CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

In virtually all fields of human endeavor, budgeting is the most commonly performed routine. Most members of households have at some time developed a financial plan to guide them in allocating their resources over a specific period. Organizations have developed a variety of processes and techniques designed to contribute to the planning and control functions.

One of the most important and widely used of these processes is budgeting. Budgeting involves the establishments of predetermine goals,the reporting of actual performance results and evaluation of performance in terms of predetermine goals. Budgeting control systems are universal and have been considered an essential tool for financial planning (Churchill, 2010).

Recent budgeting research has become more extensively informed about the various functions (planning, control and evaluations) that budgeting serves (Becker et al. 2016). Accordingly, the focus of research is shifting from assessing the effects of budgeting in an aggregate manner toward considering the importance of the individual functions of budgeting and the associated implications for control systems design in various organizational sittings (Sponem and Lambert 2016).

In particular, the planning functions of budgeting has been found to grow more prominent in volatile business environment or a shaky economy, with organizations often addressing the uncertainty by turning to more frequent forecast or to scenario work (Goretzki and Messner 2016; Palermo 2018.). Notwithstanding this utility, it appears that the intensions behind more predictive accounting practices can sometimes be controversial from the standpoint of budgetary functions; leading to confusion and contradictions if the is failure to distinguish between the core purpose of planning and evaluation.

The role of budgetary control in planning involves its own intriguing contradictions. While practice-oriented literature often suggests it has an alternative to rolling forecasting (Zeller and Metzger 2013). In the accounting literature, some scholars fine strong overlap between the role of budgetary control and rolling forecasting in planning and the evaluation function of annual budgeting or rolling budgeting (Becker et al 2016).

According to the International Monetary Fund(IMF), budget preparation is the principal mechanism for the smooth running of organizations(see section 4 and 5).This process is normally established and control by a legal and regulatory framework, and exhibit differences depending on the historic origin. Given the common heritage of many countries,it is possible to identify four main patterns i.e Francophone, Latin American, Commonwealth and Transition Economics.

To understand the budget preparation process in a given country, it is important to

–           Assess the basic soundness by judging  the budget preparation system against certain internationally acceptable standards or budget principal

–           Know where to find the rules governing the budget preparation process

–           From these rules, identify who has the responsibility for what elements of the budget preparation process.

In the world scene, budget preparation and control are designed with 3key characteristics. These are

Annuality: A budget is prepared every year, covering only one year, voted every year, and executed over one year.

Unity: Revenues and expenditures should be consider together to determine annual budget targets.

Universality: All resources of an organization should be directed to a common pool or fund to be allocated and used for the priorities of the organization

Although budgeting preparation is important to the smooth running of an organization, it will not ascertain profitability thus the is need for budgetary control.An enterprise, especially small and medium scale enterprises, uses budgeting as a means of coordinating the various activities and functions of an enterprise objective(s).

Budget overruns have always been a litmus test for project success or failure.In 2020,the COVID-19 pandemic made staying within budget become a bigger nightmare,with the most successful companies, and the best project managers,put to the ultimate test of prudently managing financial resources during massive uncertainty.

Many organizations have had to reexamine their changing priorities, budget, and organizational success or failure definition.The global uncertainty surrounding the business world now fuels the increasing pressure for managers of organization and their teams to change their budgeting strategy and project execution. As such, effective budget management is a primary area of focus for organizations whose aim is to make profit. Such an organization could be government, business, enterprise or family.

Initially businesses used the appropriation type of budget adopted by the government. The purpose was to limit the expenditures on some items such as advertising and research and development, which were consider as luxury items. But this is in contrast with what is obtainable in the present day economics.

Going by the volume iv of International Edition of the Encyclopedia Americana (2000), “A business unit employs a budget to carryout it financial planning or forecast. A business budget is a formalized quantitative presentation-a set of figures of a firms coordinated plans”.

Budgeting is universal and can be applied in both the public and private sector like small and medium scale. Budgetingis essentially a process of planning and control. A well-prepared budget provides management with a planned program based upon investigation, study, and research on the part of the entire organization. In addition, well-prepared budget provides complete coordination of the marketing, production and financial activities of a business, budgeting alone however, does not bring realization of the plans. Control over operations is necessary in order that deviations from the plans maybe noted and corrected so that the business maybe kept on the planned course.

Budgetary control originated in the 1920’s as a means of planning and control.Businessmen wanted to see the possible outcome of their plans and forecast, and budgets were prepared for this purpose. Hamilton (2013) rightly indicated that “modern budgetary control comprises both a plan of operations and the means of controlling operations within the scope of the plan”. He further pointed out that:

“Budgetary control by itself is not a wonder-working device; neither should it be regarded as a mere accounting procedure. It is a powerful tool of good business management. Effective use of this tool requires sound organization, proper accounting classification and records, adequate research, and the enthusiastic support of all employees from top down”.

Budgetary control is very useful in the making of business plans. Every organizational activity can be expressed in terms of budgets.Thus with the operation of a budgetary control system, business expenditures can be made to match with the economic realities of the organization.

In recent years, budgetary control has been frequently examined to find its relationship with profitability of industries. The existence of many industries as at present can only be justified in terms of their profitability. Therefore to such industries, anything which improves their profitability is worthwhile.

Profitability may mean different things to different organizations under different conditions. Most organization takes it mean the ability to realize a return over and above the cost of resources put into the organization’s activity. However to some other organizations, anything which reduces the cost of operation is profitable.

The use of budgetary control in profit planning is tremendous. It can be used in matching expenditures and incomes inorder to make some profit. And to the extent that budgetary control is frequently applied in profit planning, its contribution to the realization of profit cannot be doubted.

1.2 Problem Statement

Finance occupies a pivotal position in the life of and organization, and for SMEs it is even of more importance. Budget is therefore a guide to a particular objective and it is obvious that without a guide to a particular objective, it will be very difficult to achieve that objective economically.

However making funds available to SMEs is not sufficient to make SMEs profitable since many SMEs today do not control their performance vis-a-avis their budget very well to control the controllable factors in their budget to enable them achieve their plan.

Budget, which is one of the tools that could be used by business organizations to achieve their profit plan unfortunately, is not being used properly by many business organizations. In essence, many SMEs have failed in their profit plans due to lack of budgetary control in their organization.

This study address the following research questions

1. Is budgetary control practicable in SMEs?
2. Does budgetary control have an impact on the profitability of SMEs?
3. Has budgetary control helped to minimized cost in SMEs?
4. Should budgetary control be encouraged in SMEs?

1.3 Objectives

The aim of this study is to find out the impact of budgetary control on the profitability of SMEs. This study has been designed

1. To identify the problem of budgetary control as related to the profitability of SMEs.
2. To examine the impact of budgetary control on the profitability of SMEs.
3. To make recommendations.

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