Budgeting

A budget is a detailed plan, which shows the financial consequence of an organization's operating activities for a specific future time period (Langfield, Thorne, & Hilton, 2003: 422). Developing a budget is a critical step in planning any activity for businesses, government, enterprises, and for individuals. The managers need information to help them manage resources and create value. Moreover, budgeting and performance evaluation are closely related, since the budget provides many of the performance targets which must be achieved by management. As Purdy and Gago has stated that "Budgeting is a complex affair, amongst other things, arising from the relationships of a budget with other parts of an organizations. The budget's use is associated with the manager's personality and pattern of leadership (2002:235).

Furthermore, in the public sector it has been difficult or almost impossible, for any manager to have an overdraft to spend more than what parliament has approved in the annual budgeting. If expenditure in excess of he budgeting is expected, it has been necessary for the manager to go through a particularly difficult process of getting an approval from the parliament. The way for emphasizing budget management is purely political and traditional. Therefore, it is hard to escape the fact that a government's annual budget is a great political event. This is one of the important ways in which the public sector's job differs from a private sector business manager. On the other hand, the budgeting process can serve five primary purposes:

o It forces management to plan ahead and anticipate the future on a systematic basis

o It provides management with realistic performance targets

o It serves as a communication device with which the various managers can exchange information concerning goals, ideas and achievements

o It coordinates the various segments of the organization and makes each manager aware of how the different activities fit together

o It furnishes management with motivation in the form of the goals to be achieved. (Atrill, McLaney, & Harvey, 2000: 235).

The master budget consists of two major parts, the operating budgets and the financial budgets. Operating budgets are detailed descriptions of the revenues and costs of projected activities required to achieve satisfactory profit results, while financial budgets show the funding and financial position needed for the planned operations (Hoggett & Edwards, 2000: 1033). Operating budgets consist of the sales budgets and various cost budgets that are directly associated with the operating activities of the organization whereas financial budgets consist of the budgeted statement of financial performance, budgeted statement of financial position, cash budget and capital expenditure budget (Langfield, Thorne, & Hilton, 2003: 425).

Analysis

In the annual report of the Motor Accidents Insurance Board (MAIB), the budget information is discussed on page 22. Generally, the budget information has already covered all aspects of a firm's activities.

Operating budgets

The sales budget; which is a detailed summary of the estimated sales units and revenues from the organization's products for the budget year, MAIB forecast the combined effect of strong investment performance; increased premium revenue and continued favourable claims experience will boost their premium levels to 4% in year 2007 - 2009. However, there is no detailed information about increasing premium level by 2% in 2006/2007 compared to year 2005/2006 (actual). Sales forecasting is a critical step in the budgeting process, and that it is very difficult to do accurately. Accurate forecasting of sales is so important to the budgeting process that managers at all levels of the business may participate in the forecasting. Major factors that are considered will include on the sales forecast are:

o Past sales levels and trends for the company. Premium revenue in 2005/06 amounted to $117.4 million (2004/05: $111.4 million). The increase in premiums received resulted primarily from a 2.7% increase in motor vehicle registrations (MAIB annual report, 2005/2006: 18)

o The funding of the RSTF is paramount to this contribution with a primary objective to lower the number of serious road casualties and thereby the number of claims received by the Board (MAIB annual report, 2005/2006: 9).

o Amendments to the Motor Accidents (Liabilities and Compensation) Regulations 2000. The new statutory benefits apply in respect of injuries received in motor accidents (MAIB annual report, 2005/2006:5).

o GPOC has recommended that premiums remain unchanged for 12 months from 1 December 2006 (MAIB annual report, 2005/2006:4).

Beside that MAIB has also developed a series of cost budgets that show how the demand for those services will be met. The cost of operations will be carried out to support the forecast demand for its goods or services. For example: MAIB has prepared the budgets for claim expenses, administration expenses, and an overhead budget.

Financial budgets

For financial budget, a statement of financial performance highlights the total contribution margin generated from premium revenue. The fixed expenses are classified as claim expenses, administration, road safety and foundation expenses. MAIB has stated the firm's financial result after tax yearly but the firm did not provide monthly statements of financial performance. However, the budgeted statement of financial performance is submitted to Treasurer and Portfolio Minister and to be reviewed by the Budget Review Committee that would allow the budget to be considered how sales volume and expenses would differ for each month.

Furthermore, MAIB was also developed the budgeted statement of financial position as the interrelationships between the profit and loss activities. For example: the increasing number of financial return on equity as a result of increasing the amount of budgeted profit. From this statement, MAIB is able to outline the expected financial position of the firm at the end of the budget period such as solvency level, financial return on equity and total assets. Unfortunately, MAIB did not consider alternative programs, sub - programs and activities to see whether there are better ways of achieving the goals they have set for themselves. By doing forward estimates, MAIB will know how much of their objective could be achieved if funds allocated were cut back or increased by 2 per cent. The decision makers will be prepared