CHAPTER ONE

INTRODUCTION

1.1 Background Of The Study

The world is getting more exposed. Recently, people have started seeing the need to start planning. Some draw plans on how to meet some of their goals in the future. Corporate bodies are not left out. The first process in management and handling problem is to draw a proper plan on how to tackle such a problem.  Thus a budget is actually a management plan of action expressed quantitatively, mostly but not exclusively in financial terms (Kodjo, 2009).

Globalization has influenced the plans that organizations make in that information required to drawing up such plans are at the manager’s doorsteps.  Now we talk about management information system with the use of software packages like the ERP, so that managerial planning is just very timely and relevant in decision making which is the primary function/responsibility facing every manager at all managerial levels.

Budgeting forms part of management tool.  It is a traditional way of managing and controlling companies (Bergstrand and Olue, 1996).  Organizations use budget to plan and co-ordinate in the following year.  To motivate employees, allocate resources and co-ordinate operations within an organization has been the primary purpose of budgeting.  For operation purposes, budget is always quantified in financial terms. It is aimed to facilitate responsibility distribution and used to evaluate performance (Tibby and Lindsay Part 1, 2003).

According to Welsch, Planning is the only comprehensive approach to managing so far developed and if utilized with sophistication and good judgement, there would be provision of framework for implementing such fundamental aspect of scientific management as management by objectives, effective communication, participate management, dynamic control, continuous feedback, responsibility accounting, management by exception and the managerial flexibility. Budgeting helps administrative officials to make careful analysis of all existing operations, thereby justifying expansion, eliminating or restricting wrong practice (Musselman and Hughes, 1981).

According to Appiah-Mensah (1993), budgeting is the way and means of preparing budgets and that a budgets is a plan of action which has been prepared and approved prior to the period when it will be used, detailing monetary, quantitative or other descriptive terms, the event to be accomplished in the budget period. A budget is different from a mere forecast, in that it is a formal management of events which are desired by management to take place in an organization within a defined period of time.

‟A budget is a quantitative expression of a plan of action prepared in advance of the period to which it relates. It is a plan expressed in terms of money prepared and approved prior to the budget period which show income, expenditure and capital to be employed „‟ (Lucey, 1993)

Horngren Forster and Datan (1997) describe a budget as a quantitative expression for period of time designed for future plan of action by management. A budget can cover both financial and non-financial aspect of these plans and act as a blue – print for the company to follow in the upcoming period. Thus a budget is also an itemized estimate of operating result of an enterprise for a future time period.

According to Brook and Palmer (1984), it is a business financial control system. Budgeting is about making plans for the future, implementing those plans and monitoring activities to see to it that they conform to plan.

Cherrington, Hubbard and Luthy (1988), also describe a budget as an itemized estimate of the operating results of an enterprise for period. They explain further that, the form of the budget varies from organization, but it is eventually summarized into the form of normal financial statements.

From the above definitions budgeting can be describe as a process of determining quantitative estimate for a particular future time period concerning the financial statements of the enterprise. Budget can also cover non-financial aspect as well as financial aspect.

Budgeting is important to individuals and companies in the following way;

• The first importance of budgeting is planning. Forward planning forces managers to formally consider alternative future courses of action, evaluating them properly and deciding on the best alternative.
• Planning encourages managers to anticipate problems before they arise giving them time to consider alternative ways to overcome them when they do arrive.
• Budgeting also help management in Co-ordination: left to their own, department manager may make decision about the future which is incompatible or even in conflict with other departments.
• Control and performance evaluation: Budgeting also ensure that actual performance is measured against expected performances. Control and performance evaluation help to take corrective measures to any adverse variances which were revealed during the evaluation period.
• Budgeting ensures that all stages of management are involve the process of budgeting which brings the different levels closer together. The junior members feel that they have a say in the running of the organization – this lead to increase job satisfaction and consequently productivity. It has therefore been said that, the actual process of budgeting is as beneficial as the budget itself.
• Assists Management Action: The preparation and agreement of budget, the analysis and comparison of actual expenditure with budgeted yard sticks, the reporting and action taken on adverse controllable variances, all assists in encouraging management to be more financially aware of their actions and areas requiring special attention.
• Motivation: Budget encourage motivation which is required to achieve a targets goal objective together with the managerial efforts necessary to achieve that target goal/objective.

Planning is the primary and control is the last function of management. Budgeting and budgeting control occupies an important place among the various techniques which are used in performing these functions. According to ICMA London, a budget is a functional statement prepared prior to a predetermined period of time of the policy to be pursued during that period for the purpose of obtaining given objectives.

The Tennessee board of Regents (2006) defines budgeting as the process whereby the plans of industries are interpreted into an itemized, authorized and systematic plan of operation, expressed in monetary terms for a given period. Budgeting, at both management level and operation level looks at the future and lays down what has to be achieved.

In this regard the work of C.Adams et al (2003) can also be pointed out. These authors emphasized that to be effective, budget must be aligned with the organization’s strategies, appropriate for the organization performance management processes and must be involve processes that are valued based, consequential and continuous.

Egan (1997) maintains that without effective controls, an enterprise will be at mercy of internal and external forces that can disrupt its efficiency, and   when this occur such enterprise will not be able to combat such forces. When budgeting and budgetary system is in use, budgets are established which set out in financial terms, the responsibility of managers in the relation to the requirement of the overall policy of the company, continuous comparison is made between the actual and budgeted results which is intended to either secure, through action of managers, the objectives of policy or to even provide basis for revision.

1.2 Statement Of The Problem

Generally, some managers perform better than others, in spite of similarities in education and work background.  A lot of people have adduced reason for this differences.  In some extreme cases people even tend to believe that managerial skills are innate. While it sounds funny and simplistic to attribute managerial performance to certain inherent qualities of the manager in question, there is need however for the skills and capabilities that make up the policy making and strategic management of the organization to be examined.

Albeit, started that the work of managers is multidimensional, in that it aims towards in providing the welfare of the organization as a whole.

“Planning” pervades every other business policy. It is the top management that should initiate and manage the strategic management process. Thereafter, it supervises implementation and effect control.

Planning and control with respect to budgeting is a policy decision which is not easy to undertake. Due cognizance of various factors must be taken in the exercise.  More difficult still, is the fact that the factors being estimated are future variables.  It tends to adopt skill in forecasting and informed hindsight to venture into the specialized area of planning and control. Planning cannot be mentioned without the phrase “forward looking” yet more systematic in analysis of the future.

It adopts a comprehensive, formal and systematic approach to discovering opportunities and anticipating problems.  It is pertinent to note that the ultimate end of planning is to make an organization survive in the face of competition and change. Hence, control tends to continuously evaluate the set of plans in order to ensure that every planned action is geared towards actualization of set goals and objectives.

Budgeting as a tool in managerial planning and control is a concept traceable to the bible days, precisely the day of Joseph in Egypt.  It was reported that “nothing was given out of the treasure without a written order”.  History has it that Joseph budgeted and stored grains which lasted the Egyptians throughout the seven years of famine.

It was first introduced in the 1920s as a tool to manage cost and cash flows in large industrial organizations. Johnson (1996) states that it was during the 1960’s that companies began to use budgets to dictate what people needed to do. In the 1970s performance improvement was based on meeting financial targets rather than effectiveness, companies then faced problems in the 1980s and 1990s when they were not willing to spend money on innovations in order to stay with the rigid budgets, they were no longer concerned about how customers were being treated, only meeting sales targets became essential. Budget in business organizations are formally associated with the advent of industrial capitalism for the industrial revolution of the eighteenth century, which presented a challenge for industrial management.

However, budget at the early stage of its development was concerned with preparing and presenting credible information to legitimize accountability and to permit correct performance evaluation and consequently, rewards. Over the years, the functions and focus of budgeting has shifted considerably and business organization become more complex and their environment becomes dynamic coupled with the emergence trend, the term budget has been differently defined and examined by various scholars in several ways.

Control checks whether the plans are being realized and put into effect corrective measures, where deviation or shortfall is occurring (Egan, 1997), Egan emphasized that without effective controls, an enterprise will be at the mercy of internal and external forces who can disrupt its efficiency, and be unaware, such enterprise will not be able to combat such forces. Continuous comparison is made between the actual and budgeted results, which is intended to either secure, thorough action of managers, the objectives of policy or to even provide a basis for policy revision.

Effective control is a key management task which ensure that efforts produced at all levels are commensurate with those required to ensure the long term future effectiveness and success of the organization (Stewart, 1997).

In the area of production, companies have experienced a situation where various policies, effect and measures have been used all towards making sure that the defects and economic failures of the past years as a result of lack of proper planning and control are corrected, further plans are taken to ensure that future plans and objectives are thoroughly set out and implemented.  The problem of choice and resource allocation is the core cause of business disequilibrium.  Most manufacturing firms have problem with allocation, distribution and control of resources in their production floor. Is it that proper check are not in place?  Or that managers are not competent enough in drawing out budgets?

The role of budgeting in managerial planning and control is with a view to enhancing optimal performance and productivity in manufacturing companies.  It has further become necessary in views of poor management system in other to enhance productivity and proper functionality of manufacturing companies.

1.3 Objectives Of The Study

The objective of this study is to determine the role of budgeting in management’s decision making, to assess the relationship between budgeting and managerial planning and control, but the main objective of this study is analyse the role of budgeting on management planning and control.

1. To examine the budgeting of companies in Cameroon.
2. To determine the managerial planning and control process of companies in Cameroon.
3. To analyse the relationship between budgeting and managerial planning and control of companies in Cameroon.
4. To make recommendations based on the above objectives.

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