Full Project-BUDGETARY CONTROL AS A TOOL FOR IMPROVED PERFORMANCE: A STUDY OF SELECTED COMPANIES;

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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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