THE IMPACT OF BUDGETARY CONTROL ON THE PROFITABILITY OF AN ORGANIZATION
2.1 INTRODUCTION
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:
Budgets may be categorized in numerous ways, but for a business concern, the following classifications may be found.
OPERATING BUDGET
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
FINANCIAL BUDGETS
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 and operation.
CAPITAL BUDGETS
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.
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.
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