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Budgeting: Profit Planning And Control
Joshua Mutama. Download PDF. A short summary of this paper. Where the work of others has been referred to, a reference and an acknowledgement has been made. Mutama and my entire family. Thank you for making me the person I am today. My gratitude goes to the management of Shisashe timber dealers who provided the necessary information without which this study wound not have been possible.
I also would like to thank my supervisor, Hajjat Bakia Wamala for her guidance, correction, rebuke, knowledge and relentless effort towards making this study successful.
Her passion for perfection can only be described as remarkable. Thank you for standing by me for all the three years we spent at Kyambogo University. Lastly I would like to thank my family without whom this study would not have possible. I would like to thank my mother Mrs Harriet for her support, sacrifice and belief, my father Mr Mutama Senior for being a role model and a foundation on which the whole family stands.
My gratitude goes to my brothers John and Joab and sisters as well. There could never be a better family to grow up in. In view of this, there is every need to do realistic planning for the activities of the firm taking into consideration the limiting factors and the long term objectives. In order to achieve this, budgeting — a tool for planning and control becomes very important. Budgeting is widely accepted as an efficient method for short and long term planning and control. It is employed majorly in large businesses, but even the small businesses are using it at least in some informal manner.
Budgeting is one of the most powerful financial tools available to any small business owner. Put simply, maintaining a good short- and long-range financial plan enables you to control your cash flow instead of having it control you.
The Tennessee board of Regents defines budgeting as the process whereby the plans of industries are interpreted into an itemized, authorized and systematic plan of operation, expressed in monetary terms for a given period. Budgeting, at both management level and operation level looks at the future and lays down what has to be achieved.
As a tool for planning budgeting enables small businesses to plan ahead and to check on its performance against budgeted figures and therefore provides a basis for decision making. This process involves the use of budgets and budget control. According to Brown and Howard of Management Accountant "A budget is a predetermined statement of managerial policy during a given period which provides a standard for comparison with the results actually achieved.
Budgets also formulate the expected performance standards and reflect managerial objectives. Budgetary Control is the process of establishment of budgets relating to various activities and comparing the budgeted figures with the actual performance for arriving at deviations if any.
Accordingly, there cannot be budgetary control without budgets. Budgetary Control is a system which uses budgets as a means of planning and controlling. England, Budgetary control is defined by Terminology as the establishment of budgets relating to the responsibilities of executives to the requirements of a policy and the continuous comparison of actual with the budgeted results, either to secure by individual actions the objectives of that policy or to provide a basis for its revision.
Budgetary Control is the process of establishment of budgets relating to various activities and comparing the budgeted figures with the actual performance for arriving at deviations. Therefore, implementation of budget control systems would enable small enterprises to come up with policies that lead to achievement of company objectives. Studies carried out prove budgetary control systems play a leading role in establishing an efficient management control system for creating a sustainable competitive advantage.
Cash flow management simply refers to the process of balancing cash. It involves monitoring cash coming into the business, majorly from sales recorded on receipt of payment and from other sources including lenders, and investors.
Also, it focuses on controlling money leaving the business for example payments, such as electricity bills, salaries and purchases. It is an integral part of the business cycle which consists of several objectives such as accelerating cash inflows wherever possible, delaying cash outflows until they come due, investing surplus cash to earn a rate of return, borrowing cash at the best possible terms, maintaining an optimal level of cash that is neither excessive nor deficient.
It refers to the actual amount of money that is used for daily activities, excluding inventory, receivables, or property owned. Cash management is a strategy by which an enterprise administers and invests its cash. It is also seen as a tool for control of cash collection. Cash management is an essential tool which aims at establishing the financial position of the business. It is a set of guidelines established by management to ensure that the business has optimal cash balance to meet the business goals Huang; Ramachandran, A common tool used to manage cash is the use of cash budgets.
Cash budgets are prepared in order to ensure that there will be just sufficient cash in hand to cope adequately with budgeted activities. It shows in summary form, the expected cash receipts and cash payments during the budget period. Small enterprises are especially vulnerable to cash flow problems since they operate with inadequate cash reserves or none at all. Worse still, management of these firms tend to miss the implications of a negative cash flow until it is too late Peng and Jiahai, This makes cash flow management critical for the survival of the business.
A definition of small businesses cannot be easily settled because they can range from fast growing firms to private family firms that have not changed much for decades. Small businesses can also range from a part-time business with no staff to a manufacturer employing a number of people or from stand-alone businesses to those that are part of technology and that have investment partners based abroad. According to Uganda Small Scale Industries Association, small enterprises even spread across all subsectors of the economy with majority operating in the informal sector.
The Informal sector covers all business activities. Many researchers define small businesses in terms of the numbers of people employed. Storey , for example, China defines small businesses as those with 10 to 99 workforces. In Uganda, a small enterprise is defined as one with a number employees ranging from 3 to 50 people.
A small business can also be defined in terms of the value of its assets. These businesses are normally characterized by: ownership by households, non-taxable, legal but unregulated, absence of final accounts, having no regular paid employees and sometimes such businesses are operational for only a short period. Small enterprises have been recognized worldwide as engines of growth and development in the economy Harper, ; et al, ; Ba-el and Felsenstein, Small enterprises are efficient and prolific job creators, the seeds of big businesses, and the fuel of national economic engines.
For the government, small businesses are a source of employment opportunities particularly for the low skilled workers, as well as women and young people. They also contribute to local supply and service provision to larger corporations and act as training ground for unskilled labour.
Company Profile Shisashe timber dealers is a family owned and managed business, which is located in Kirekain the main town of Kira Wakiso district. It is situated on the Kampala-Jinja Highway, approximately 11 kilometres 6. It is divided into two main departments which are the finance department headed by Mrs Barugahare Harriet and production department headed by her husband Mr Kinus M Hosea. The business was started in It deals in selling and modifying timber, and making furniture.
The company has a daily turnover of UGX 85, on average. Shisashe timber dealers also have another branch in Banda, a town located along the Kampala-Jinja road, close to Kyambogo University. According to Mrs Barugahare Harriet, the Manager of Shisashe, budgeting is carried out to plan for expenditures on electricity, salaries, payment of debt and repairs or purchase of equipment.
The type of budgeting done is informal. In other words it is not a legal requirement, it is not used to attract investors and the process does not involve quantitative computations. Also, budgets are made at random times. The management suggested that they are made occasionally, only when a pressing matter arises. Management of Shisashe usually prepare short term budgets for periods less than a year, meant for cases where immediate action has to be taken for example payment of workers and repair or replacement of machinery.
It is difficult for Shisashe timber dealers to come up with long term budgets because of a number of economic uncertainties, and lack of information to accurately forecast future trends in prices.
The management of Shisashe timber dealers is in charge of the cash flow management process as well. This process includes controlling cash collection, investment, and borrowing cash at the best possible terms, cash allocation and cash administration and credit management. Management is in charge of monitoring and control of all aspects regarding collection and distribution of cash. They supervise and authorise all transactions.
However, according to management, the greatest challenge is improvement of their cash inflow and reduction of expenditure. They have slow cash inflow generation procedures with high rate of cash outflow for example; Shisashe timber dealers rely majorly on cash generated by the business itself. Also, the access to finance from financial organisations is limited as a result of high interest rates. This limits investment as all profits are used either for business expenses or for family purposes.
The lack of investment hinders production, which in turn reduces cash generation. Despite using borrowings from financial institutions like BRAC and from family members plus use of personal savings, the business continues to face the challenge of reducing cash inflows.
The business also uses the budget for planning, control and monitoring and has set up controls like supervision, review of the budget and authorisation in order to ensure effective management of cash. However, despite the above efforts, cash flow management still remains inadequate. According to Mrs Barugahare, Shisashe timber dealers still face challenges with improving cash inflow and reducing expenditure. Some projects are poorly planned, like the renting of land for the Banda workshop which has been unproductive since According to the sales vouchers there has been a reduction in sales.
This has prompted an investigation of the effect of budgeting on cash flow management in small businesses with reference to Shisashe timber dealers Kireka. The study also aims at establishing ways of improving budgeting in small businesses.
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by Glenn A. Welsch
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