What is Budgeting?
Budgeting is the most important and necessary function of the management. It has to be undertaken at every stage and by every type of company. All the private and public, small and large, profit and non-profit organizations prepare budgets for making their functions effective and efficient. Budgets include some facts and figures that are estimated and forecasted for future. It provides guidance to the companies in achieving their set objectives and targets. However, a continuous and lengthy process is involved in preparing the final budgetary statement. In other words, budget can be defined as comprehensive plan that covers the quantitative and financial information related to a particular business or an organization (Bogsnes, 2016). Furthermore, it is a type of management tool used in taking important decisions for the particular accounting period. It focuses on the strategies, policies and procedures which are to be followed by the managers and executives in order to conduct their operations smoothly and effectively. Budgets prepared by the companies also assist the accountants and managers to figure out the variances and identify the areas where modifications and improvements are required. It compares the actual performance of the business with the set benchmarks and determines the differences between the two. On a whole, budgeting is a vital element in making the organization successful and increasing its growth in the future (Bogsnes, 2016).
Budgeting
The term budget refers to a formal communication of polices, plans, goals and objectives predetermined by the organizations for a particular period of time. There are different types of budgets prepared for different purposes like cash budget, sales budget and many others. According to Institute of Cost and Management Accountants, budget means the quantitative statements prepared before the specific time period that expresses the policies and procedures to be pursued by the company in lieu of attaining the set goals and objectives. One of the features of budgets is that it is prepared in advance and it gives proper guidance to the management about the manner in which all the objectives can be achieved (Rubin, 2016)
The procedure of creating plans and preparing budgets is known as budgeting. It is the very important function of management which is required to be undertaken in every organization whether public or private. All the small and large companies prepare budgets for figuring out their future income and expenses. In the corporations operating at large scale, budgeting is a collective process in which each and every operating unit prepares their own budget and plans their expenses accordingly (Wildavsky, 2017)
Objective of Budgeting
Every organization has to create a balance between resources like time and money in order to facilitate smooth functioning of its operations. For creating such balance, companies need to do proper planning and control and for that preparation of budgets is very much necessary. It is a vital tool which helps in utilizing the available resources in the most effective and efficient manner. In the context of business management, there are three main purpose of budgeting which is as follows:
- A tool for making appropriate decisions
Importance of Budgeting
The budgets provide a financial framework which helps the managers to take appropriate and suitable decisions for their organization. By looking at the budgets, management can decide about the proposed course of action to be taken and suitable strategy to be framed so that the set motives can be accomplished. Also, it helps in deciding what expenses are to be incurred and what can be avoided so that more revenue can be generated (Baiocchi and Ganuza, 2014).
- Future estimation of income and expenses
Budgeting is the most important aspect of planning function of business management. For the purpose of forecasting or predicting the future income, profits and expenses, the managers need to deploy the process of budgeting in the business. The main aim of this function is to provide a Performa in financial terms which discusses all the expenditures to be incurred in future along with the respective incomes. Estimation of the revenue amounts and expenses, the managers can easily figure out the profitability of their organization (Wildavsky, 2017).
- Reviewing the performance of business
Budgeting helps in comparing the actual performance with the forecasted one thereby, allowing the management to monitor performance as a whole. The function facilitates the identification of variances which is defined by the difference between the actual and estimated figures. By finding out the differences in the identified areas, managers can easily decide about the measures which can be taken for rectifying the same and improving overall functioning of the business.
Process of budgeting
There are various steps involved in preparation of budgets and estimates. Such series of steps is undertaken by the experts and professionals who have proper knowledge about the budgets and related concepts. The first step involves collecting the required information from internal and external sources. The main area from which data can be easily gathered is to study the past trends ongoing in the business. It consists of the growth rates experienced by the business in the past years, revenue earned, profits made and many other aspects. Economic conditions and competitive positions are also reflected from the past movements. All such related facts and figures are collected in the first stage (Kelly and Rivenbark, 2014).
After this the goals and targets are set for the business and its employees. Both the long term and short term objectives are set and budgets are created accordingly. Once the motives are determined, then the key activities are identified that are required to be performed in order to achieve the targets. The third stage involves allocation of available economic and other resources to the activities identified in the earlier stage. A proper allocation is very much important for the success of budget as well as for organization. Once the resources are distributed, then the expenditures to be incurred and income to be generated is estimated and the profit figure is calculated. The last step involve in budgeting is the constant monitoring and review of performance of all the departments to ensure that all of them are working according to the budget and the strategies framed.
Benefits of budgeting
- The major advantage of budgeting is that it facilitates performance evaluation by setting the goals and objective for each employee and for every department. It makes the evaluation easy and reliable.
- It helps in estimating the profitability of the company by forecasting all the income and expenses for the future. It identifies the areas which can produce money for the organization and figure out the expansion opportunities.
- Performing the function of budgeting allows the managers to think and plan for a longer term. It considers the competitive and financial position of the company while making plans for its future growth and success.
- Other benefits include planning of funds, allocating cash and conducting a bottleneck analysis (Gallani, et. al., 2018).
Purpose of Budgeting
Limitations of budgeting
- Creating budgets is very costly and time consuming process. It includes extra manpower and expert knowledge for making correct estimates. It becomes more complex when performed in a big and large scale organization.
- The figures and facts reflected by budgets are rigid in nature and cannot be easily changed according to the variations in situations and circumstances. Any change in market does not enable the management to make a significant modification in its strategies and polices (Kelly and Rivenbark, 2014).
- The budgets can be manipulated by the senior executives for their personal goals. For instance, the manager can intentionally increase the expenses and reduce the revenue in order to fit them in the budget.
Overall, it can be said that budgeting is a very important aspect of management functions as it provides guidance and directions to the executives and employees for the purpose of achieving targets and earning profits for the company.
The two articles based on budgeting of real life organization are chosen from journals Research Journal of Finance and Accounting and Journal of Finance and Accounting. The purpose and research question set out by them are discussed below.
- A Systematic Review of Budgeting and Budgetary Control in Government Owned Organizations
The purpose of the study is to conduct a systematic review of budgeting and budgeting control activities in the government owned organizations of Nigeria with a special focus on Nigerian National petroleum Cooperation (NNPC). In order to fulfill the same, a survey is conducted in which questionnaires are forwarded to the respondents to gather the primary data. The secondary data is collected from the annual financial reports, memos, files, tax laws and gazette of the NNPC (Isaac, Lawal and Okoli, 2015). The research questions carried out by the study are as follows:
- Determine how the practices of budgeting influence the quality of services delivered by government corporations.
- Identify the benefits and importance of budgeting and budgetary control in decision making of government owned agencies (Isaac, Lawal and Okoli, 2015).
- Figuring out the relationship between the appraisal of NNPC‘s goal and effective budgeting practices.
All such research questions are been answered in the journal article with the use of proper methodology and techniques (Isaac, Lawal and Okoli, 2015).
- Budgets and Budgetary Control as a Management Tool for Ghana Metropolitan Assemblies
The main purpose of this study is to examine the budgeting as a management tool for metropolitan assemblies in Ghana. Its objective is to figure out how the budgets are prepared and implemented, the benefits and limitations of budgeting and the usage of variance as a performance measure by the metropolitans, district and municipal assemblies (Kyei, Kwaning and Francis, 2015). The article mainly focused on the Kumasi Metropolitan Assembly (KMA) which is situated in Kumasi. The research question of the study is to find out eth practices and procedures of budgeting followed by Ghanaian Metropolitan Assemblies (GMAs).
The research provides insights into problems existing at GMAs and to find out that whether they can achieve their targets with or without effective budgeting and budgetary control practices. Furthermore, it is also focused in finding out the reasons for the failure in the budgets of organizations and their related practices. The study also uses questionnaires in order to collect the data which contains both the open-ended and close-ended questions. The results are then analyzed on the basis of responses received by the respondents and conclusions are made (Kyei, Kwaning and Francis, 2015).
Similarities in findings of both research articles
The main similarity between the findings is that the results of the research are found out by applying the same methodology and techniques. Both the articles states that the study has adopted survey method in which questionnaires are been prepared and are given to the respondents. The results are then analysed and findings are been made. It has been concluded from both the articles that budgeting practices are very much effective in making plans for the business activities of the organizations.
Another similarity was that the studies were focused on government based organizations. Findings suggested that the budgets do help in establishing control among the corporations and assists in making appropriate decisions for them. Furthermore, it is also focused on the fact that KMA and NNPC prepare several types of budgets like sale, labour and many others. Both the articles finally concludes that budgeting is a fundamental tool for decision makings and it reveals that both the organizations make practical use of practices related to budgeting and budgetary control (Kyei, Kwaning and Francis, 2015).
Benefits of Budgeting
Differences in the findings of the studies
The major difference is that study 1 is focused on revealing the importance of budgeting in government organization of Nigeria such as Nigerian National petroleum Cooperation (NNPC). On the other hand, study 2 laid emphasis on identifying the benefits and problems associated with the budgeting in metropolitan assemblies of Ghana such as Kumasi Metropolitan Assembly (KMA).
Another difference was that the sample size chosen for conducting research in study 1 was 80% of the subjects of management and non-management staff (Isaac, Lawal and Okoli, 2015). While the another article selected 100% respondents among which, 35% were head of departments, 41% were accountants, budgeted officers were also there constituting 12% and 2% were planning officers and others covered 10% (Kyei, Kwaning and Francis, 2015). Due to the different sample size, the outcomes of the analysis were also diverse making the findings of both the articles dissimilar. The conclusion of first study was based on the systematic review of budgeting and budgetary control practices implemented by NNPC whereas second study showcases that KMA and other assemblies of Ghana do make a practical use of budgets and follow all the budgetary control practices in order to make its activities efficient. The findings of article 1 suggested that most of the respondents agree to the fact that budgeting is a vital function of the management and needs to be performed on every stage (Isaac, Lawal and Okoli, 2015). On the other side, article 2 suggested that assemblies were using budgets in their organizations but were facing some problems at the same time in respect of their implementation. It also highlighted the fact that KMA have faced issues like lack of resources, poor management of time and others at time of creating budgets.
On a whole, it can be summarized that though both the articles focused on concept of budgeting but are different in their own way such as their purposes, sample size and other factors which make their findings different from each other.
Outcomes from study 1
Following are the lessons and outcomes from the research conducted for the Nigerian government corporations that will be any way useful for the management accountants.
- It was revealed that the actual performance of the organization for a specific accounting period can be easily compared with the budgets prepared in that time period.
- Budgeting and its control practices allow the managers and other executives to think for a long term and plan for the future operations of the organization (Isaac, Lawal and Okoli, 2015).
Apart from the above two outcomes, other lessons learned from the article include that having a good budgeting process can result in the effective allocation of resources in those part of the corporation where they can be best utilized. In addition to this, a result oriented budget defines all the goals and objectives which are used as the benchmarks for measuring the performance of the organization.
Outcomes from study 2
The article two highlights following lessons which are useful in enhancing the knowledge of management accountants and their professional practices.
- The study suggested that the board members and department heads who are involved in the creation of budgets should be aware about the rationales and principles on the basis of which budgets are prepared.
- Collection of adequate information is very much important in making a budget successful. Moreover, the data gathered has to be critically examined using all the measures and parameters (Kyei, Kwaning and Francis, 2015).
On a whole, second study provides insights into the fact that budgeting is a fundamental function of management and has to be performed at every level. It considers it as tool of management and organizations like KMA should make a practical use of them so to ensure best practices in the organization.
Steps Involved in Budgeting
The lessons learned from both the studies states that creation of budgets and establishing budgetary control is the vital practice which has to be followed by every organization. studies are useful for management accountants in a way that they highlights the problems and issues which have been faced by the government companies while implementing budgeting in their system. In addition, it focuses that many of the people believe that budgets are very much necessary for planning the business activities and establishing control on the same. The accountants can learn the fact that practicing budgeting in their profession is necessary as every organization is doing and applying the same. It is the major aspect of management accounting as it helps in the financial planning of the business. Also it is very much necessary for the growth of employees, managers and the organization as a whole. Hence, it can be said that management accountants need to enhance their knowledge and practice of budgeting according to the changing times and requirements.
Conclusion
The above report concludes that two researches are carried out in context of budgeting which mainly focuses on identification of the problems and issues arise at time of implementing the budgets and analysing the practical use of budgeting in the organization. It can be said from the above report that function of budgeting is the major aspect of management accounting. It is very important for planning the business operations and activities from a financial perspective as well as helps in taking important decisions.
The report concludes that the respondents and officials of Nigerian National petroleum Cooperation (NNPC) agree to a large extent that budgeting is very important and effective for their business. It helps them in establishing the control over their business activities and guides the company in achieving its set targets and objectives. Moreover, the article also suggested that a good budgetary system will result in better resource allocation and use of the available resources. The article two concluded that Kumasi Metropolitan Assembly (KMA) has faced many challenges and issues while implementing budgetary system in their organization. The findings also reflected that KMA has made practical use of budgets and has applied rigorous budgetary control practices in its business despite having some issues. This proves that budgeting function is necessary for all the organizations as it ultimately helps in monitoring and reviewing the performance on periodic basis. Overall, it offers a legal framework within which an organization is required to function in order to achieve its predetermined objectives and goals. Therefore, it was concluded by the researches that metropolitan, municipal and district assemblies do give more importance to the function of budgeting.
References
Baiocchi, G. and Ganuza, E., (2014) Participatory budgeting as if emancipation mattered. Politics & Society, 42(1), pp.29-50.
Bogsnes, B., (2016) Implementing beyond budgeting: Unlocking the performance potential. United States: John Wiley & Sons.
Gallani, S., Krishnan, R., Marinich, E. and Shields, M.D.,(2018). Budgeting, Psychological Contracts, and Budgetary Misreporting. United States: John Wiley & Sons.
Isaac, L., Lawal, M. and Okoli, T., (2015). A systematic review of budgeting and budgetary control in government owned organizations. Research Journal of Finance and Accounting, 6(6), pp.1-11.
Kelly, J.M. and Rivenbark, W.C., (2014) Performance budgeting for state and local government. California: Routledge.
Kyei, E., Kwaning, O.C. and Francis, D., (2015). Budgets and Budgetary Control as a Management Tool for Ghana Metropolitan Assemblies. Journal of Finance and Accounting, 3(5), pp.159-163. Available at: https://www.iiste.org/Journals/index.php/RJFA/article/view/21157/21381 [Accessed 16 September 2018].
Lalli, W.R., (2012). Handbook of budgeting (Vol. 562). New Jersey: John Wiley & Sons.
Rubin, I.S., (2016) The politics of public budgeting: Getting and spending, borrowing and balancing. Chicago: CQ Press.
Wildavsky, A., (2017) Budgeting and governing. California: Routledge.
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