BUDGETING AND BUDGETARY CONTROL IN THE BANKING INDUSTRY: A STUDY OF ECOBANK NIG PLC
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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The importance of banking industry in all its forms and content cannot be over-emphasized because its usefulness cut across all facets of human endeavours. Globally and Nigeria in particular, the banking industry is perhaps the fastest growing industry with wide varieties of generational services which provides a good ground for vibrant National Economic Development (Harper, 2004).
The banking industry has grown rapidly in size, content and form which necessitate budgeting and budgetary control to ensure proper co-ordination of activities of the various sub-units of the organization which can lead to efficient utilization of resources and profit maximization (Harper, 2004).
It can be said that management control is needed to ensure that banks achieve its objectives. Once, the objectives have been achieved, plans would be drawn up so that the progress of the firm can be directed towards the end in the objectives. Budgets are drawn up for control purposes that is, an attempt to control the direction that the bank is taking (Creswell, 1994).
Budgeting is an instrument used by organization in preparing a budget, banks inclusive, to achieve the purpose of matching plans with actions. A budget may be defined as a plan quantified in monetary prepared and approved prior to a defined period of time usually showing planned income to be generated and/or expenditure to be incurred during that period and the capital to be employed to attain a given objectives (Batty, 1996).
Thus, budgeting which is a quantitative plan of action and a link between financial resources and human behavior to accomplish policy objectives is put to direct some management attention from the present to the future and enable it to anticipate problems or opportunities in time and deal with it effectively. It must be of note that in the banking sector various plans must then be coordinated by the management with a view to secure parallelism of operation and to eliminate any possible had-ups always remembering that pace of any organization is that of its slowest part (Dady, 1979).
This prevents wastage of time and efforts and also the fruitless looking up of capital in fixed assets or stock, and result in the spending of the most affective amount of money at the right time on the right objects (Garrison, and Noreen, 2000).
Budgeting control on the other hand, which work side by side with the accounting system, is primarily forward looking which aim is to provide all level of management with an instrument for recording plans and measuring performance in relation to those plans in order to detect and remedy any departure of the actual from expected.
According to Kessey (2002), budgetary control is a systematic and formalized approach for performing significant phases of the management planning and control of functions. Is part of overall system of responsibility accounting within an organization. It is a system of accounting in which cost and revenues are analyzed in accordance with areas of personal responsibilities so that the performance of the budget holders can be monitored in financial terms.
In the broad sense, it means the use of a comprehensive system of budgeting to aid management in carrying out its function of planning, coordinating and controlling operations. The budgetary control consists of:
- Establishing budget for each area of functional responsibility identifying the performance required in order that the objectives of the business as a whole may be achieved.
- The regular comparison of actual with budgeted results.
- Actions resulting from this comparison either to secure adherence to the defined objectives or to agree some modification of the original plan.
The principal advantage of budgeting and budgetary control of the banking industry can be of immense benefits to each shareholders and management because the budgetary control systems and the budget department constitutes a veritable nerve centre activities which the shareholders rely on for adequate returns on it investment and which provides the management with relevant direction for decision making.
1.2 STATEMENT OF THE PROBLEM
It is worthy of note that some organizations are able to maintain a somewhat precarious control over it affairs, however, the complexity and hazards of modern day businesses are such that clearly defined objectives and an efficient system of control have become necessary for all sizes of enterprises in which absence of it cannot enable management to determine the liquidity, profitability and viability of the business. As a result, relevant information needed for appropriate decision may not be available as at when due.
1.3 AIM AND OBJECTIVES OF THE STUDY
The aim of this study is to learn many facet of budgeting and budgetary control and relate its uses to the banking sector.
It also aims at perceptive procedures which can be adopted in the banking industry.
The following are the objectives of the study,
- To ascertain if the management provides adequate instruments for recording plans and measuring performance at all levels.
- To investigate into the type of budgeting techniques used and what factors are considered in setting targets.
- To ascertain the extent of employees’ participation in the budget preparation
- To assess the level of employees’ compliance with the management control set up.
- To ascertain if the budget reflects the organization’s activities.
1.4 RESEARCH QUESTIONS
The following questions would serve as a guide in the search to finding answers to the problem being investigated.
- Does management provide adequate instrument for recording plans and measuring performance at all levels?
- What are the types of budgeting techniques used and what factors are considered in setting targets?
- What is the extent of employee’s participation in the budget preparation?
- Does member of staff comply with the control set up by the management?
- Is the budget reflective of the organization’s activities?
1.5 RESEARCH HYPOTHESES
- Ho: There is no significant relationship between budgeting control and organizational performance .
H1: There is significant relationship between budgeting control and organizational performance.
- Ho: There is no significant relationship between budgeting control and organizational goal setting
H1: There is significant relationship between budgeting control and organizational goal setting
1.6 SIGNIFICANCE OF THE STUDY
It brings about efficiency and improvement in the working of the organization. Thus, it is a way of communicating the plans to various units of the organization; by establishing the divisional, departmental, sectional budget, exact responsibilities are assigned.
Furthermore, it helps to achieve the goals set for the unit and it serves as a basis for evaluating the performance. Besides, it serves as a benchmark for controlling the on-going operations.
1.7 SCOPES AND DELIMITATION
Due to time constraints this research work would be limited to the budgeting planning and budgetary control system of ECOBANK (NIG.) PLC
Though, it is hoped that issues raised would bear relevance to the budgetary system in other organizations in banking industry.
However, the findings may not necessarily be generalized to all business organizations in the industry due to the fact that the procedures and extent to which various business organization in the industry perform its role with a view to identifying problems encountered in budgets, may differs.
1.8 DEFINITION OF TERMS
Budgeting: It is a quantitative plan of actions and also a link between financial resources and human behavior to accomplish policy objectives.
Budgetary Control: Is the establishment of department budgets relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objective of that policy, or to provide basis for its revision CIMA.
Master Budget: Is a summary of quantitative expectation regarding future cash flows, net profit and financial status of an organization after reflecting the feasible objectives of all the sub-units like sales, production and distribution.
Cash Budget: This is to ensure that the organization has enough but not too much cash on hand during the budgeting period.
Production Budget: It is necessary to adjust the expected units to be sold with change on level of finished goods anticipated during the period, in order to determine the production for the period
Principal Budget Factor: This is the factor that imposes a limitation ceiling on the level of activities of the organization.
Budget: A formal statement of the financial resources set aside for carrying our specific activities in a given period of time.
Responsibility centre: It can be defined as any functional unit headed by a manager who is responsible for the activities of that unit.
Revenue Centres: It is an organizational units in which outputs are measured in monetary terms but are not directly compared to input costs.
Expenses Centres: It is a unit where inputs are measured in monetary terms but outputs are not.
Profit Centre: It where performance is measured by the difference between revenues (output) and expenditure (inputs).
Investment Centres: It where outputs are compared with the assets employed in producing them.
Budget Centres: Unit responsible for the preparation of budget; A budget centre may encompass several cost centres.
Budget Committee: This may consist of senior members of the organization e.g. departmental heads and executives with the managing directors, as chairman.
Labour Budget: It is a defined period of time. It summarizes monthly receipts and payments. It enables a firm to take precautionary measures and arrange in advance for investment and loan facilities whenever cash surplus or deficit arises.
Budget Manual: This is document, charts of organization which details the budget procedures and contains account codes for items of expenditure and revenue. It clearly defines the responsibility of persons involved in the budgeting system.
Raw Materials and Purchasing Budget: A raw materials usage budget is the expected quantity of each raw material needed in the manufacturing process. Besides, purchases budget depends on the amounts needed for production and the amount of raw materials needed for the ending inventory and held in the beginning inventories.
Sales Budget: It is obtained by multiplying the quantity to be sold by the selling prices of each product.
REFERENCES
Batty J. (1996). Corporate Planning and Budgeting Control Mac Donald and Evans.
Harper W. M. (2004). Management Accounting, the English book society and Mac Donald and Evans London and Phymonth P. 105.
Creswell, J. W. (1994), Research design. Qualitative and quantitative approaches. Thousand Oaks, California: Sage.
Dady, B. L.(1979), How Florida power and light installed ZBB. Management Accounting (US) PP.31-34.
Eddison, T. (1973), Local Government management and Corporate Planning, Leonard Hill books, Great Britain 2nd Edition.
Erasmus P. W. and Visser, C. B. (2000), Government Finance, The first step, Kenywn; Juta and Co. Ltd.
Garrison, R. H. and Noreen, E. W. (2000), Managerial Accounting, McGraw-Hill, New York, NY.
Kessey, D. (2002). Local Revenue Mobilization, a paper presented on Human Resource development workshop organized for District Budget Analysts in MMDAs at Achiawkrom Wood Industry Training Centre.
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