Budgeting In All Inflationary Environment

BUDGETING IN ALL INFLATIONARY ENVIRONMENT (A CASE STUDY OF BINEZ HOTELS LTD ABA)

In this chapter we are going to examine and review the contribution of various authorities in related literature.  The chapter begins with a general review and than proceeds with discussions on meaning nature and purpose of budgeting. We shall also discuss on the meaning types as well as the pros and constitution of inflation.

Business operate in a competitive economic and technological environment were a lot of uncertainties abound, changes in the business environment are often so dramatic sweeping and for reaching that they may call to question or render absolute, hitter to sound method of doing things production techniques or even managerial know how. There is therefore a vital need to plan and make provision in advance to avoid being trapped by these changes managers need to plant not only keep pace with development in the economic and technological environment but also to conserve business resources and manage. It effectively in order to ensure short and long run profitability viability and growth poor planning or lack of its result in wastage of resources, losses and eventual collapse of business.

Also Read: Inflation In Nigeria, Causes, Consequences And Control

Planning has been defined as the design of the desired future state of an enterprise or entity and the effective ways of bringing it about, it involves the determination of future courses of action for accomplishing the objectives of the enterprise. It provide guidelines for decision making and reduces uncertainties about the future planning is actualized through the use of budgeting.

A budget is an expression of managements implention and expectations in quantitative and monetary terms. It outlines the target income expected and the expenditure to be incurred to achieve that income. But however painstaking budget preparation or implementation may be its advantages are usually vitiated by general or even specific changes in the price level. For instance, a rise in the price of raw materials, labour or overheads usually in creams projection cost and lowers capacity utilization inspite of management. Where the firms cannot pass the high cost of production in from of higher prices to consumers, then its profit margin must certainly reduce, conversely where initiation is caused by a general increase in the price level that may be occasional. For instance by the depreciation of the Naira or excess of money supply and aggregate demand over aggregate supply than management though inefficient many be recording substantial deceptive profit occurring mainly form changed circumstance rather than the application of cost reducing management techniques.

Naturally, the size of a firm’s profit is deemed to reflect the efficiency with which management transforms factor inputs into sales of finished goods. However, were uncertainties in the business environment are excruciated by persistent upward fluctuations in the price level, the use of budgeting for profit planning may produce variance which may prima faice either question the ability of management to run the organisation effectively or create a false impression of well – being for the enterprise. For instance a rise in product costs above what was budgeted normally produces an unfavourable expenditure variance and increases the company’s financial requirements, as the company must have to brrow to finance production. Also here holding gains or exchange rate conversion account for a greater percentage or profit management may be commending itself for his deceptive profit when in actual fact volume of production and ales have not increased. Inflation pressure create damaging distortions in budgets. Argument are at Polar end as to the desirability of inflation in the economy. Some authorities agree that within bounds, inflation is an acceptable and pragmatic instrument of a development policy. Walter (1975:11) contended that where inflation is the only available alternative to persisted stagnation in an economy, it may be attractive as late resort insipite of its risks. He maintained that inflation has an invigorating effect on loosening economic and social relationship and gives the more enterprising and ingenious elements of the populace a chance to come to the force.

In opposition to this view, Bernsterin and Patal (1972L99) asserted that inflation is self defeating since it cheapen the real value of a country’s currency and may discourage voluntary savings which provides the solid foundation for economic development. In the light of the foregoing the therefore, the crucial question is to what extend can a firm control it own destiny and to what extends are it fortunes tics to the economic environment? Cilantier and Underdown (1990), articulated the opinions of the two conflicting schools of thought to this question. According to then the market theory postulates that the firm is solely at the whims of prevailiny economic and social forces o that successful management depends upon the ability to ‘read’ the environment.

In contrast, the quality control theory asserts that management has control over the firms future and that the firms destiny may be manipulated and hence controlled. According to this theory, the quality of management planning and control is the key for success.

In reality, however business operate some where in between these two extreme view. Many elements such as raw materials price fixed overheads, sometimes labour and market demand complexly outside the control of management. Other variable overheads and selling prices may be determined by the organisation.

A firm should therefore distinguish and manipulated controllable variable and prepare to meet changes in the non-controllable variables. Budgetary planning can be used to take full advantages of favourable changes and to minimize the impact of unfaourable ones.

• MEANING AND PURPOSE OF BUDGETING

The word budget has been defined in many ways by different authorities. The chaptered institute of managements define budget as ‘a plan qualified in monetary terms, prepared and approved prior to defined period o time usually showing planned income during the period and the capital to be employed to attain a given objective’.

Fremgen (1973) defined budget as “a comprehensive and coordinated plan expressed in financial term or the operations of the resources of an enterprises for some specific period in the future. It a plan about a firm’s expectations in the future the time frame which the plan is valid must be stated.

Barudit (1978) states that a budget is not only a financial plan that set fourth cost and revenue goals for responsibility contres within a business but also a device for control, coordinate, communication performance evaluation and motivation. Knowledge of budgeted goods and information about the extend to which goals have been achieved provides managers with a basis for measuring efficiency, identifying problem and controlling cost coordination of various functional activities within the organisation on is accomplished through the process of budgeting.

PURPOSE

          The original purpose of budgeting was to curb the extravagance of government but today it is a widely used tool for management planning and control Pandey 1979: 111 outlines the major purpose of budgeting as:

1. To state the firms expectations in clear formal terms to avoid confusion and to facilitate their attainment.
2. To communicate expectation to all concerned with the management of the firm so that they are understand, supported and implemented.
3. To provide a detailed plan of action for reducing uncertainly and for proper direction of individual and group efforts to achieve goals.
4. To provide a mean of measuring and control performance of individuals and units and to supply information on the basis of which necessary corrective action can be taken.

• TYPES OF BUDGETS

A complete budget such as the one normally employed by a large-scale organisation is usually classified under three broad headings:          

1. The operating budgets
2. The financial budgets
3. The capital budgets.

These three broad classifications than make up the comprehensive or master budgets. They are now discussed.

• THE OPERATING BUDGET

The operating budget is used to plant the activities and operations of the enterprise such as production sales and purchase within the budget period. The operating budget is distinguished in two parts the performance or activity budget and the responsibility budget.

The activity budget specifies the operations to be performed during the budget period and plans for each product the expected revenues and their associated costs. The responsibilities budget specifics plans in terms of individual responsibilities. Generally, the operating budget embodies the following component budgets.

The activity budget specifies the operations to be performed during the budget period and plans for each product the expected revenues and their associated costs. The responsibilities budget specifics plans terms of individual responsibilities. Generally the operating budget embodies the following component budgets.

1. a) The sales budget: The sales budget dictated the nature of other budget since it is the first and the since it is the first and the most important. It is influenced by the economic environment and fluctuations in consume demand. In preparing the sales budget, past sales budget, past sale figures and market trends are usually given adequate consideration. Other factor considered include the sales force, knowledge of plant capacity and business climate etc.
2. b) The production budget: The production budget is prepared after the sales budget and it is based mainly only on the sale forecast. The sales forecasts for each production owed combined with information about the beginning and the desired level of ending inventory of finished goods. The budgeted production is calculated using the model. Budget production (units). Sales estimate plus ending inventory less beginning inventory.
3. C) Materials Budget: Raw materials are needed to ensure availability of stock, maintain continuous production and sure for the rainy day. The quality and cost of materials need to maintain continuous production is usually estimated at the beginning of the year and the purchase department ensures that the budget is well implement in required in previous year provide a guide for estimating the material budget.
4. d) The labour Budget: labour cost budget is usually divided into direct and indirect labour budget. Basically the labour budget depends upon the types of production and the type of labour and rates needed to attain desired production.

• THE FINANCE BUDGET           

Financial budget are used to quantify the financial implications of the operation budgets. The expected cash in flows, cash out flows financial position and operating results are all examined. The financial budget composed of the following component budget.

1. The cash budget: A major objective of the cash budget is to plan cash in such way that the company always maintains sufficient cash in such  way that the cash balance to meet its needs and moves it idle cash in the most profitable manner. Too little cash endogenous the liquidity of a company while two much cash impairs profitability. There a company has to plan its cash budget to maintain an optional level of cash always. A good cash budget should inform management of those periods when the cash balance would not be sufficient to maintain production and when excess cash in expected, stock etc.
2. The statement of change in financial position. Thus is a schedule should clearly the source and applications of a firms financial resources. Funds can be used to pay dividends, acquired fixed assets, stock etc and can as well be pay derived or obtained form the sales of assets, the issue of shares or debenture or obtaining loans from commercial bank.

2.3.3  THE CAPITAL BUDGET        

The capital budget involves these financial decisions to invest in or acquired fixed asset or worth wide projects. The timing and magnitude of expected cash flows that would result from the project as well as its estimates cost are .. serious consideration. Such projects usually involve the commitment of large runs of money and have long-term implication for the enterprise. N important point note about capital budget is that once a decision on any project or capital asset is taken it cannot be revise easily. In well  run companies, there is usually a committee separate from the budget committee to appropriate funds for capital investment and the profitability of each investment is usually carefully evaluated. Capital budgets are difficult to prepare because estimate of each flow over a long period have to be made and usually these estimate of cash flows or usually these involve a great degree of uncertainly.

• STEPS IN PREPARING BUDGET

For a budget to be meaningful, a systematic approach to its preparation must be adopted. Budget preparation is usually rested in the budget committee whose duties according to presidency (1979) include the following:

1. To provide guidelines for budget preparation           
2. To offer tectonically assistance

• To resolve difficulties and disputes which may arise between functional heads.

1. To receive and receive individual or component between budget to scrutinize budget reports.

Budget preparation and procedure very among organisation depending on size, type of production, market degrees of uncertainty in the industry in which the form operates, management choice and money other factor. Though there is no university in the steps or procedures adopted by firms in budget preparation because of their individual uniqueness, however, certain procedures apply in almost all situation.

The following are the steps which firm usually adopt in preparing their budgets

1. Rive of the environment
2. Review of the firm for strengths, weakness and constraint
3. Sales budget
4. Capital expenditure
5. Cost budget
6. working capital budget
7. master budget for profit planning, financial position, funds flow and cash flow.

• TECHNIQUES OF BUDGETING

Authors of budgeting techniques and profit planning identity the types of budgeting techniques to include:

1. Traditional or incremental budget
2. Planning, programming, budgeting system (PBS)

• Zero – board budgeting

A part from the above classification, budgeting techniques are equally classified as either fixed budgeting techniques or flexible budgeting techniques. However for the purpose of this research this later classification is take for analysis.

FIXED BUDGET: This is a budget based one level of activity or operation to which various cost are relate. This techniques is not widely embraced because it is in appropriate for the purpose of performance evaluation.

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