Budgeting System in
Non-Banking Financial Institution
With Special reference to Micro Credit
1st Assignment of
Advanced Management Accounting
Due Date: 26th May 2018
Lecturer’s Name: Dr. Hilary E. Silva
Table of Contents
TOC o “1-3″ h z u Introduction PAGEREF _Toc514784177 h 2Literature review PAGEREF _Toc514784178 h 3Role of budgeting system in micro credit PAGEREF _Toc514784179 h 5Background of the company PAGEREF _Toc514784180 h 5Budget process PAGEREF _Toc514784181 h 5Implications of the budget PAGEREF _Toc514784182 h 5Challenges in budgeting system face by the company PAGEREF _Toc514784183 h 6Conclusion PAGEREF _Toc514784184 h 7References PAGEREF _Toc514784185 h 8
Introduction”If you don’t know where you’re going, you’ll end up somewhere else”- Yogi Berra
Financial institutions that do not have a pure banking license are generally called as non-banking institutions. These institutions play a significant role in satisfying diverse financial needs of different sectors in the economy by facilitating bank related financial services such as micro credit, insurance, investment, risk pooling, contractual savings and market brokering. It creates a supplementary and competing role in financial sector.
It contributes not only to the economic development of the country but also to establish a firm financial system. Recently most of the Sri Lankan banking and financial sector engage in non-banking transactions such as lease financing. Thus, in Sri Lankan context non-banking financial sector has experienced a rapid growth.
Planning in non-banking institutions is the process of establishing goals and objectives and the courses of action to attain them. Planning does not guarantee organizational success of the firm because they may fall due to faulty performance of function of organizing, motivating and controlling. Thus, budgeting is required for planning and control purposes.
Budgets are quantified financial guides for a future period of time and considered as a major management control tool widely used by the organizations. It requires management to specify future expected revenues, expenditures, cash inflows and cash outflows. It is a standard which allow organizations to measure actual performance and to compare against standards.
A budget assists organizations to control its costs and to achieve financial goals to survive in the industry as it directs activities and effort of employees towards common objectives. Non-banking institutions required to maintain its financial stability, adapt the environmental changes while taking risks as mentioned earlier. There is a need for non-banking institutions to develop and implement a well-conceived strategic plan in order to be competitive in the business environment. A management control mechanism of budgeting could be used to verify that the company is on the path for reaching the strategic developments as it is set as the year one of the strategic plan.
This is a study elaborates the role of budgeting system with special reference to a selected non-banking financial institution. And the study is based on interview conducted with the finance manager of the company and previous research papers.
Literature reviewThis section reviews the earlier studies related to budgeting system, preparation of budget, budget controls, management involvement on budget, budget as a tool of gauging financial performance, and role of cash budget which plays a major role in the bank and finance industry.
In the budgeting literature, budget is defined as a comprehensive preplan regarding usage of financial and other resources for a specified period of time (basically one financial year). With the inclusion of both financial and nonfinancial aspects of planned operations and projects budget provides a guideline for the organization towards well focused results. Moreover, budgeting is the process of formulating a budget. All units of the organization necessitate coordinating activities amongst departments and other business units in order to complete the budget (Blocher et. al, 2010). Thus in an organization planning, controlling, communication and coordination can be contemplated as main functions in the budgeting system.
According to Kerosi (2018) budgets empower the evaluation of firms’ financial viability and thus it is used as a future financial performance tools. Additionally when consider the duration of budgets organizations can prepare both long-term and short term budgets where short term budgets cover monthly, quarterly, semi-annual and annual budgets while long term budgets cover medium to long term time span.
In a Vietnam study on managers’ creation of budgetary slack, has identified impact of management budgetary participation (Huy Ngo et.al, 2017). Besides an Tarigan and Devie (2015) who had conducted Indonesian study has evident that budgeting participation has a positive influence on both managerial performance and job-relevant information then job-relevant information also positively influences managerial performance and they also shows that budgeting participation also has a positive influence on managerial performance through job-relevant information as the intervening variable. Moreover, Owusu et.al (2014) have examined the performance of public universities in Ghana with budgeting system and revealed there is a positive relationship between budget participation and employees’ execution of budget goal. However they argued it cannot only assist a firm to attain its budget goal where other behavioral essentials needed to be realized in the budgeting system since basis to budget goal attainment orbits around behavioral elements.
In a study, Balogun et.al (2015) examined the budgeting system and firm performance and the study revealed that on the performance of an organization has an impact because of budgets and the budgetary controls since they have a positive relationship. With the link of budget with overall strategy, budgets give every organization a structural support to achieve its goals and objectives and thereby exploiting performance via resource sharing and control. Thus with the detailed information regarding the next fiscal year managers have the ability to set realistic objectives when the budget is well prepared.
By observing micro and small enterprises in Kenya, Kerosi (2018) revealed that performance is positively related to the budgetary control practices. The study has observed when budgeting outcomes linked to programs those budgets have clear goals and objectives. The study further found that the enterprises engage its stakeholders in making key budget decisions and that the management of these enterprises review the budget periodically. The study recommended achieving greater results, that the budget review and control should be done frequently. Moreover Sri Lankan study on the budgeting and firm performance conducted for the apparel sector, contributed to the literature observing positive relationship between budgeting process and the performance of the industry (Silva & Jayamaha, 2012)
Diversified organizations in terms of types and sizes are required to plan expected cash inflows and outflows to attain financial goals and objectives. Cash budget is essential to finance managers to act proactively to make corrective actions in financing and investing situations. If not the managers may source funds at a higher cost and may utilize those funds in an unprofitable way. Thus, an effective cash budget ensures the availability of optimum fund to carry out business activities and utilization of funds to maximize profit by keeping expenditure in line with planned expenditure (Amoako.et al, 2013). Conclusively, cash budget plays a vital role in financial management since mainly cash is the main element in budgeting system.
Role of budgeting system in micro credit
This section discusses the budgeting system of a selected Licensed Finance Company, with special reference to its main product; Micro credit. The objective of this study was to elaborate the role of budgeting system in view of the real world example. The explanation is based on the interview with Finance Manager of the company.
Background of the companyThe company taken into the study offers tailor made solutions through a range of innovative product platforms since its rebranding in 2010. The company’s product portfolio emphasizes the importance of micro credit, while identifying the need of establishing and diversifying into other main financial product categories. The company employs over 1,500 staff in its 36 branch locations island wide and according to company data it holds a share of 1.21% of the total assets of the Non-Bank Financial Institutions (NBFI) sector.
Budget processIn general company is implementing planned budgets and the key players in budget preparation and implementation process are board of directors, zonal heads, branch managers and heads of departments. Since the organization is a service provider annually cash budget is prepared mainly for the operations of next financial period. For the Micro credit lending product budget, branch managers together with zonal heads draft branch wise quarterly lending targets for next financial year and present their budget at the budget committee. Prior year lending patterns, current interest rates, new rules and regulations are some sources for the budget and the cost is forecasted based on prior year expenditure incurred. Depending on cash availability the outlined budget will be reconstructed and budget committee will finalize the budget and then the implementation is done by zonal heads and branch managers. Mainly there are three steps involve in the studied NBFI’s budgeting system. First formulation of budget with employee participation, then continual assessment of actual against budgeted performance and based on variances revise the budget as required.
Implications of the budgetThough budget has an effect on the company, unarguably there is an unwanted pressure linked with the budget planning to implementation process. Such as budget planning is compelled since it is needed to assure the accuracy of forecasting while at the time of implementing it is vital to conform the target achievement.
In the studied company there is a decent evolvement in the function of top management in budgeting, since it generates notable results during budget preparation which also enrich effective management of the company. Besides with a budget committee who standardize the processes, rules and regulations, company is being assisted to follow-up in budget implementation. Thereby organization operation is usually consistent with planned budget which in turn have an effect on the company performance.
Challenges in budgeting system face by the company
According to the interviewee Board with the budget committee scrutinizes and then reasons out the variances with the responsible managers to identify the main causes for deviations. The variance analysis is executed on monthly basis, and quarterly comprehensive analysis is conducted.
Thus specifically variances occur due to changes in the interest rates, non- cash availability in the company, contingent affairs etc. Furthermore, in some instances branches have over achieved their targets due to the performance of marketing and recovery officers who pursue the commission and bonuses. Due to this concentration only on revenue generation could lead poor credit assessment which will result additional impairment cost to the company.
Besides Micro credit also shows under achievement in some occasions as it is mainly dealing with low income earning entrepreneurs. Moreover the budget has qualitative challenges to face as well as the quantitative issues with regard to this product. Such as uncontrollable factors: weather, political changes, changes in rules and regulations inversely affect for the forecasting.
As most of the time higher resource allocation is provided to Micro credit and when targets are not meet then every so often departmental clashes arise. Then the conflicts adversely affect to the company performance thereby.
According to interviewee the company, which is operated in the highly regularized risky industry, is under a poor forecasting issue in the budgeting system rather than implementing. And company bear a cost of adjusting the budget based on actual quarterly performance.
ConclusionIt can be concluded that a proper budgetary control ensure a smooth execution of a budget. Budgetary practices of the organization are not up to date since, lack in application of Information Technology Systems in forecasting budgetary figures. Further, they follow a traditional approach in preparing their current budgets based on the previous year budget. The study recommend the organization to train employees regarding the existing budgetary control techniques to improve an effective decision making and to implement in an efficient and a productive manner. Further, as the organization operates in an uncertain environment they must study the organizational performance and budget implementation and to take corrective measures to attain financial goals and objectives.
References BIBLIOGRAPHY Amoako, K. O., Marfo, E. O., Gyau, K. E., & AsamoaH, F. O. (2013). Cash Budgetan Imperative Element of Effective Financial Management. Canadian Social Science Vol. 9, No. 5, 188-191.
Balogun, A., Mamindu, A. I., & Dr.Owuze, C. A. (2015). Budgetary Control & Organizational Performance. Journal of Education Research in Natural and Social Sciences (JERNASS) Vol.1, No.1, 97-108.
Blocher, E. J., Stout, D. E., & Cokins, G. (2010). Cost management (5th Ed). New York: McGraw-Hill/Irwin.
Huy Ngo, Q., Ninh Doan, T. M., & Nha Huynh, T. (2017). A Study on Managers’ Creation of Budgetary Slack in Emerging Economies: The Case of Vietnam. Asian Journal of Accounting Research, Vol. 2 Issue: 2, 15-28.
Kerosi, E. (2018). Analysis of Budgetary Control Practices and the Management of Micro and Small Enterprises at Kangemi Town in Kenya. International Journal of Scientific and Research Publications,Vol.8, 1-14.
Nazarova, V., Seitkhamzina, G., Shtiller, M. V., Shtiller, I. V., ; Kohut, O. Y. (February 2016). Budgeting Systems in the Strategic Management Accounting. Indian Journal of Science and Technology, Vol 9(5), DOI: 10.17485/ijst/2016/v9i5/87602, , 1-11.
Owusu, E. E., Dwomoh, G., Collins, M., Yaa, G., ; Daniel, O. (2014). Assessing the Relationship between Budget Participation and Employees’ Performance of Public Universities in Ghana: a Case of University. International Journal of Academic Research in Accounting, Finance and Management Sciences Vol. 4, 85–95.
Silva, L. M., & Jayamaha, A. (2012). Budgetary Process and Organizational Performance of Apparel Industry in Sri Lanka. Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 3(4), 354-360.
Tarigan, J., & Devie. (2015). The Influence of Budgeting Participation on Managerial Performance in Service Companies: An Evidence from Indonesia. Journal of Accounting and Finance Vol. 15(8) , 95-105.