BUDGETING AND BUDGETARY

CONTROL

By

S. A. ABDULLAHI B.Sc., MBA, Ph.D,MNIMN,MNIM,FEI

DEPARTMENT OF BUSINESS ADMINISTRATION
AHMADU BELLO UNIVERSITY
ZARIA
 Content of the Presentation
• Introduction
• Budgeting Process Defined
• Steps Involved in Budgeting Process
• Features & Phases of Good Budgeting
Process
• 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 the
current Democratic Dispensation has remain the
efficient allocation and utilization of our copious
God given resources.

 Budgeting & Budgetary Control in Nigeria is

generating more interest and concern never like
before 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 a
more systematic as well as realistic approach.

 It points the direction of the overall economy and

typically plays a significant role in determining the
course of development.

 It determines the pace and volume of economic

activities

 It lays the framework for the distribution of income

as well as wealth in the economy.
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 Budgeting Process
 Budgeting is the process of planning and
controlling resources culminating into the
development of a budget and the
establishment of budgetary control framework.

 Traditionally budgets have been employed as

devices to limit expenditure.

 A much more useful and constructive view is

to treat the budgeting process as a means for
obtaining the most effective and profitable 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 to
sustain a healthy economy and environment.

 Nigeria has recently pursued efficiency enhancement

and 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 Process
 The budgeting process essentially requires five
basic actions:

1. Set up a system of establishing specific objectives and

targets, designing policies and strategies of achieving
them as well as projected financial statements which can
be used to analyze the effects of the operating plan on
projected 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 Development
Programmes, training and retraining of staff and for major
publicity campaigns.

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 Steps in Budgeting Process

3. Forecast the financing sources to be used over

the plan period. This involves estimating the
funds to be generated internally as well as those
required from external sources.

4. Establish and maintain a system of controls

governing the allocation and use of funds.
Essentially, this involves the effort to insure that
the 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 forecasted
conditions upon which the plan was based.

 New conditions must be recognised and

incorporated

 This step is really a "feedback loop" which

triggers modifications to the plan.

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 Characteristics of Good
Budgeting Process

 Participatory: involve as many people as

possible in drawing up a budget.

 Comprehensiveness: embrace the whole

organisation.

 Standards: established standards of

performance.
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 Characteristics of Good
Budgeting Process
 Flexibility: allow for changing
circumstances.

 Feedback: constantly monitor

performance.

 Analysis of costs and revenues: this can

be done on the basis of product lines,
departments or cost centres.
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 Tips for Budgeting:
 Cost Conscious
Think about costs early enough
List all resource needs
 Competence
Exhibit skills
Check all figures
Ask only what you really need
 Clarity
No ambiguity
No deceit
No inconsistency
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 Tips for Budgeting:
Commitment
Be 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 tedious
It 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 and
unusual quantity of some items;
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 Tips for Budgeting:
Encourage linkages
- connect budget to specific project
activities and objectives
 Enough to cover subject matter
- short but concise, well highlighted
Complement
Explore more 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 recurrent

expenditure relating to an investment are
captured
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 Tips for Budgeting:
 Current policy in Nigeria emphasises capital
investment. 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 be
misleading
– Subsidies to parastatals not shown in
revenue account
– Net parastatal revenues are typically less than
half the gross
– Identifying the true cost of generating
revenues using ABB

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 Phases in Budgeting Process
 The budgeting process is organized in
phases with each phase involving a wide
range of administrative, accounting and
legislative activities or inputs cutting across
the different units of the establishment as
follows:

1. Budget Formulation

2. Budget Execution & Control

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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, usually
monetary 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 advance

of the period in which they are to be used.

 Budgets should include all of expected income,

expenditure, and the capital to be employed over the
budget period.

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 Advantages of Budgets
• A budget helps organisations in the following
ways:

 It brings about efficiency and improvement in the

operations of organizations and governments.

 Exact responsibilities are assigned. It thus minimizes the

possibilities of buck passing if the budget figures are not
met.

 It is a way or motivating managers to achieve the goals

set for their units.

 It serves as a benchmark for controlling on-going

operations. 24
 Advantages of Budgets

 It helps in developing a team spirit where

participation in budgeting is encouraged.

 It helps in reducing wastage and losses by

revealing them in time for corrective action.

 It serves as a basis for evaluating the

performance 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 estimates

as per approved budget

 Ensuring that funds are used for the purposes originally

authorized

 Ensuring that there is no delay in disbursement of funds to

spending units e.g. delays in authorization and releases or poor
cash management resulting in insufficient funds being available.
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 Budget Execution & Control

2. Complying with due process and achieving

value for money with respect to
procurements and payments.

3. Monitoring and controlling recurrent and

capital expenditure as well as revenue
against the budget. This involves periodic
inspection and reporting on
implementation

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 Budgetary Control
• Budgetary control is a vitally important element
of budget execution and therefore necessary for a
successful and efficient budgeting process.

• Budgetary control is defined by the Institute of

Cost and Management Accountants (CIMA) as:

• "The establishment of budgets relating the

responsibilities of executives to the requirements of a
policy, and the continuous comparison of actual with
budgeted results, either to secure by individual action
the objective of that policy, or to provide a basis for
its revision".
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 Budgetary Control
• It serves a numbers of purposes:
– It tracts actual performance against planned
performance (Revenue, Expenditure)
– Ensures revenues are met and applied to
purposes originally budgeted.
– Ensures efficiency by reducing waste &
leakages
– Provides information to monitor and assess
targets 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 system
of control.

 Budgeting is closely connected with control.

 The exercise of control in the organization with

the help of budgets is known as budgetary
control.

 Budgets are simply exercises in calculation

unless they are used. When we use a budget, we
do so as part of a system of budgetary control.
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 Budgetary Control
 The process of budgetary control includes:

1. Continuous comparison of actual performance

with budgetary performance.

2. Revision of budgets in the light of changed

circumstances.

A system of budgetary control should therefore not be

made rigid. There should be enough scope of flexibility
to provide for individual initiative and drive.

Budgetary control is an important device for making the

organization more efficient on all fronts. It is an
important tool for controlling costs and achieving the
overall objectives. 31
 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 with

budgets, showing any variances and disclosing the reasons for
them, and

5 taking any appropriate action based on the analysis of the

variances

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 Symptoms of Inadequate
Control:
• 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 accounts
receivable.
• 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

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 Financial Discipline in Budgetary
Process
 Financial Discipline is the judicious allocation and
utilization of scarce resources to ensure that benefits
accrue 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 ensure

accountability and prudence utilization of scarce financial
resources.

 Without a disciplined financial set up businesses are

bound to fail. Governments and economies have
collapsed for lack of financial discipline.
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 Financial Discipline in Budgetary
Process
Financial Discipline entails the following:

 Prudence in spending
 Ensuring proper expenditure control
 Blocking all leakages and Eliminating all sorts of
Malpractices associated with funds management
 Ensuring value for money
 Accountability
 Strict adherence to budget and
 Review of budgets and financial allocations from
time to time
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 Financial Discipline in Budgetary
Process
It is generally believed that there is a
strong relationship between financial
discipline, sound budgetary process
and good governance.

 “It is being increasingly recognized within the

world financial circle that there exist a strong
relationship between the deficient economic
situation of a particular country and its lack of
capacity in the field of accounting”
 J.M.Turner (1992), at the International congress of Accountants held in Mexico City

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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 more
effectively 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 Management
forum in Washington

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 Financial Discipline in Budgetary
Process
 From the two assertions emerged a strong positive
argument on the intrinsic value of financial discipline
and sound budgetary control in any kind of organization,
be it enterprise, government or others.

 Thus inadequate or inefficient financial discipline and

budgetary control could have adverse effect on the
condition of a company or a nation’s economy.

 The situation of Nigeria would appear to have given

validity and justification for the assertions.

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 Conclusion
• It can be inferred from the discussion that the importance
of effective budgeting, sound budgetary control and strong
financial discipline to the successful actualization of an
organisation’s goal cannot be overemphasized. Thus
inadequate or inefficient financial discipline and budgetary
control will no doubt have adverse effects on the condition
of a company or a nation’s economy.

• The budgeting process in Nigeria is obviously far from

being optimum. There is therefore the urgent need of
ensuring that budgets in Nigeria are not only made realistic
but are also fully implemented for the benefits of all.

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 References
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Organisations” Management Accounting (CIMA) December Pp36-37
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CIMA Terminology

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Hall. ISBN-10: 0132226456, ISBN-13: 978-0132226455.

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• Cooper D (1981) “A Sociological And Managerial View Of Management

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•
40
 References
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•
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Principles, Practice and Issues, MIS Press, Zaria

41
 References
• Hammond TH ET Al (2000) A Zero Based Look at Zero Base Budgeting.
Transaction Books USA
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Kent Publishing Company. 2/3 1986
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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 The

control function outside the business organisation” ... pp329-339

The National Report to the World Summit on Sustainable

Development (2002). Swaziland Environment Authority, Mbabane,
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Thank you for your time
&
Patience.

Do have a wonderful day

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