great suspicion.

Consequently, energy and time is usually wasted to work against budget proposals instead of striving to achieve the set objectives.

Precisely, the officers concerned already have developed a negative bias even before the budget is drawn and approved. Often sources for setting budgeting targets are secondary. This happens where budgets are drawn by top-level managers and a few accounting staff. The result is that the budget is defective and not much can be done to salvage it, unless it is withdrawn and re-written. In circumstances like these, the officers who are to implement the budgetary control system lack sufficient commitment, which is necessary towards achieving set objective.

1.4 SCOPE AND LIMITATION OF THE STUDY:

This research work does not encompass the entire subject matter of budgeting and the attendant variance analysis. The emphasis is on the applicability of budgeting systems as management tool for planning, controlling and decision-making at Emenite Limited, a manufacturing firm.

We shall pay attention also to the means by which the problems of budgeting are handled in the company. Also the study will concern itself with the indicators of the benefits of budgetary control and how feedback is given to operating units about the performance on budget items.

1.5        DEFINITION OF IMPORTANT TERMS

BUDGET:  a formal statement of forecast usually expressed in financial and quantitative terms which aids in achieving set objectives with available resources.

BUDGET CENTRE: this is a center or section of the organization identified and known as a budget or cost center. The center should be the responsibility area of the manager so that the manager is aware of the actual performance expected from the center and aware of the acted performance as at when it occurs.

CASH BUDGET:  a cash budget is prepared to show the expected receipts, payment and periodic cash balances during the budget period or control period.

FIXED BUDGET:  this is a budget, which shows several levels of activity. It is similar to a series of flexible budget.

The flexible budget recognize the different behavioral pattern of cost in relation to various out-put level.

MASTER BUDGET: a comprehensive overall financial and operating plan for the organization, comprising a sales forecasts, estimated cost of goods sold, operating expenses, capital expenditure and projected financial statements.

PRODUCTION BUDGET: this requires production to meet sales budget requirements and changes in stock. It includes an estimate of the number of units to be produced during a budget period.

SALE BUDGET:  this shows the individual products sales units, sales value and total value. It includes the estimated goods to be sold and revenue to the derived from sales.

BUDGETARY PLANNING: is the process of preparing detailing short term (usually one year) plans for the functions activities and departments of the organization, this covers the long term corporate plan into action. In general, plans are developed using physical values, for example, the number of units to be produced, the number of hours to be worked, the amount of materials to be consumed and so on.

CONTROLLING:  is the managerial function concerned with the plan; which in turn was formulated on the basis of an analysis of fundamental organizational goals.

BUDGET AS A MANAGEMENT TOOL: the budget has grown to be for more than financial tool.

It is a tool around which an experienced manager organizes all planning activities. It is the best tool for making sure that key resources and especially the resource of performing people are assigned to priorities and to results. It is equally a tool at integration for managers in the organizations.

And it is a tool that enables the manager to know when to review and revise the plans; either because results are different from what is expected.

DECISION:         from management view, a decision involves making a choice among alternative course of action. Without decision no business can operate since all business actions are the consequences of some management decisions. Even in action itself is the result of a decision. In many ways decision-making is the purpose, the specialization and the end product of the manager. In fact, it is the very reason for his existence as a manager.

It is management who must decide to add or drop a product or service.