BUDGETING AND PROFITABILITY IN AN ORGANIZATION (A STUDY OF SAMSUNG ELECTRONICS NIGERIA PLC)

ABSTRACT

A budget is a comprehensive, formal plan that estimates the probable expenditures and revenues for an organization over a specific period. Despite the importance of budgeting, most organizations pay less attention to it and some have problems like; poor planning of its resources and reduced productivity due to organization not defining performance execratory or follow-up with its employees. Thus, this research is carried out to determine the influence of “Budgeting on profitability in an organization” with special focus on Samsung Electronics Nigeria Plc. Aka Road branch, Uyo. This study accessed the condition for effective budgetary control, essential of budgetary control, uses of budgetary control in profit planning, etc. During the study, data were collected from respondents in the company through the use of questionnaire. Scholarly work of various experts concerning budgeting and profitability and its benefits to the organization were reviewed by the researcher. Data collected were presented, analyses and interpreter, and hypotheses tested using t-test statistics. The study reveals that budgeting tools, planning, etc highly enhance profitability in Samsung Electronics Nigeria Plc. Aka Road, Uyo. The following recommendations were made among others; Samsung Electronics should efficiently use organization’s resources and endeavor to manage inventory effectively in order to enhance profitability.

CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

Time and money are scarce resources to all individuals and organizations; the efficient and effective use of these resources requires planning. Planning alone, however, is insufficient. Control is also necessary to ensure that plans actually are carried out. A budget is a tool that managers use to plan and control the use of scarce resources. A budget is a plan showing the company’s objectives and how management intends to acquire and use resources to attain those objectives within defined period of time, usually a year” (Wilkipedia 2018). The process of preparing and using budget to achieve management objectives is called “budgeting. Budgeting is an essential element which is vital to management accounting techniques which can benefit all aspect of business if it is understood and properly used.

Moreover, the growing complicity of the business environment and ever increasing competition among firms in the modern time makes planning and budgeting inevitable tool for business success (Lucey 2010). Successful management is no longer just a matter of flair, skill and determination, a conscious effort is needed to harness available resources towards the achievement of enterprise objectives (Pandy 2015). Therefore budgeting is one of the tools adopted by management for effective cost planning, control and increase in productivity. The budgeting process involves planning for future profitability because earning a reasonable return on resources used is a primary company objective. A company must devise some method to deal with the uncertainty of the future. A company that does not plan whatsoever chooses to deal with the future by default and can react to events only as they occur.

Wildarsky revised (2000:213) argued that because a budget serve diverse purposes, it mean different things to different people, among the various possible interpretations given by him include; it is a plan, it is a prediction and it is a link between financial resource and human behaviour to accomplish policy objectives. Also, it is a mechanism for making choices among alternative expenditure. But most importantly, the budgeting process involves planning for future profitability because earning a reasonable return on resources used is a primary company objective. A company must devise some method to deal with the uncertainty of the future. A company that does no planning whatsoever chooses to deal with the future by default and can react to events only as they occur. However, most businesses, however, devise a blueprint for the actions they will take given the foreseeable events that may occur.

Rufus Wizon (2012) observed that, without a budget a business may aim loosely. It may never know where it is going or where it should go. Even with a budget, a business may not reach it planned objectives or destination, but the exercise of budgeting control will note the deviation from the plan and thus provide the opportunity for necessary corrective action. The making of such plans and continuous review and execution are the essence of budgeting control.  A budget shows management’s operating plans for the coming periods; formalizes management’s plans in quantitative terms; forces all levels of management to think ahead, anticipate results, and take action to remedy possible poor results; and may motivate individuals to strive to achieve stated goals. Companies can use budget-to-actual comparisons to evaluate individual performance. For instance, the standard variable cost of producing a personal computer at IBM is a budget figure. This figure can be compared with the actual cost of producing personal computers to help evaluate the performance of the personal computer production managers and employees who produce personal computers.

Many other benefits result from the preparation and use of budgets. For example: businesses can better coordinate their activities; managers become aware of other managers’ plans; employees become more cost conscious and try to conserve resources; the company reviews its organization plan and changes it when necessary; and managers foster a vision that otherwise might not be developed.

The planning process that results in a formal budget provides an opportunity for various levels of management to think through and commit future plans to writing.  Batty (2009) defined budgeting control as a system which uses budget as a means of planning and controlling all aspect of producing and or selling commodities or services. This is true as we tend to prepare revenue and expenditure variance analysis to be able to deduce areas of divergences for which the management need to watch to avoid embarrassment as any adverse variance will translate into inability to meet the cooperate objectives which will eventually lead to disagreement with stakeholders. In addition, a properly prepared budget allows management to follow the management-by-exception principle by devoting attention to results that deviate significantly from planned levels. For all these reasons, a budget must clearly reflect the expected results. Failing to budget because of the uncertainty of the future is a poor excuse for not budgeting. In fact, the less stable the conditions, the more necessary and desirable is budgeting, although the process becomes more difficult. Obviously, stable operating conditions permit greater reliance on past experience as a basis for budgeting. Remember, however, that budgets involve more than a company’s past results. Budgets also consider a company’s future plans and express expected activities. As a result, budgeted performance is more useful than past performance as a basis for judging actual results.

Moreso, a budget should describe management’s assumptions relating to: the state of the economy over the planning horizon; Plans for adding, deleting, or changing product lines; the nature of the industry’s competition; and the effects of existing or possible government regulations. If these assumptions change during the budget period, management should analyze the effects of the changes and include this in an evaluation of performance based on actual results.

To put it succinctly, there are variables on which this research which has to do with budgeting and profitability depends upon. It is worthy of note that profitability of an organization depends on budgeting. A budget is a comprehensive, formal plan that estimates the probable expenditures and income for an organization over a specific period. Budgeting describes the overall process of preparing and using a budget. Since budgets are such valuable tools for planning and control of finances, budgeting affects nearly every type of organization—from governments and large corporations to small businesses—as well as families and individuals. A small business generally engages in budgeting to determine the most efficient and effective strategies for making money and expanding its asset base. Budgeting can help a company use its limited financial and human resources in a manner which best exploit existing business opportunities.

  Intelligent budgeting incorporates good business judgment in the review and analysis of past trends and data pertinent to the business. This information assists a company in decisions relating to the type of business organization needed, the amount of money to be invested, the type and number of employees to hire, and the marketing strategies required. In budgeting, a company usually devises both long-term and short-term plans to help implement its strategies and to conduct ongoing evaluations of its performance. Although budgeting can be time-consuming and costly for small businesses, it can also provide a variety of benefits, including an increased awareness of costs, a coordination of efforts toward company goals, improved communication, and a framework for performance evaluation.

In practice, most of the manufacturing companies in Nairobi County use period budgets as their budgetary control. These follow several management accounting tools. These are, Knowledge of responsibility accounting reporting systems, cost behavior patterns, and the use of cost, volume-profit analyses help management project revenues and costs for departments or products. A profit planning in itself is possible only after all cost behavior patterns have been identified (Caldwell  1996).

  Ivestopedia (2018) Funds management is the management of the cash flow of a financial institution. The fund’s manager ensures that the maturity schedules of the deposits coincide with the demand for loans. To do this, the manager looks at both the liabilities and the assets that influence the bank’s ability to issue credit.

Funds management also refers to as asset management covers any kind of system that maintains the value of an entity. It may be applied to both intangible assets like intellectual property, goodwill and financial assets, or human capital, and tangible assets, such as real estate. It is the systematic process of operating, deploying, maintaining, disposing and upgrading assets in the most cost-efficient and profit-yielding way possible.

A fund manager must pay close attention to cost and risk to capitalize on the cash flow opportunities. A financial institution runs on the ability to offer credit to customers. Ensuring the proper liquidity of the funds is a crucial aspect of the fund manager’s position. Funds management can also refer to the management of fund assets.

Effective utilization of all available resources is an important aspect of budgetary control. In simplistic terms, there are two broad classes of resources: inside and outside. Companies directly hire (or own) inside resources. Companies also have indirect relationships with outside resources. Outside resources might include partners, contractors, and vendors. The desired effect of utilizing all available resources is to reach optimum project production at the least cost in the desired time frame. This means companies must learn to appropriately manage not only the timing or schedule of a project but must also understand the quality level required for each output component. Clear judgment of all available resources is critical to achieving these optimum relationships. In budgeting, budgeting ensures that resources are effectively utilized and when the resources are effectively utilized it leads to profitability of an organization.

            A budget is a comprehensive, formal plan that estimates the probable expenditures and income for an organization over a specific period. Budgeting describes the overall process of preparing and using a budget. Since budgets are such valuable tools for planning and control of finances, budgeting affects nearly every type of organization–from governments and large corporations to small businesses–as well as families and individuals. A small business generally engages in budgeting to determine the most efficient and effective strategies for making money and expanding its asset base. Budgeting can help a company use its limited financial and human resources in a manner which best exploit existing business opportunities.

Intelligent budgeting incorporates good business judgment in the review and analysis of past trends and data pertinent to the business. This information assists a company in decisions relating to the type of business organization needed, the amount of money to be invested, the type and number of employees to hire, and the marketing strategies required. In budgeting, a company usually devises both long-term and short-term plans to help implement its strategies and to conduct ongoing evaluations of its performance. Although budgeting can be time-consuming and costly for small businesses, it can also provide a variety of benefits, including an increased awareness of costs, a coordination of efforts toward company goals, improved communication, and a framework for performance evaluation.

Planning and control and related resources and their costs are the keys to good management. The process of developing plans for a company’s expected operations and controlling operations helps to carry out those plans is known as budgetary control. Objectives of budgetary control are: To aid in establishing procedures for preparing a company’s planned revenues and costs. Budgets also aid in coordinating and communicating these plans to various levels of management (Kariuki 2010).

In addition, budgets formulate a basis for effective revenue and cost control .for companies to benefit from budgetary control, they should first set quantitative goals, define the roles of individuals, and establish operating targets. Short term or one year plans are generally formulated in a set of period budgets. A period budget is a forecast of operating results for a segment or function of a company for specific period of time (Caldwell 1996).

            Profitability means ability to make profit from all the business activities of an organization, company, firm, or an enterprise. It shows how efficiently the management can make profit by using all the resources available in the market. According to Harward and Upton, (2012) “profitability is the ‘the ability of a given investment to earn a return from its use.” However, the term ‘Profitability’ is not synonymous to the term ‘Efficiency’. Profitability is an index of efficiency; and is regarded as a measure of efficiency and management guide to greater efficiency. Though, profitability is an important yardstick for measuring the efficiency, the extent of profitability cannot be taken as a final proof of efficiency. Sometimes satisfactory profits can mark inefficiency and conversely, a proper degree of efficiency can be accompanied by an absence of profit. The net profit figure simply reveals a satisfactory balance between the values receive and value given. The change in operational efficiency is merely one of the factors on which profitability of an enterprise largely depends. Moreover, there are many other factors besides efficiency, which affect the profitability.

1.2       Statement of the Problem    

The sole aim of every business is to maximize profit. Poorly planned budget has led to poor cost control which has significant effect on the profitability of an organization. For any organization to make progress or achieve its goals, it requires roper planning of its resources, which can only be achieved through budgeting. Until an organization is able to completely plan effective budget, then profitability of that organization remains questionable.

What really instigated the topic budgeting and profitability in an organization was due to the major setbacks in most organizations in terms of profit maximization. For any organization to register good profit, it need to meet customers’ demand along side with a sizeable market, generate demand for customers to achieve revenue and high price points. This requires the provision of a strong value proposition and effective promotional messaging. Budgeting constraints are major hustle for most organization trying to attract customers.

Another factor that has affected profit maximization is reduction in productivity. If an organization does not clearly define performance expectation or follow up with employees about their level of productivity such organization can experience reduced revenues. When an employee join an organization they should a performance plan with the standard of their position listed. Regular appraisal helps employees to know that the organization is satisfied with their performance. If management does not set performance standard and follow up with reviews, staff members may not feel appreciated. Continually wondering if they are meeting expected requirements will sap productivity. Without set standards, management will face a disciplinary challenge when poor work performance eventually does affect productivity.

Based on these assertions, the research intends to carry out a study on “Budget in and Profitability in an Organization” A Case Study of Samsung Electronics Nigeria Plc, Aka Road branch. Uyo. Akwa Ibom State.

 1.3      Purpose of the Study

The purpose of the study is to determine the influence of budgeting on profitability in an organization. Specifically, the study sought to:

1.      determine the influence of utilization of resources on  profitability in Samsung Electronics Nigeria Plc.

2.      determine the influence of planning on  profitability in Samsung Electronics Nigeria Plc. 

3.      determine the influence of inventory management on profitability in Samsung Electronics Nigeria Plc.

4.      determine the influence of communication skills on profitability in Samsung Electronics Nigeria Plc.

1.4                   Significance of the Study

                The findings of this study would be of immense benefit to a number of interest groups associated to the research study. For example managers, government/ministries, schools, counselors and students 

Mangers: This study will be of benefit to managers of business firms be it manufacturing, trading or servicing industry as it will provide them with useful information on maintaining adequate level of inventories to reduce costs to the bearest minimum thereby enhancing their profitability effectively and efficiently.

Government/ministries: It will be a useful tool to government/ministries/departments as it would help them improve upon their budgeting control/system to avoid waste, obsolete, lost, check fraud, even embezzlement and enhance efficiency in government.

Schools: Budgeting is of great benefit to schools as it would help meet their objectives, determine the quality and quantity of services in the institution, help coordinate different units and departments towards general goals of the school, help caution administrators or head teacher against unrealistic optimisms. In other words it helps to check on the kind of decisions that are made by the administrators and also helps education institutions to achieve the purpose expected by the society.

Counselors: This study would help counselors working with clients who are struggling financially and feel that they need the help of budget/credit counselor as they will use their education, experience and training to assist clients in determining why they are in debt, and to find ways to deal with the problem. For example, helping clients to establish a realistic plan for managing their money, implement the plan with the client and provide periodic follow-up service, etc

  Students: This study will benefit students of Business/Accounting education and other related disciplines who want to carry out subsequent research on this topic in the nearest future by serving as a reference material on their research.  

1.5 Research Questions

The following research questions are generated to guide this study.

1.         How does utilization of resources influence profitability in Samsung Electronic Nigeria Plc?

2.         How does planning influence profitability in an organization?

3.         How does Inventory management influence profitability in Samsung Electronics Nigeria Plc?

4.         How does communication skill influence profitability in Samsung Electronics Nigeria Plc?

1.6   Null Hypothesis

Ho1:   There is no significant influence of utilization of resources on the profitability   of Samsung Electronics Nigerian Plc

Ho2:   There is no significant influence of planning on the profitability of Samsung Electronics Nigeria Plc.  

Ho3:   There is no significant influence of inventory management in the profitability of Samsung Electronics Nigeria Plc.

Ho4:   There is no significant influence of communication skills on the profitability of Samsung Electronics Nigeria Plc.

1.7       Delimitation of the Study

This study is delimited to budgeting and profitability in Samsung Electronics Nigeria Plc. This study is restricted to the data made available by the Account and Budget Department as well as staff and top executives of the company.