THE IMPACT OF BUDGETARY CONTROL ON THE PROFITABILITY OF AN ORGANIZATION
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
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’.
(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 objectives.
- 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 of budgeting.
- 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
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 and operation.
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 shares etc.
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 control purposes.
- 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.