Explanation of budgeting
Budgeting is considered to be the vital function of management and is used as a performance tool in the companies to evaluate and determine their performance. Budgets are been prepared by all the private, public, profit and non-profit organization with an objective to make their operations effective and efficient. Another objective is to detail their actual performance compared with the standard one. The process of budgeting include preparation of various types of budgets that include some fact s and figures which are estimated and forecasted for the coming future. The data reflected by budgetary report help the management and executives to take corrective actions and formulate suitable strategies for the future course of action. Budgets help the organization in meeting its targets and achieving its objectives in an efficient and effective manner. It provides direction to the employees and managers in order to work in the best interest of the company so as to book future growth and success (Baiocchi and Ganuza, 2014).
The report includes a brief introduction about the selected topic budgeting and provide insights about the facts like its process, benefits and limitations and others. In the later part, the two journal articles which articulate the budgeting system in real life organization are been explained. It includes the discussion of the purpose and research question, similarities and differences in the findings and the outcomes or lessons learned from the articles that will be useful for the management accountants in Australia. In the last, a conclusion is given which comprises of the finding of the report.
Explanation of budgeting
Budgets basically refer to the formal statements that communicate the predetermined goals, objectives, strategies and policies of the organization to its employees and other individuals. Generally, companies operate through different departments and segments and for each of them different types of budgets are been prepared like sales budget for sales department, cash budget, material purchase budget and others. The definition of budgets given by Institute of Cost and Management Accountants is that they are quantitative statements prepared in advanced with a purpose of reflecting or communicating the set policies and procedures, which are required to be followed by the company in order to achieve their predetermined targets. Among the various features of budgets, one of the characteristic is that it provides proper guidance to the people of organization so that they can work in an efficient and effective manner and can achieve their set targets in the provided time frame (Bogsnes, 2016).
Purpose of budgeting
Budgeting refers to the procedure of creating budgets which is pursued by the management at all levels. It is very important for the managers to undertake such responsibility so that they can easily figure out their company’s future income and expenses. All the small, large and medium sized companies follow budgeting in their business and use the same as a tool to measure their performance and position. Budgeting allows them to know the variance that have occurred while comparing the actual and standard performance and guide them to take appropriate steps.
The process of budgeting comprises of some steps which are followed by each and every organization. At the first stage the goal and objectives are defined and set for the business and after that the core activities are determined which are to be performed for the purpose of meeting the objectives. The third stage involves the allocation of resources to each activity identified. Once the resources are allocated, the amount of expenditures and income are estimated to calculate the profit figure. The last step involves implementation of budget prepared and constant monitoring of the same. The performance of all the departments is reviewed at the last according to the budgetary reports (Gallani, et. al., 2018).
Purpose of budgeting
It is the responsibility of every company to maintain a balance between its assets or resources and time so as to conduct smooth function of the operations. In lieu of completing such duty, they need to make proper plans and establish suitable control system. All this can be facilitated by the preparation of budgets and applying budgeting system in the organization. It is considered as a vital tool as it helps in utilizing the available resources in the most optimal effective manner. The objectives of budgeting are as follows:
- Used as a decision making tool
Preparation of budgets deals with the formation of a framework which helps the managers and executives to take appropriate and suitable decisions that will be beneficial for the company. By looking at the set figures and facts, managers can decide about the possible course of action which can be taken and formulate the strategies that can be applied to the organization (Isaac, Lawal and Okoli, 2015).
- Business performance review
Another objective is to use it as a tool for reviewing and comparing the performance of the business. The budgets prepared allow the companies to manage and monitor their operations and performance as a whole. It helps in identifying the gaps between standard and actual figures which facilitates the managers to figure out the areas which require improvement so that overall function of the organization can be improved (Kelly and Rivenbark, 2014)
- Estimation of income and expenses
Benefits of budgeting
One of the motives of using budgeting is to determine the amount of expenses and income which are likely to be incurred in future. The main purpose of this process is to forecast and predict the future profits, income and expense of the company. It provides the same in a statement comprising all the predicted income and their corresponding expenses.
Benefits of budgeting
- It facilitates efficient and effective utilization of available resources so as to make high profits and make the operations cost effective.
- It helps the management of the company in taking proper decisions for the future growth and success of the business (Rubin, 2016).
- It estimates all the income and expenses in order to predict the profitability of its operations and the company as a whole. It determines the areas which can produce more money for the firm and find out some profitable opportunities.
- It allows the managers to think and plan for a longer term. Budgeting stimulates comparative analysis of the financial position of the company which eventually assists the managers to plan accordingly.
- The main advantage is that it facilitates the evaluation of the company’s performance by setting the targets for each department in advance. It makes the comparison easy and reliable (Rubin, 2016).
Limitations of budgeting
- Creation of budgets is a very expensive and time consuming process. It includes expert skills and extra labor for making correct estimations and predictions. For the companies, operating at big and large scale, budgeting is a very complex process.
- The figures included in budgetary reports are rigid in nature and cannot be modified as per the changing business environment and market conditions. Any variations in the market do not allow the managers of the company to modify their budgets accordingly. Moreover, they cannot change their policies and strategies which are already formulated in advance (Wildavsky, 2017).
- Chances of manipulating the budgets are high as they are prepared manually. The top management and senior executives can change the facts and figures according to their own interests and reflect a faulty image of the budgets. They can intentionally increase the expenditure and decrease the income as per their own will and to make them fit into the budget.
Overall, the term budgeting is a very important element of the management function as it provide the complete guidance to the people and employees in order to ensure that all the predetermined objectives and goals are met and the company is able to earn profits in future. Therefore, it can be said that it is very much necessary for the companies to apply budgeting in their system so that they can work in the most effective and efficient manner and achieve high growth and profit in future (Wildavsky, 2017).
This section explains the two articles which are selected for the analysis. The articles have conducted research on the budgeting in real life organization. They are been taken from journals named as IOSR Journal of Humanities and Social Science and Journal of Business Management & Social Sciences Research. The purpose and research question set out by the two studies is as follows:
Article 1: The Impact of Budgeting and Budgetary Control on the Performance of Manufacturing Company in Nigeria.
The purpose of conducting this research is to study the impact of budgeting practise and implementation of budgetary control on the performance of a Nigerian manufacturing company named as Cadbury Nigeria Plc. The article focuses on the practices adopted by the firm in order to satisfy their needs in the most cost effective manner and fulfill their responsibility of stewardship towards their stakeholders at the same time (Siyanbola, 2013).
Following are the research questions set by the article:
- What is the importance of budgeting tools and techniques in the manufacturing company operating in Nigeria?
- How budgeting helps in planning the profit for the Nigerian company?
- What is the effect or impact of budgetary control on the performance of the employees working in the manufacturing company?
- What is the reason behind the lack in having adequate skill for formulating appropriate policies and procedures for the smooth functioning of the enterprise?
- The article also sets out the research question which states that why Nigerian company operating in manufacturing sector is not able to plan and control their process of policy implementation and control(Siyanbola, 2013).
- What is the manner in which the inadequate and inappropriate data and records create problems for the entity while implementing effective budgeting techniques?
Article 2: Budgetary Control and Performance in Public Corporations in Osun State
The purpose of the study is to determine the relation between the estimated and actual revenues and expenses. The research is conducted on the five parastals working in Osun state which includes the evaluation of their budgeting performance for the financial years starting from 2007 to 2011 (Olaoye and Ogunmakin, 2014).
The research question sets out by the article is that it is based on the premise that the accomplishment of budget is far away from the reality and the differences between budget and its accomplishment in real are very wide and are kept on increasing day by day. Moreover, the government corporations prepare their budgets keeping in mind the social and public welfare so that their mission of social development can be achieved smoothly. On basis of this, the study formed a question that whether the relation between actual and estimated expenditure incurred and income earned is weak or strong. Also, what are the implications of having a weak or a strong relationship on the performance and position of government corporations operating in Osun state of Nigeria (Olaoye and Ogunmakin, 2014).
Limitations of budgeting
Similarities in the findings
The main similarity of both the articles is that both are focused on studying the implications of budgeting and budgetary control activities on the performance of companies having their operations in Nigeria (Siyanbola, 2013). Both of them suggested that there is a growing need for the organization to form and implement budgets in their system so that they can earn high profits and make their working effective and efficient. Another similarity is that the studies were conducted on the companies of Nigeria so they have undertaken the market and other conditions of the same country. The findings suggested that budgets do assist in measuring the performance of the entities by comparing their actual and budgeted data. It helps in identifying the areas where more investment is required and the parts from which the expenditure can be cut down (Olaoye and Ogunmakin, 2014),
Differences in the findings
The major difference occurs from the methodology used by both the articles. Article first used the methods like direct interview, questionnaire and observations. Some direct and indirect inquires were also made to the staff and management of the company (Siyanbola, 2013). On the other hand, article second used analytical techniques of simple correlation that is applied for computing the relationship between the actual and estimated revenues and expenditures generated by five selected government corporations. The variation in the methodology eventually brings a difference in the findings of both the articles (Olaoye and Ogunmakin, 2014).
Another difference is that findings of one study suggested that Cadbury and its departments have a well defined approach to implement budgets in its systems and all of the segments are involved in the process of budgeting (Siyanbola, 2013). The findings of second study suggested that Water Corporation, agriculture department and college of education of Osun has weak relationship whereas a strong relation between income and expenses was observed in case of Osun State broadcasting Service Corporation and property Development Corporation. Apart from this, the article one shows the research only one company of Nigeria named as Cadbury Nigeria Plc whereas article two conducted a research on five government corporations named as Agricultural Development Corporation, College of Education, Broadcasting Service Corporation, Osun state water corporation and Property Development Corporation (Olaoye and Ogunmakin, 2014). Moreover, the research done on Cadbury include the analysis of primary data and on the other side, the research of article two was based on secondary data derived from the annual reports of corporations.
Analysis of two journal articles
Outcomes from study 1
- It is very important for the Nigerian manufacturing company to implement budgeting in their process so as to meet their financial objectives.
- Cadbury prepare its budgets on annual basis and review and control the same on periodic basis (Siyanbola, 2013).
- Being a multinational company, Cadbury follow a structure through which responsibilities are assigned for the purpose of controlling the performance of employees.
- The feedback taken from every division is compared with the budgeted results and variances are noticed (Siyanbola, 2013).
Overall, the outcome from study 1 states that in Cadbury, few numbers of employees were aware about the budgetary system and by implementing the same, the company can motivate its work force to satisfy its needs (Siyanbola, 2013).
Outcomes from study 2
- The corporations like agriculture development, college of education and Water Corporation have weak relationship with correlation -0.28, -0.41 and -0.33 respectively.
- The property development and broadcasting service corporation has strong relationship with -0.58 and -0.64.
- The revenue generated by each corporation was not in accordance with the budgets and therefore more investments and policies reorientation are required.
The lesson learned from both the articles is the creation of budgets and implementing a budgeting system is the vital practice that has to be followed by the managers of the company. The studies provide insights to the management accountants about the importance of budgeting in a private and Government Company. They suggested that budgeting can be used as a performance measurement tool as well as a technique to implement control in the business. The accountants learn that practicing budgeting in their profession is very important as it is the need of hour and every organization requires such technique in its system to work successfully in future.
Conclusion
The report concludes that budgets and budgeting both are very much necessary for the companies operating in Nigeria. It also states that the management and employees should work in accordance with the budgetary allocation so as to meet the targets on time and achieve high profits. In Cadbury Plc, many of the employees were aware about budgetary practices whereas the government corporations failed to work as per their budgets. Therefore, it is recommended that companies should prepare budgets and work according to achieve growth in future.
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.
Olaoye, F.O and Ogunmakin, A.A., (2014). Budgetary Control and Performance in Public Corporations in Osun State.IOSR Journal Of Humanities And Social Science, 19(7), pp.59-62.
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.
Siyanbola, T.T (2013). The Impact of Budgeting and Budgetary Control on the Performance Of Manufacturing Company In Nigeria. Journal of Business Management & Social Sciences Research, 2(12), pp.8-16.
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