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BUDGETARY CONTROL AS A
TOOL FOR IMPROVED PERFORMANCE: A STUDY OF SELECTED COMPANIES
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF
THE STUDY
Since we live in an age which is marked by uncertainties in
business prospects, it is in a setting of this nature that the budget is of
great importance. Nearly everybody budget to some extent, even though many who
prepare and use budget do not recognize that what they are doing is budgeting.
Most people make estimate of the income to be realized over some future period
of time. As a result of this planning, spending will be limited to some
predetermined allowable amount. (Garrison, 2000:297). In achieving an improved
level of corporate performance, the management team must be motivated to strive
to achieve the standard required by the budget. These cannot be achieved if the
managers did not participate in the budgeting process and apply the best
control measures. Thus, in order to survive under these environmental
complexities and vagueness, managers and stakeholders of organizations need sharp
tools, proven management techniques to forecast the major changes which are
likely to affect the business while they choose future direction and dimension
of resources needed to attain selected goals (Akintoye, 2008:1).
Budgetary control as proven management accounting tool
(Chandler, 1990:245) helps organization management and enhances improved
performance of any economy in different ways. Its primary function is to serve
as a guide in financial planning. It also establishes limit for departmental
excesses. It helps administrative officials to make careful analysis of all
existing operations, thereby justifying, expanding, eliminating or restricting
present practice (Musselman and Hughes, 1981:2). Its serves a number of
purposes, these include: planning, controlling, coordinating, communicating,
motivating and the performance of management (Drury, 2004:591). Each of this
purposes or functions contribute to the overall improvement in the performance
of an organisaiton.
The Chartered Institute of Cost and Management Accountants
Comprehensively defines the budget as “a plan quantified in monetary terms,
prepared and approved prior to a defined period of time, usually showing
planned income to be generated and or expenditure to be incurred during the
period and the capital to be employed to attain a given objective”. (CIMA,
1992:31).
Budgeting and control entails a distinct pattern of decisions
in an organization which is capable of determining its objectives, purposes or
goals and how these goals are achieved by establishing principal policies and
plans. However, the inability to recognize the problem concerned and fixing a
boundary off investigation creates an obstacle for the successful
implementation of budgeting and control. Some organizations only look for
narrow ranges of alternatives which they arrive at from their past expenses and
present situation, other management levels even avoid long-term planning and
budgeting in favour of today’s problem thereby making the problems of tomorrow
more severe (Steward, 1993:8). The foregoing reflects on the need for
organizations to set up a formal mechanism for scanning its environment for
opportunities and give early signs of future problems, this course of action
will improve the system of budgeting and control, resulting in an apriori
expectation of improved performance in the companies as seen in this study.
1.2 STATEMENT OF THE
PROBLEM
The quest for improved corporate performance measured by
increase in profit, asset base, liquidity and growth in reward to owners and
shareholders, has resulted in firms adopting different strategies of growth.
To remain competitive, companies need to align their
budgetary planning and control systems with the overall strategy. The following
questions confront all top level managers, as they formulate budgetary, plans
and allocate capital which is better for a firm? Investing outrageous amount of
capital, or scale back on capital, investment? To reduce employment so as to
raise the amount of assets at work per employee or elevate employment to meet
the demands created by new investment? (Thaker, 1998:4).
These questions become more compelling as investors demand
that corporations consistently deliver shareholders value regardless of their
long-term strategy for deploying human and financial capital. An important
factor that distinguishes the winners from the losers in creating shareholders
value is the equality in investment decisions, which in turn depends on the
soundness of such budgetary control system (Thaker, 1998:4).
Unfortunately, many organizations make poor investment
decisions for investing too little in positive net present value projects and
much in negative net present value projects, resulting in investment myopia. To
ensure and encourage proper budgetary control in any organization, all
budgetary decisions must be made to answer satisfactorily such questions as:
who gets what? How? When? and why? (Wildarsky, 1999:21).
In a nutshell why do organizations use a particular budgetary
techniques instead of another? What are the merits and demerits of using a
particular budgetary control system? How does budget influence the management
of companies in Uyo Metropolis? Does budget and its processes have any positive
or negative effect on the effective management for improved performance.
1.3 OBJECTIVES OF
THE STUDY
The main aim of this research is to assess the impact of
budgetary control for the improved performance of companies in Uyo metropolis.
Other related objectives are:
to determine whether there is any relationship between the
budgetary control system and the performance of the companies under study.
To determine whether the management of the companies derive
any benefit from budgetary control system.
to determine whether budgetary control enhances good decision
making in the companies..
To identify the challenges facing the firms in the
application of budgetary control system.
1.4 RESEARCH
QUESTIONS
The present formulation addresses the following questions in
the search for concrete lessons for the future.
What are the basis for the operations of budgetary control in
the companies?
What are the benefits of budgetary control in the companies
under study?
What is the relationship between the companies performance
and the budgetary control system?
What are the challenges facing the firms in the application
of budgetary control to bring about profitability?
What are the types of budgetary control system adopted by the
companies?
What are the measures taken by these companies in tackling
the problems of budgetary control in the organizations?
1.5 RESEARCH
HYPOTHESES
Based on the aims and the problem of the study, the following
hypotheses have been formulated to empirically validate the data collected from
the primary sources.
Ho: there is no relationship between budgetary control system
and performance in the selected companies (Champion Breweries Plc, Power
Holding Company of Nigeria and Oceanic Bank International Plc)
HI: There is a
significant relationship between budgetary control system and performance in
the selected companies (Champion Breweries Plc, Power Holding Company of
Nigeria and oceanic bank International Plc.
Ho: The management of the Companies do not derive any
benefits from budgetary control system.
H1: The management
of the companies derive benefits from budgetary control system.
Ho: Budgetary control does not enhance good decision making
in the companies.
H1: Budgetary
control enhance good decision making in the companies.
1.6 SIGNIFICANCE OF
THE STUDY
This study is of great theoretical significance, social and
professional relevance. This work will be of great value to the operators of
companies in their efforts to adopt budgetary control as a tool for improved
performance. It will also enable the industrialist and their counterparts to be
more involved in the provision of budgetary control tools for effective
performance and efficiency in the study area.
It will equally help the assisting agencies to evolve
measures to bring overall performance improvements through budgetary control
system, thereby implement strategic change that will lead to economy
development.
It will also avail the general public with information about
performance and effectiveness of the companies in Uyo Metropolis. It will serve
as a guide to other researchers who may be interested in the study in future.
1.7 SCOPE/LIMITATION
OF THE STUDY
This study focuses on budgetary control as a tool for
improved performance: a study of selected companies in Uyo Metropolis. The
study will examine the concept of budgetary control, its application in the
selected companies. Attempt will be made to establish the relationship between
budgetary control and improved performance, profitability, accountability and
efficient implementation of budgetary control in a firm.
In the course of carrying out this research, the researcher
encountered some problems which would have hindered the exhaustive treatment of
the work. The major constraints were the time factor, finance and the problem
of gathering sufficient information, lack of cooperation on the part of
operators of these companies to disclose information on the finance of their
companies or enterprises posed a great problem as they consider such
information confidential for fear of information leakage to competitors. That
notwithstanding, the researcher used his research techniques in overcoming the
above problems and the study was carried out with all the available information
at his disposal.
1.8 DEFINITION OF
TERMS
Budget: Budget is a
future plan of action which is expressed in monetary terms. It is when plan is
expressed quantitatively. This is also described as a plan of work (Wood and
Sangster, 2002:003).
Budgeting: This is a systematic and formalized approach for
performing significant phases of the management planning and control functions.
It is a process of preparing detailed short-term corporate plans into action
(Adeniyi, 2004:298).
Budgetary Control: ICMA defines budgetary control as the
establishment of budgets relating the responsibilities of executives to the
requirements of a policy and the continuous comparison of the actual with the budgeted
results, either to secure by individual action, the objective of that policy or
to provide a basis for its revision (Omolehinwa, 2006:310)
Control: This is
viewed as comparing actual results with he plans for the purpose of taking
corrective actions. It consist of verifying if anything occurs in conformity
with the plan adopted (Omolehinwa, 2006:311).
Budget Period: This is the period which budget is proposed
and used which may then be sub-divided into control periods.
Cash Budget: This is the expected cash receipt and
disbursement during the budget period adjusted for the opening and closing of
balances (Wood and Sangster, 2002).
Master Budget:
This is the summary of quantitative expectation regarding future cash
flows, net profits and financial status of an organization after reflecting the
feasible objectives of all the sub-units like sales, production and
distribution (Omolehinwa, 2006:312)
Recurrent Budget: This is the estimates of income and
expenditure of a particular period which is annual in nature. It is designed to
control expenditure in any organization. The emphasis of recurrent budget is on
salaries and running cost of the organization.
1.9: THE HISTORICAL
BACKGROUND OF THE SELECTED COMPANIES: CHAMPION BREWERIES PLC, POWER HOLDING
COMPANY OF NIGERIA (PHCN) AND OCEANIC BANK INTERNATIONAL PLC
Champion Breweries Plc was incorporated as a private limited,
liability Company on the 31st July, 1974 with the name South East Breweries
Limited. The Company’s name was changed from South East Breweries Limited to
Cross Rivers Breweries Limited and thereafter to Champion Breweries Limited.
The later name, Champion Breweries Limited was changed to Champion Breweries
Plc on the 1st of September, 1992. On the 11th of December, 1976, the Brewery
was officially commissioned and its products, Champion Larger Beer launched
into the market successfully with initial capacity of 150,000 hectoliters per
annum. The second production line was officially commissioned on the 11th of
December, 1979 with enhanced capacity of 500,000 hectoliters per annum. In the
same year, the company won silver medal for quality at the 10th world selection
for Beers and non-alcoholic Beverages in Luxemburg.
Consequent upon pressure of demand for its products, the company
took a decision to double its capacity to one million hectoliters. This third
expansion which gulped substantial resources could not be realized. The non
completion of the expansion programme coupled with lack of working capital and
inadequate maintenance of the plants forced the company to close its doors for
business between 1990 and 1991. With the advent of democracy in Nigeria in
1999, the government of Akwa Ibom State made the reactivation of the brewery a
cardinal activity. Consequently, the Akwa Ibom State Investments and Industrial
promotion (AKIIPOC) was charged with the responsibility to reactivate the
company. The reactivation process which commenced in February, 2000 lasted
about nineteen months. Now, the Brewery is fully operational with the capacity
of 500,000 hectoliters per annum.
Electricity utility company started in Nigeria in 1929 when
the Nigerian Electricity supply Company (NESCO) commenced operations with the
construction of hydroelectric power station at Kurra falls. The Electricity
Corporation of Nigeria (ECN) was established with a mandate to develop the
hydropower potentials of the country. In 1972, ECN and NDA were merged to form
the National Electric Power Authority (NEPA) as a monopoly, charged with the
responsibility of generating, transmitting, distributing and selling of
electricity nationwide. The monopoly status was maintained until 1998, when its
ceased to have an exclusive right in power production and sales. This is due to
government intention to liberalize electricity subsector and prepare NEPA for
privatization. In effect, the policy has been implemented since 2004 on which
we now have the Power Holding Company of Nigeria (PHCN).
Oceanic Bank International Plc is one of Nigeria’s foremost
financial services Institutions. The bank was incorporated on March 26, 1990
under the companies and Allied Matters Act (CAMA) 1990 in Nigeria as a private
Limited Liability Company and was granted a commercial banking licence on April
10, 1990. Its commenced business on 12th June 1990, fourteen years later, on the 4th June 2004, Oceanic Bank converted to
a public liability company. Its shares were listed on the Nigerian Stock
Exchange (NSE) on 25th June, 2004.
1.10 ORGANIZATION OF
THE STUDY
For the purpose of having a clear and comprehensive
discussion of the topic, the researcher segmented the work into five
complementary chapters.
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