The Lion King | 39
Investment
Understanding
budgeting and
control processes
in financial
institutions
By Olawale Hamed
B
udgets are essential to the overall
strategic planning and control
framework for any organisation.
Simply put, a budget is a quantitative
expression of a plan for a defined
period of time. It is a financial plan that
uses figures to gauge an organisation’s
expected future results. It may include
planned sales and revenues, resources,
costs and expenses, assets, liabilities
and cash flows. It also expresses ac-
tivities or events and strategic plans of
business units in measurable terms.
In some financial organisations, the
responsibility for budget preparation,
administration and control lies with the
Performance Management Unit. The
major activities of this function include:
performance analysis, budget prepa-
ration, monitoring and control, design,
implementation and monitoring of key
performance indicators (KPIs), imple-
mentation of cost strategy, among
others.
The process of budgeting in large finan-
cial organisations
The organisation carries out a strate-
gic market surveillance to ascertain
the current year economic scenario,
peer performance analysis, economic
outlook for the country /countries of
operation. It also considers proposed
revenue, expenditure, balance sheet,
cash-flow budget, target for the com-
ing year based on the foregoing factors
considered and business opportunities
foreseen in line with strategic goals and
aspirations.
Based on this, a report is presented to
the Board of Directors (BoD) for con-
sideration. The BoD deliberates on the
proposed figures, making adjustments
and amendments to the proposal if
necessary, before approving it.
After BoD approval, the Executive
Management Committee (EMC) meets
to further deliberate on how the budget
would be equitably allocated and
achieved. Revenue Budgets are then
allocated and communicated to Profit
Centres, whilst expense budgets are
allocated to Cost Centres.
Budgetary control
Profit Centres:
These are departments
within the organisation whose activities
involve revenue generation. In UBA,
they are referred to as Strategic Busi-
ness Units (SBUs) and are also respon-
sible for their own expenses because
budget targets are allocated net of
operating expense. Thus, their overall
budget achievement is classified in the
books as Net Contribution.
MPR sessions are usually held monthly to
measure the actual performance level
of the profit centres in comparison with
their allotted budgets or targets. Pre-
senters at the session must clearly show
actual performance against budgets,
which are compared for accuracy.
Both positive and negative variances
must be duly explained.
For negative variances, clear action
plans to cover revenue gaps must be
highlighted. Positive variances are also
considered for the purpose of identify-
ing if judgment errors had been made
in drafting the budget initially.
Budget run rate is also compulsory in
MPR presentations using the following
formula:
Annual Budget - Actual Revenue To Date
Number of Outstanding Months
The above formula helps the budget
reviewer track revenue gaps relative to
the actual time available to cover such
gaps.
Cost Centres:
These are departments
whose activities allow them incur ex-
penses on behalf of the organisation,
also referred to as Service or Support
Centres. The appraisal focus of these
units is timeliness and overall quality of
service rendered to the external and
internal clients they service. Positive
difference in total expenses incurred
compared to their expense budget is
referred to as Cost Savings and carry
positive points in the appraisal process
for personnel in these units.
Business leaders in the cost centres
are continually encouraged to strive
to achieve the highest possible quality
at the least possible cost. The organ-
isation’s management also places
premium on the numbers emanat-
ing from cost centres and thus hold
monthly meetings to review budgetary
and extra-budgetary approvals and
consequent expenditure of these de-
partments.
