Budgeting and Budgetary Control Anan 2009 II

8/4/2019 Budgeting and Budgetary Control Anan 2009 II

1/44

BUDGETING AND BUDGETARY

CONTROL

By

S. A. ABDULLAHIB.Sc., MBA, Ph.D,MNIMN,MNIM,FEI

DEPARTMENT OF BUSINESS ADMINISTRATIONAHMADU BELLO UNIVERSITY

ZARIA


2/44

2

Content of the Presentation

Introduction

Budgeting Process Defined Steps Involved in Budgeting Process

Features & Phases of Good BudgetingProcess

The Budget Document.

Problems & Challenges in Budgeting

Budget Execution & Control

Financial Discipline in Budgeting &Budgetary Control

Conclusion & Recommendations

References


3/44

3

Introduction

The most perplexing challenge of Governance

and Development in Nigeria especially under thecurrent Democratic Dispensation has remain theefficient allocation and utilization of our copiousGod given resources.

Budgeting & Budgetary Control in Nigeria isgenerating more interest and concern never likebefore largely because of style of treatment:

Process reduced to random act

Product is sub standard and

Poorly used and not implemented


4/44

4

Introduction

Budgeting deserves better treatment and amore systematic as well as realistic approach.

It points the direction of the overall economy and

typically plays a significant role in determining thecourse of development.

It determines the pace and volume of economic

activities

It lays the framework for the distribution of incomeas well as wealth in the economy.


5/44

5

Budgeting ProcessBudgeting is the process of planning and

controlling resources culminating into thedevelopment of a budget and theestablishment of budgetary controlframework.

Traditionally budgets have been employedas devices to limit expenditure.

A much more useful and constructive viewis to treat the budgeting process as ameans for obtaining the most effective andprofitable use of resources through

planning and control.


6/44

6

Budgeting Process Budgeting stands as a vehicle to improve the quality of

life for individuals, families and communities and tosustain a healthy economy and environment.

Nigeria has recently pursued efficiency enhancementand encouragement policies:

Paradigm Shift

Introduced some structural economic reforms

Enabling & Back up legislations

Anti corruption agencies and Due Process


7/44

7

Steps in Budgeting ProcessThe budgeting process essentially requires five

basic actions:

1. Set up a system of establishing specific objectives andtargets, designing policies and strategies of achievingthem as well as projected financial statements which can

be used to analyze the effects of the operating plan onprojected profits and other financial conditions indicators.

2. Determine the specific financial requirements to support

the plan. This includes funds for capital expenditures,personnel costs, as well as for research and DevelopmentProgrammes, training and retraining of staff and for majorpublicity campaigns.


8/44

8

Steps in Budgeting Process

3. Forecast the financing sources to be used overthe plan period. This involves estimating thefunds to be generated internally as well as thoserequired from external sources.

4. Establish and maintain a system of controlsgoverning the allocation and use of funds.

Essentially, this involves the effort to insure thatthe basic plan is carried out properly.


9/44

9

Steps in Budgeting Process

5. Develop procedures for adjusting the plan if

conditions deviate from forecastedconditions upon which the plan was based.

New conditions must be recognised andincorporated

This step is really a "feedback loop" whichtriggers modifications to the plan.


10/44

10

Characteristics of GoodBudgeting Process

Participatory: involve as many people aspossible in drawing up a budget.

Comprehensiveness: embrace the wholeorganisation.

Standards: established standards ofperformance.


11/44

11

Characteristics of GoodBudgeting Process

Flexibility: allow for changingcircumstances.

Feedback: constantly monitorperformance.

Analysis of costs and revenues: this canbe done on the basis of product lines,departments or cost centres.


12/44

12

Tips for Budgeting:Cost Conscious

Think about costs early enoughList all resource needs

Competence

Exhibit skills

Check all figures

Ask only what you really need

ClarityNo ambiguity

No deceit

No inconsistency


13/44

13

Tips for Budgeting:

CommitmentBe involved

Show your own contribution

Do not make mistakes

Considerate

Be realistic

Show the possibility

No extravagance


14/44

14

Tips for Budgeting:

Correctness

Estimate should be based on facts

Check out the figures in details

Read and re-read and ask others to check

Computerize

Budget process is tediousIt is repetitive

Use spreadsheet to add and drop


15/44

15

Tips for Budgeting:

Establish rationale

- state why each component/activity is

required;

Explain any formula- how did you arrive at the figures e.g.allowances, mileage, etc;

Establish evidence for need- justify the need for major items andunusual quantity of some items;


16/44

16

Tips for Budgeting:

Encourage linkages- connect budget to specific projectactivities and objectives

Enough to cover subject matter

- short but concise, well highlighted

Complement

Exploremore than one source of Rev.

Establish columns to show sources


17/44

17

Tips for Budgeting:

Cost using Activity Based Budget (ABB)rather than traditional (incremental)

budgeting

Prepare an indicative ABB for each target and

milestone

Set out all the capital and recurrent cost implications

of delivering the milestones

ABB ensures that both the capital and recurrentexpenditure relating to an investment are

captured


18/44

18

Tips for Budgeting:

Current policy in Nigeria emphasises capitalinvestment. Recurrent expenditure is seen as

unproductive

Budgeting using ABB will reveal that recurrent

costs should increase to meet many of the

targets

There will be cases where a particular strategy

will involve only recurrent expenditure


19/44

19

Tips for Budgeting:

It is essential that budgets are firmly linked to

achievable and realistic projections

This will depend on: Reliable forecasts of the Statutory Allocations and IGR revenues

Realistic budgets based on reasonable assumption

Acceptance by political leaders that budgets must be kept within

available funds

Avoiding off-budget expenditures, unplanned salary increases

and other cost overruns that usually compound the difficulties of

making funds available


20/44

20

Tips for Budgeting:

Revenue from units or Parastatals may bemisleading

Subsidies to parastatals not shown in

revenue account

Net parastatal revenues are typically less than

half the gross

Identifying the true cost of generatingrevenues using ABB


21/44

21

Phases in Budgeting Process

The budgeting process is organized in

phases with each phase involving a widerange of administrative, accounting andlegislative activities or inputs cutting across

the different units of the establishment asfollows:

1. Budget Formulation

2. Budget Execution & Control

A B d F l i


22/44

22

A. Budget Formulation Budget Formulation

Budget Preparations

Budget (Call) Circulars

Submission of Budget Proposals

Approval of the Budget


23/44

23

A Budget

A budget is a plan expressed in quantitative, usuallymonetary term, covering a specific period of time,usually one year.

In other words a budget is a systematic plan for the

utilization of financial and material resources.

Budgets need to be prepared and approved in advanceof the period in which they are to be used.

Budgets should include all of expected income,expenditure, and the capital to be employed over thebudget period.


24/44

24

Advantages of Budgets

A budget helps organisations in the following

ways:

It brings about efficiency and improvement in theoperations of organizations and governments.

Exact responsibilities are assigned. It thus minimizes thepossibilities of buck passing if the budget figures are notmet.

It is a way or motivating managers to achieve the goalsset for their units.

It serves as a benchmark for controlling on-goingoperations.


25/44

25

Advantages of Budgets

It helps in developing a team spirit whereparticipation in budgeting is encouraged.

It helps in reducing wastage and losses byrevealing them in time for corrective action.

It serves as a basis for evaluating theperformance of managers.


26/44

26

B. Budget Execution & Control

Budget execution & Control involves three

basic tasks:

1. Administration of the budget:

Ensuring that authorized expenditure matches with the estimatesas per approved budget

Ensuring that funds are used for the purposes originally

authorized

Ensuring that there is no delay in disbursement of funds tospending units e.g. delays in authorization and releases or poorcash management resulting in insufficient funds being available.

B d t E ti & C t l


27/44

27

Budget Execution & Control

2. Complying with due process and achievingvalue for money with respect toprocurements and payments.

3. Monitoring and controlling recurrent andcapital expenditure as well as revenueagainst the budget. This involves periodicinspection and reporting onimplementation


28/44

28

Budgetary Control

Budgetary control is a vitally important element

of budget execution and therefore necessary fora successful and efficient budgeting process.

Budgetary control is defined by the Institute ofCost and Management Accountants (CIMA) as:

"The establishment of budgets relating the

responsibilities of executives to the requirements of apolicy, and the continuous comparison of actual withbudgeted results, either to secure by individual actionthe objective of that policy, or to provide a basis forits revision".


29/44

29

Budgetary Control It serves a numbers of purposes:

It tracts actual performance against plannedperformance (Revenue, Expenditure)

Ensures revenues are met and applied to

purposes originally budgeted.

Ensures efficiency by reducing waste &leakages

Provides information to monitor and assesstargets and take remedial action, if necessary

Comparative, timely, accurate, detailed & profiled


30/44

30

Budgetary Control

No system of budgeting can be successful

without having an effective and efficient systemof control.

Budgeting is closely connected with control.

The exercise of control in the organization withthe help of budgets is known as budgetarycontrol.

Budgets are simply exercises in calculationunless they are used. When we use a budget, wedo so as part of a system of budgetary control.

Budgetary Control


31/44

31

Budgetary Control The process of budgetary control includes:

1. Continuous comparison of actual performancewith budgetary performance.

2. Revision of budgets in the light of changed

circumstances.

A system of budgetary control should therefore not bemade rigid. There should be enough scope of flexibilityto provide for individual initiative and drive.

Budgetary control is an important device for making theorganization more efficient on all fronts. It is animportant tool for controlling costs and achieving the

overall objectives.

B d C l


32/44

32

Budgetary Control

There are five parts to an effective cost control

system. These are:

1 preparation of budgets

2 communicating and agreeing budgets with all concerned

3 having an accounting system that will record all actual costs

4 preparing statements that will compare actual costs withbudgets, showing any variances and disclosing the reasons forthem, and

5 taking any appropriate action based on the analysis of thevariances

S t f I d t


33/44

33

Symptoms of InadequateControl:

An unexplained decline in revenues or profits. A degradation of service (customer complaints)

Employee dissatisfaction (complaints, grievances) Under funding or Cash shortages caused by bloated

(turnover) inventories or delinquent accountsreceivable.

Idle facilities or personnel. Disorganized operations (work flow bottlenecks,

excessive paper works)

Excessive costs of operations Evidence of waste and inefficiency (scrap, rework). Too many leakages resulting in fraud and cash loss Long list of abandoned and uncompleted projects

Financial Discipline in Budgetary


34/44

34

Financial Discipline in BudgetaryProcess

Financial Discipline is the judicious allocation andutilization of scarce resources to ensure that benefitsaccrue from any activity undertaken.

It focuses on ensuring that funds are only expended on

activities (projects) from which benefits would accrue.

The essence of financial discipline is to ensureaccountability and prudence utilization of scarce financial

resources.

Without a disciplined financial set up businesses arebound to fail. Governments and economies havecollapsed for lack of financial discipline.

Fi i l Di i li i B d t


35/44

35


Process

Financial Discipline entails the following:

Prudence in spending

Ensuring proper expenditure controlBlocking all leakages and Eliminating all sorts of

Malpractices associated with funds management

Ensuring value for money

AccountabilityStrict adherence to budget and

Review of budgets and financial allocations fromtime to time



36/44

36


It is generally believed that there is astrong relationship between financialdiscipline, sound budgetary process

and good governance.

It is being increasingly recognized within theworld financial circle that there exist a strong

relationship between the deficient economicsituation of a particular country and its lack ofcapacity in the field of accounting

J.M.Turner (1992), at the International congress of Accountants held in Mexico City

Fi i l Di i li i B d


37/44

37


Process

Disorderly financial affairs are an ancient curse that has

brought down the mighty. From Kings to business

leaders.to dictators, but nothing will bring down a

democratically elected government more rapidly and moreeffectively than financial chaos, financial corruption and

even financial and budget mismanagement. It is therefore

fitting that those who support and promote democracy as a

form of government also support sound financial and

budgetary management in that government

Mr. Wesberry (1999) in a presentation at an International Financial Managementforum in Washington



38/44

38


From the two assertions emerged a strong positiveargument on the intrinsic value of financial disciplineand sound budgetary control in any kind of organization,be it enterprise, government or others.

Thus inadequate or inefficient financial discipline andbudgetary control could have adverse effect on thecondition of a company or a nations economy.

The situation of Nigeria would appear to have given

validity and justification for the assertions.

C l i


39/44

39

Conclusion

It can be inferred from the discussion that the importanceof effective budgeting, sound budgetary control and strongfinancial discipline to the successful actualization of anorganisations goal cannot be overemphasized. Thus

inadequate or inefficient financial discipline and budgetarycontrol will no doubt have adverse effects on the conditionof a company or a nations economy.

The budgeting process in Nigeria is obviously far frombeing optimum. There is therefore the urgent need ofensuring that budgets in Nigeria are not only made realisticbut are also fully implemented for the benefits of all.

References


40/44

40

References

Ashford JK (1989) Management Accounting Process in Non Profit MakingOrganisationsManagement Accounting (CIMA) December Pp36-37

Belkaoui A. (1991) The Effects of Goal Setting and Task Uncertainty OnTask OutcomesManagement Accounting Research Pp91-100CIMA Terminology

Case, K.E., and Fair, R.C. (2006), Principles of Macroeconomics. PrenticeHall. ISBN-10: 0132226456, ISBN-13: 978-0132226455.

Colville I (1989) Scenes from a Budget or: Helping the Police with TheirAccounting EnquiriesFinancial Accountability and Management Vol. 5 No2 Summer P 89-106

Cooper D (1981) A Sociological And Managerial View Of Management

Accounting EssaysIn British Accounting Research. Bromwich andHopwood (Eds) Pitman

Dady BL (1979) How Florida Power and Light Installed ZBB. ManagementAccounting (US) Mar 79 Pp31-34

R f


41/44

41

References

Davidson S, Maher MW, Stickney CP and Weil RL (1987)

Managerial Accounting: An Introduction to Concepts, Methodsand Uses3/E the Dryden Press, International Edition Chicago

Drury JC (1988) Management and Cost AccountingVNR 2/E

Dupree JM Et Al (1987) How Management Accountants CanCommunicate Better. Management Accounting (US) Pp40-43

Ezzamel M Et Al (1987) Advanced Management Accounting: AnOrganisational EmphasisCassell

Grant CL (1991) High Tech Budgeting. Management Accounting(US) May 91 Pp30-31

Halidu, I. Abubakar (1996) Public Finance and Budgeting:Principles, Practice and Issues, MIS Press, Zaria


42/44

42

References

Hammond TH ET Al (2000) A Zero Based Look at Zero Base Budgeting.Transaction Books USA

Hirsch ML Et Al (1986) Cost Accounting: Accumulation, Analysis and Use.Kent Publishing Company. 2/3 1986

Jones R and Pendlebury M (1984) Public Sector AccountingPitman

Lucey T (1981) Management AccountingDPP

Morse WJ and Roth HP Cost Accounting: Processing, Evaluating, andUsing Cost Data3/E Addison-Wesley Publishing Company Massachusetts

Murphy J Fairness and Inducement (1991), Management Accounting(UK)

June 91, Pp30-31

Pyhrr PA (1970) Zero-Base Budgeting, HBR Nov-Dec Pp99-109

R f


43/44

43

References

Sizer J (2001) Insight into Management Accounting, Penguin Books,

Harmondsworth

Straats EB (2004) Information needs in an era of change. From Thecontrol function outside the business organisation... pp329-339

The National Report to the World Summit on Sustainable

Development (2002). Swaziland Environment Authority, Mbabane,Swaziland.

Turner, J.N. (1992) Opening Addresspresented at InternationalCongress of Accountants, Mexico City

Wesberry, J.P. (1999) Need to Improve Government FinancialManagement in Latin Americain proceedings of the WashingtonInternational Financial Management Forum, held at Washington D.C

Williamson D (1996) Cost and Management AccountingPrentice Hall


44/44

Thank you for your time

&

Patience.

Do have a wonderful day

Documents

Budgeting and Budgetary Control Anan 2009 II