Budgetary Process of Bank Muscat - Essay Example

Critically Evaluating a Budgetary Process of Bank Muscat Introduction Today, businesses forecast their expenditure and income they will achieve on monthly basis. Traditionally, only a few people in an organisation contributed ideas toward the budget. Due to advanced technology in the field of Information Technology, a computer software can allow many people from various department in an organisation to contributed their expect in the final budget in terms of revenue and expenses. With this, all employees are motivated as they can be seen to be having a say toward the budgetary contribution the most crucial part of management. 1 Background Information of BankMuscat Bank Muscat is one of the largest banking institution in Oman and it offers; corporate banking, consumer banking, project finance, asset management, private banking and investment banking. The institution has 92 branches and also has a representative office on Dubai. The bank was voted four times consecutively for being the best bank in Oman by The Banker and by both EuroMoney and Global Finance Inc. also five times consecutively. (http://www.bankmuscat.com/about_bk_profile.shtml) Strategic Planning and Budgeting Process Through the strategic planning and budgeting process, Bank Muscat has taken aggressive steps for many years to reduce costs and create more effective and efficient ways of operating, while at the same time preserving and enhancing quality services to its clients. The Bank has specifically shifted resources from administrative functions to support research and service thereby moving the resources to the most promising and effective programs, and eliminating duplication in programs and services. (Lerner and Cashin, 2001) The Bank's current strategic planning process integrates planning, budgeting, and continuous quality improvement and this ensures that the budget allocations will be based on sound and well-thought-out plans. (Lynn, 2004) The bank's objectives are not only to maximise profit but also to meet the needs and wants of the clients within a sustainable financial context. A risk adjusted return on capital growth rate is set by private financial institution sector. All resource allocations of the bank are integrated in the context of competing uses and available gross income. This shows clearly that the bank is projected to have enough potential income to increase reserve as it meet budgeted core commitment and expenses. The Bank's planning council is comprised of the Chief Executive Officer, Deputy Chief Executive Officer, Chief Operation Officer and all General Managers of various sections with the institution. They review the strategic plans of each financial year and consider requests for resources from the Board of Directors and later on recommend funding levels. The strategic plan starts from the bottom whereby each section within the institution develops its own strategic plans. They review their services taking into account clients' interest, societal and commonwealth needs, developments in the field of banking and the sections' expertise. Strong programs and services that are central to the bank's mission are recommended for enhancement. Unpopular services are identified to determine if they should be continued, merged with other services or eliminated. The goals of the Bank's-wide strategic plan is complemented and supported by each unit's strategic plan. There are usually annual updates that are prepared to measure the progress and refine goals. (Lerner and Cashin, 2001) Due to scarce resources, BankMuscat turned to internal budget reductions and allocations to fund strategic priorities and critical operating needs. A deliberate process of budget recycling and reallocation was incorporated into the strategic planning process. Since then, the Bank's budget priorities have been to reallocate funds from administrative and support core mission activities of delivering qualities and efficient services to their clients. 2 BankMuscat being a banking institution, its main objectives is to offer affordable banking services to its clients. For this case, while planning their budget, the need to take this nation in mind in order for them to achieve the bank's organisational goal. The bank with a network of 92 branches had taken a feasibility study on what clients in various locations requires as far as banking services are concerned. They considered a number of options on the services they were to offer to their client on what they collected during the feasibility study. BankMuscat Missions The institution's mission is to; To introduce new products and channels of services at an affordable rate besides providing high return to their customers. To provide return to their shareholders. To become a corporate citizen who is responsible. Since the employees are sources of their strength, then they have an aim of motivating and developing them. (http://www.bankmuscat.com/about_bk_mission_statement.shtml) In budgetary process, the sales process is the one that determines the activities of the institution hence it is the first one to be completed. This is because we have to predict what volume of services our clients will require them work out what quantity is required. For this case, when it comes to BankMuscat, we have to consider the number of clients we have in Oman who require banking services, then from there we can determine what quantity of sales they will demand in a particular period. Though the volume that will be produced can also be dictated by the institutions policy, it is wise to consider what quantity of the services will be demanded in the market. On the other hand the demand of finished products will be determine the production budget. For this case, the quantity of production of banking services offered by BankMuscat will be determined by demand of the finished services by the clients. In budgetary process, the stock budget dictates the purchase budget which must The bank in its operations require to make some purchases such as buying stationery, furniture and equipment hence this is normally dictated by both what is already stock with what quantity the bank require to use for that particular period. While the bank was taking this consideration of the purchases, it had to take into consideration the cash budget. The cash budget on the other hand is dictated by both the trade creditors and trade debtors. Since the bank achieve a net profit of RO 45.4 million as compared to RO 34.1 million for the year ended 31 December 2005 and 2004 respectively, there have even higher hopes of achieving higher profits this current year of 2006. For this case they have projected higher in their budget. This was an increase of 33.1 percent in net profit. This significant increased was as a result of an increase in world GDP which was estimated to have increased from 3.2 percent in 2004 to 3.8 percent in 2005. (http://www.bankmuscat.com/about_bk_mission_statement.shtml) The budgetary process at BankMuscat followed the following steps as illustrated by the diagram below. (The diagram is adopted from Lecture's Notes) During budget setting process at BankMuscat, the responsibility for the budget setting process was established which comprised of the senior management team that included; Chief Executive Office, Deputy Chief Executive Officer, Chief Operation Officer and various general managers heading various section within the institution. The officers form a budget committee that is headed by a budget officer. The budget officer is selected among the budget committee and he or she must be an accountant by professional. (Lerner and Cashin, 2001) The budget guidelines are communicated to relevant managers for them to know what is expected of them in their areas of operation. The managers are supposed to implement the guideline set and ensure that they are followed by those under him toward the achievement of the organisational goals. The general managers heading various sections in the bank are supposed to identify any key factor that would not make the organisation achieve its objective. He is also supposed to prepare the budget for the areas of the limiting factors. A draft budget is prepared by the general managers heading various sections with the institution taking into consideration the limiting factors. These budgets are reviewed to ensure there is co-ordination of activities within the whole of BankMuscat. The co-ordination of activities is necessary to ensure that there is co-ordination in the whole organisation therefore ensuring the achievement of organisational goals. A master budget is prepared for the whole institution from these budgets from various sections of the institution. This budget comprises of budgeted profit and loss statement and balance. It shows the projection of how the financial statements are expected to appear at the end of that financial period. After the master budget is prepared, it is communicated to all general managers heading various sections within BankMuscat. The managers ensure that all what has been budgeted is achieved at the end of the financial year. The general managers monitor the actual performance of the progress of the bank as compared to the budget. Monitoring and evaluation of the progress is done continuously and any deviation identified. An investigation is carried out on what would be causing this deviation. The bank's general managers respond to the variances and exercise control to ensure that the variance is corrected. This is done on by revising the whole budget or by just making correction in the deviated portion only. The budgeting process brought a number of benefits because it enabled the bank to identify short term problems that can face the banking institution. This in turn triggers them to think forward on what will happen in future in the occurrence of those problems. Since the general managers heading various section of the bank already knows what is expected of them in terms of performance, they are motivated in order to achieve the already set goals. This in turn increases the chance of the bank toward the achievement of the organisational goals. The budget already prepared by BankMuscat shows what is expected to be achieved by various sections with the bank hence this provides a basis for a system of control. It assists the bank in that they will be comparing the performance with what they had actually planned. If there is a deviation, corrections can always be made to ensure that the right track is followed all through. On the other had the budget provides a system of authorisation. This is because all sections within the bank know what is dictated by the budget; hence they ensure they follow the guideline already set in the budget. For this case, the budget to BankMuscat is like the authorisation hand to all activities being carried out by the bank. (Thomsett, 2001) Conclusion Each section within the bank already knows what is expected to be done toward the achievement of the organisational goals. They do follow the budget as their guide. Since the budget had been prepared taking into consideration all sections of the organisation, then it help co-ordinate all sections of the bank. For this case the budget help link various activities of the bank with those of other sections. The budgetary process at BankMuscat followed the right process though in future, since it is an international bank, it need to do an extensive feasibility study in order to cater for the market in the region where they are setting up a branch. References Accounting Standards Board, (1999), Revised Exposure Draft - Statement of Principles for Financial Reporting, ASB Publications. Amico New Zealand Limited (2006): Financial Reporting Act 1993, Amico New Zealand Limited, Wellington AT Foulks Lynch (1998), Drafting Financial Statements (Industry & Commerce), AT Foulks Lynch Ltd., London, Bank Muscat (2006): About as - Profile, Retrieved on September 5, 2006, from http://www.bankmuscat.com/about_bk_profile.shtml Bank Muscat (2006): About as - Mission Statement and Quality Policy, Retrieved on September 7, 2006, from http://www.bankmuscat.com/about_bk_mission_statement.shtml BPP, (1998): CAT Interactive Text - Drafting Financial Statements, BPP Publishing Ltd, London, Lerner, J. and Cashin, J.A (2001): Business and Economics, Mc Graw Hill Publishers, New York, Lynn C. (2004): Dynamics of Profit Focused Accounting, Ross publishers, New York, Thomsett M.C. (2001): Builder Guide to Accounting, Craftsman publishers, London, Wood F., and Sangster A., (1999): Business Accounting I, Financial Times Professional Ltd., London Read More