Impact Of Budgeting, Planning And Control On The Profitability Of A Manufacturing Company

Project and Seminar Material for Business Administration and Management BAM

Abstract

This study, the impact of budgeting planning and control on the profitability of a manufacturing company, was conducted using Nigerian breweries Lagos, as a case study. Since wants are plenty while resources are limited, every organisation tends to find means by which it can get what it wants with the limited resources at its disposal. Therefore, manufacturing company seek to adopt the concept of budgeting and budgetary control to satisfy their needs at the least possible cost and at the same time fulfill their stewardship obligations to the numerous stakeholders. We adopted a descriptive research design with data gathered through questionnaire administered to respondents. Three Hypotheses were tested and analyzed on a 5% level of significance and it was revealed that budgeting is a useful tool that guides firms to evaluate whether their goals and objectives are actualized. Considering the changing environment in which firms now operate, it can be concluded that budget, which is a continuous management activity, should adapt to changes in the dynamic business environment.

Chapter One

Introduction

1.1. Background of the Study

For any organization to operate meaningfully there has to be clear direction of where it is leading to or what it is aiming to achieve the standard of objectives and a means of monitoring derivatives from standard requires. These considerations can only be met through budgeting, planning as well as controlling.

A budget has been defined as a quantitative plan usually in monetary terms for the fourth coming accounting year of the ensuring period. Budgeting planning/short term planning is the process of preparing detailed, short term (usually 1 year) plans for the function, activities and departments of the organization thus converting the long term co-operate plan into yearly action. Budgeting services as a very important tool for planning and control increase in productivity, in that budgeting aids planning for the future, if services as a control function through management by exception which is the assessment of performance for the purpose of controlling. It helps in co-coordinating of the work management in order to coordinate the activities of the organization.

Wants are numerous while resources are limited but there is every tendency to waste or under-utilise the limited resources by the human factor involved in the production of goods and services. With various companies competing with one another, only few that are able to produce at least possible cost will survive the growing competition in the market. Therefore, it is paramount for every serious business undertaken to produce at that possible minimum cost so as to remain in business and also achieve the corporate objectives of profitability and stability. In view of this, there is every need to do a realistic planning of the activities of the firm taking into consideration the limiting factors and the long term objectives of the firm. In order to achieve this, budgeting – a tool of planning and control becomes indispensable. Budgeting is ubiquitous and has long been considered as a necessary tool in managing a company.

Nigeria as one of the developing countries in the world, the growth of Small and Medium Enterprises (SMEs) is very vital for the growth of the economy in general as SMEs account for over 70% of the total business activities in the country. SMEs in most developing countries are usually neglected by both the formal financial institutions and the government unlike the developed countries like China, USA, etc. where SMEs are not taken with levity as they believe were to be the engine room for the development of any economy (Amuche, 2015).

Kendall (2005) posited that budget and budgeting are concepts traceable to the Bible days, precisely the days 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. Budgets were first introduced in the 1920s as a tool to manage costs and cash flows in large industrial organizations. John (1996), states that it was during the 1960s 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.

A budget has been defined by Chartered Institute of Management Accountants [CIMA] (2004), as a financial or qualitative statement prepared and approved prior to a defined period of time for the purpose of attaining a given objective. It may include income, expenditure and the employment of capital. CIMA also defined budgetary control as “the establishment of budgets relating the responsibilities of executives to the requirements of a policy and the continuous comparisons of actual with budgeted results, either to secure by individual action the objectives of that policy or to provide a basis for its revision.

Budgets are known to have an important role to transmit the expectation of top management to lower levels. According to Bremser (2008) budgets are used to communicate management’s expectations to managers and employees. According to Lucey (2003), it is a quantitative expression of plan of action prepared in advance of the period to which it relates, expressed in money terms approved prior to the period.

Lucey (2003) further urges that performance of small and medium sized organization is influenced by many factors which includes planning and coordination, clarification of authority and responsibility, effective communication both internal and external, control of resources available, both human and non-human and motivation of both the lower and middle management. If the actual numbers delivered through the financial year turn to be close to the budget, this actually demonstrates that the organization’s management understand its business and has been successfully driving it in the direction they had planned. On the other hand, if the actual results diverge wide from the budget, this sends out an „out of control‟ signal. For this reason, budget based control means manager’s evaluation according to budgetary goals

1.2 Statement of Problem

Generally, organization whether manufacturing or service, required good budgeting for increasing productivity. Budgeting as a tool for planning and controlling does increase productivity. This is the problem of qualified personnel that are required for the purpose of preparation implementation and execution of budgeting, areas of responsibility will be decided by management and also budgeting pressure is another problem. Their growth will significantly have an effect of the growth of such economy. Budgets are necessary to prudently manage scarce financial resources and at the same time serve as means of expenditure authorization, control and evaluation base. Profit making organizations consider budgets and budgetary controls important elements in their policy making. It has however been observed that many manufacturing company do not care about budget or budgetary control. The success of organizations depend largely on good budget preparation and effective budgetary controls. The study will therefore be focused on whether budgeting contribute towards increasing productivity in organization or not.

1.3 Objectives of the Study

In view of the glaring problems as mentioned above the researchers main purpose of this study is to look carefully as the system of budgeting. This will enable the researcher to discover and bring to light any loop hole and lapses that may contribute on their little ways to aggregate private sector problem. Therefore, the objectives of the study are as follows:

To examine the system of budgeting, planning and control in order to assess adequacy in productivity.
To find out the extent budgeting serves in planning and increasing productivity.
To examine facts about the organization and it mode of operation with regards to productivity.
To identify the fact about operation and mode of operation.

1.4 Significance of the Study

The significance of this study is essential on its benefit and contribution to individual and organization first and foremost. This study will serve as important objectives reference to top executive of organization who wants to achieve efficiency in production. It will also be significant to students who want to carry out further research on the area of study secondly, the finding of this study will be useful to both the organization and any other similar organization as well as general public in the field as it depicts the nature of problem associated with budgeting in this part of the country. Finally, this study will also cover the public as an essential requirement for the award of higher national diploma

1.5 Research Hypothesis

In order to achieve the stated objectives for this study, the following null hypotheses are stated so that they can be tested with analytical tools and inferences could be drawn on them.

H0: Budgeting planning and control does not influence the productivity of an organization
H1: Budgeting planning and control influences the productivity of an organization
H0: The adoption rate of budget and budgetary control by manufacturing company in Nigeria is significantly high
H2: The adoption rate of budget and budgetary control by manufacturing company in Nigeria is significantly low
H0: Budget and budgetary control have no significant impact on the profitability of manufacturing company in Nigeria.
H3: Budget and budgetary control have a significant impact on the profitability of manufacturing company in Nigeria.

1.6 Scope and Limitation of the Study

This study is on the impact of budgeting, planning and control on the profitability of an organization with Nigerian breweries Lagos serving as the case study.

However the research has some constraints which are;

The study limitation was inability of management to divulge certain information which they consider sensitive and fear of publication which might be detrimental to their operation.

Time: the time at the disposal of the researcher which is allocated for the study was a major limitation as the researcher has to combine other academic work with the study.

Finance: The finance at the disposal of the researcher in the course of the study does not allow for wider coverage as resources are very limited as the researcher has other academic bills to cover.

1.7 Definition of Terms

Impact:

Is defined as the action of one object coming forcibly into contact with another or a marked effect or influence.

Budgeting:

Budgeting is the process of creating a plan to spend your money. This spending plan is called a budget. Creating this spending plan allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do. Budgeting is simply balancing your expenses with your income.

Planning:

Planning (also called forethought) is the process of thinking about and organizing the activities required to achieve a desired goal. It involves the creation and maintenance of a plan, such as psychological aspects that require conceptual skills. There are even a couple of tests to measure someone’s capability of planning well. As such, planning is a fundamental property of intelligent behavior.

Control:

Control, or controlling, is one of the managerial functions like planning, organizing, staffing and directing. It is an important function because it helps to check the errors and to take the corrective action so that deviation from standards are minimized and stated goals of the organization are achieved in a desired manner.

Profitability:

Profitability is the ability of a business to earn a profit. A profit is what is left of the revenue a business generates after it pays all expenses directly related to the generation of the revenue, such as producing a product, and other expenses related to the conduct of the business activities.

Manufacturing Company:

Definition of a Manufacturing Business. … A manufacturing business is any business that uses components, parts or raw materials to make a finished good. These finished goods can be sold directly to consumers or to other manufacturing businesses that use them for making a different product.

1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows.

Chapter one is concern with the introduction, which consist of the (background of the study), statement of the problem, objectives of the study, research questions, research hypotheses, significance of the study, scope of the study etc.
Chapter two being the review of the related literature presents the theoretical framework, conceptual framework and other areas concerning the subject matter.
Chapter three is a research methodology covers deals on the research design and methods adopted in the study.
Chapter four concentrate on the data collection and analysis and presentation of finding.
Chapter five gives summary, conclusion, and recommendations made of the study.

Chapter Five

Summary Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to evaluate the impact of budgeting planning and control on the profitability of a manufacturing company.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of budgeting planning and control on the profitability in Nigeria.

5.2 Summary

Finding of hypotheses tested and direct interview conducted reveals the followings:

Cost control has a remarkable impact on business profitability through reduction of wastages and losses; effective utilization of materials; labour resources and other inputs in the production cycle;
The relationship between cost control and business profitability can be seen from the view point of material utilization, labour and cash, wastage elimination, supervision of cost expended in the course of production, administrative, selling and distribution activities. All these help improve the earnings of an enterprise, thus its profitability and continuity;
Budget as a tool, can only help ensure effective cost control, when actual costs expended are compared with planned cost and the variances are analysed to see their causes in order for the management to take corrective actions. Note that budget, in itself, will not serve any purpose in cost control unless we embark on budgetary control which is the monitoring aspect of budget. It is then that budget would be of importance when we talk of cost control and profitability in any business concern;
The requirements for ensuring effective cost control entail complete data collection on cost from all departments, analysis of the cost data, then budgetary control and administration.

5.3 Conclusion

From the findings of this research, it is evident that budgeting and planning control has a positive impact on business profitability and that element of cost, such as materials, labour and overhead cost and workers’ behaviour could be strategically controlled with measures like responsibility accounting, data collection and data reporting.

The absence of behavioural control, either through motivation, incentives and the rest will short change the effect of cost control on profit growth, but if with all the conditions and measures management is able to focus on enlightening and motivating workers on the true purpose of cost control, then greater profitability is assured.

Finally, it can be said that dedicated work force, improved technology and effective policies (budgeting inclusive) has helped the manufacturing companies to remain effective and efficient in fulfilling their stewardship obligations to the stakeholders.

5.4 Recommendations

From the above findings and in order for the manufacturing companies to operate profitably, they must take the following critical steps:

Adopt a budgetary system of adequate planning with strict adherence to implementation, that cuts across the finance, production, administration, marketing etc;
The finance department should review all existing standards and introduce measures that will tighten the internal control system to prevent leakages of financial resources;
Only judicious and profitable investments should be undertaken;
Top executives of Cadbury Plc, who presently have firm grip on the beverages and confectionary market in the country, should assess the current marketing and distribution policies as well as economic, political, technological and other socio-economic factors that affect the company;
Budgeting and budgetary control system should not be too complex for the people to understand;
To enhance the attainability of budgets, resources should be provided to complement the budgets;
As the environment is dynamic, budget should be reviewed and adjustment made from time to time, where necessary;
The management should ensure that workers pursue the set budget;
There should be an excellent communication link between production and sales departments, so as to meet target thereby eliminating undue variances.

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