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BUDGETING AND BUDGETARY
CONTROL
By
S. A. ABDULLAHIB.Sc., MBA, Ph.D,MNIMN,MNIM,FEI
DEPARTMENT OF BUSINESS ADMINISTRATIONAHMADU BELLO UNIVERSITY
ZARIA
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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
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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
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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.
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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.
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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
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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.
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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.
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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.
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Characteristics of GoodBudgeting Process
Participatory: involve as many people aspossible in drawing up a budget.
Comprehensiveness: embrace the wholeorganisation.
Standards: established standards ofperformance.
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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.
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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
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Tips for Budgeting:
CommitmentBe involved
Show your own contribution
Do not make mistakes
Considerate
Be realistic
Show the possibility
No extravagance
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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
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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;
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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
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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
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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
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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
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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
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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
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A. Budget Formulation Budget Formulation
Budget Preparations
Budget (Call) Circulars
Submission of Budget Proposals
Approval of the Budget
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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.
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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.
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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.
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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
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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
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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".
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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
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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
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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
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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
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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
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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
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Financial Discipline in Budgetary
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
Financial Discipline in Budgetary
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Financial Discipline in BudgetaryProcess
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
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Financial Discipline in Budgetary
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
Financial Discipline in Budgetary
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Financial Discipline in BudgetaryProcess
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
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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
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References
Ashford JK (1989) Management Accounting Process in Non Profit MakingOrganisationsManagement Accounting (CIMA) December Pp36-37
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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
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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
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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
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Pyhrr PA (1970) Zero-Base Budgeting, HBR Nov-Dec Pp99-109
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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
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Thank you for your time
&
Patience.
Do have a wonderful day