The budget serves as a
vehicle through which the actions of the different parts of an
organization can be brought together and reconciled into a common
plan. All organization whether economic, social or political make
plans for the future.
Organization and companies have limited resources and these scarce
resources impose limits on the number, extent and range of end-result
in the organization .
Set out to achieve “common organizational goals include
maximization of profit or achieving satisfactory levels of performance
(profit satisfaction) according to copelanct and descher (1979),
achieving to continual growth or ensuring the survival of the
organization, avoiding risk in making investment and perform a social
services desired by others. It is with a view of achieving their
organizational goals that creak emphasis on budgeting. Budgeting is
essentially a process of planning and control. A well prepared budget
provides management with a planned programme based upon investigation,
study and research on the part of the entire organization. Hence, a
budget serves to bring together the separate plans of different
departments in an organization and provides means of co-ordinating the
marketing, production and financial activities of the organization.
If an organization is to function effectively, there must be definite
lines of communication so that all the parts will be kept fully
informed of the plans and the policies, and constraints, to which the
organization is expected to conform
According to the chartered institute of management
Accountants, (CMA) budget is defined as “a plan quantified in monetary
terms, prepared prior to a defined period of time usually showing
planned income to be generated and expenditure to be incurred during
that period and the capital to be employed to attain a give obejctive’.
Fregman J.M. (1973) described budget as a comprehensive and
coordinated plan, expressed in financial terms for the operations and
resources of an enterprise, for some specified period in future. A
budget involves every level of activity, integrating revenue plans,
assets requirements and financial needs.
According to T. Lucy (1984), budgeting has a number of benefit namely:
- Performance Evaluation: A manager’s performance is often
evaluated by measuring his or her success in meeting the budgets. In
some companies bonuses are awarded on the basis of an employee’s
ability to achieve the target specified in the target specified in the
periodic budgets, or promotion may be partly dependent upon a manager’s
budget record. The budget thus provides a useful means of informing
managers of how well they are performing in meeting targets that they
have previously helped to set.
- Coordination of Activities: without any guidance, managers
may each make their own decisions, believing that they are working in
the best interests of the organization. For instance, the purchasing
manager may prefer to place large orders so as to obtain large
discounts; the production manager will be concerned with avoiding high
stock levels; and the accountant will be concerned with the impact of
the decision on the cash recourses of the business. It is the aim of
budgeting to reconcile these differences for the good of the
organization as a whole.
- Plans implementation: This serves as a guide for
implementing plans that are set to achieve the organizational objective
as the aspect of planning in budgeting first of all enables management
to determine those policies needed to achieve the desired goals or
- Communication: if an organization is to function
effectively, there must be definite lines of communication so that all t
he parts will be kept fully informed of the plans and the policies,
and constraints, to which the organization is expected to conform.
Everyone in the organization should have a clear understanding of the
part they are expected to play in achieving the annual budget. Through
the budget, top management communicates its expectation to lower level
management, so that all members of the organization may understand
these expectations and can coordinate their activities to attain them.
- Motivation and God congruence: if the goal congruence that
is the objective of an organization and that of the individual
participating in its achieving agree, there will be a motivational
impact on the participants to achieve the planned goal congruence.
This aspect of he benefit of budget is known as the behavioural aspects
- Control” A budget assists managers in managing and
controlling the activities for which they are responsible. By comparing
the actual results with the budgeted amounts for different categories
of expenses, managers can ascertain which costs do not conform to the
original plan and thus require their attention.
- TYPES OF BUDGET
Budgets may be categorized in numerous ways, but for a business concern, the following classifications may be found.
According to I M Pandy (1988)
operating budgets relate ot the planning of the activities or
operations of the enterprise such as production, sales and purchases.
They are concerned primarily with specified physical activities for
instance, the sales budget is distributed to the sales division, while
the production budget is sent to the production department. The
operating budget is made up of two categories vix: programme or
activity budget and
- Programme or activity Budget: this specifies the operations
or functions to be performed during the next year. It focuses on the
activities rather than on the person.
- Responsibility Budget: It specifies plans in terms of
individual responsibilities. The focus is on individuals. Its basic
objective is to achieve control by comparing the actual performance of a
responsible individual with the expected performance.
The financial budget
according to Joseph Baggot (1976), consist of the budget of the budget
capital expenditure, the cash budget, the balance sheet and the
statement of changes in financial position. They are concerned with
the financial implications of the operating budgets that is the expected
cash in flows and cash out flows, financial position and operating
results. The budget components of financial budgets are also called
proforms statements. The most important component of the financial
budget is cash budget. The major objective of he cash budget is to
plan in such way that he company always maintains sufficient cash in the
most profitable manner.
The preformed financial statement provides information as to the
future assets, liabilities and income statement items. They are
prepared to identify the anticipated result/outcomes of the budgeted
operations. The preparation of the cash budget and proforms statement
compels management to look ahead and balance its policies, activities
They involve the plan to
acquire worthwhile projects, together with timing of the estimated
costs and cash flows of each project. Such projects require large sums
of money and have long term implications for the firm. Capital
budgets are very difficult to prepare because estimates of cash flows
over a long time have to be made and they involve a great deal of risks
and uncertainty. Capital budgeting is in respect of such things as
the replacement or increase of plant, machinery and building, the
acquisition of existing business, the cash redemption of redeemable
A detailed budget for each responsibility centre
is normally prepared for one year. The annual budget may be divided
into either twelve monthly. Alternatively, the annual budget may be
broken down by months for the first three months, and by quarters for
the first three months, and by quarters for the remaining nine months.
The quarterly budgets are then developed on a monthly basis as the
year proceeds. For example, during the first quarter, the monthly
budgets fore the second quarter will be prepared, and during the second
quarter, the monthly budgets for the third quarter will be prepared.
This process is known as continuous or rolling budgeting, and ensures
that a twelve-month budget is always available by adding a quarter in
the future as the quarter just ended is dropped. Rolling budgets also
ensure that planning is not something that takes place once a year when
the budget is being formulated. Instead, budgeting is a continuous
process, and manager are encouraged to constantly look ahead and review
future plans. Furthermore, it is likely that actual performance will be
compared with a more realistic target, because budgets.
There is a danger that because budgets are reviewed and changed at
the end of each quarter, budget staff will not give sufficient
attention to preparing the new budget for the fifth quarter or
reviewing the budget for the fourth quarter, because they know these
budgets are likely ot be changed in the quarterly review process.
Irrespective or whether the budget is prepared on an annual or a
continuous basis, it is important that four-weekly budget be used for
- ADMINISTRATION OF THE ANNUAL BUDGET
It is important that suitable administration
procedures be introduced to ensure that the budget process works
effectively. In practice, the procedures should be organization, but
as a general rule, a firm should ensure that procedures are established
for approving the budgets and that the appropriate staff support is
available for assisting managers in preparing their budgets.
THE BUDGET COMMITTEE
The budget committee should
consist of high-level executives who represent the major segments of
the business. Its major task is to ensure that budgets are
realistically established and that they are coordinated
satisfactorily. The normal procedure is for e functional heads to
present their budget to the committee for approval. If the budget does
not reflect a reasonable level of performance, it will not be approved
and the functional head and re-submit it for approval. It is
important that the person whose performance is being measured should
agree that the revised budget can be achieved; otherwise, if it is
considered to be impossible to achieve, it will not act as a
motivational device. If budget revisions are made, the budgets should
at least feel that they were given a fair hearing by the committee.
The budget committee should appoint a budget officer, who will
normally be the accountant. The role of he budget officer is to
coordinate the individual budgets into a budget for the whole
organization, so that the budget committee and the budget can see the
impact of an individual budget on the origination as a whole.