Excellent Customer Service in the Nigerian Banking Subsector Post-consolidation Era

1.1 Background

On 6 July 2004, the Governor of the Central Bank of Nigeria kick-started the consolidation of the Nigerian banking system by revealing an agenda that aimed at reforming the Nigerian banking subsector. Items on the banking subsector reform agenda in was for banks to meet the minimum recapitalisation requirement of ^25 billion and for banks to consolidate through mergers and acquisitions. On 2 January, 2006, the Central Bank of Nigeria came up with the list of 25 deposit money banks that met this recapitalisation requirement all alone or through mergers and acquisitions.

After the momentum gathered by rush for recapitalisation and consolidation in the Nigerian banking system might have died down, Nigerian banks will face enormous and challenges that will make survival increasingly essential. This could be attributed to the foreseen competition among the 25 deposit money bank.  These banks will struggle to make profit and maintain increasing trend is earnings that will make returns on capital employed robust, meet shareholders’ expectations and maximise shareholders’ wealth.

If these banks are to survive and be successful providers of financial services, they should apply practical approach to customer services. The customer should be seen as king whose needs and expectations should form the centre-piece of banks’ activities. The excellent provision of these needs will guarantee customer satisfaction, good business performance and competitive advantage for the bank concerned.

During this post-consolidation era, the sophisticated and discerning bank customer will expect a good blend of the speed and personalised attention which the so-called ‘new generation banks’ are known for one hand, and the security and caution usually associated with the ‘old generation bank’ on the other hand. Excellent customer services in a bank will put in place, machinery that ensure effective, efficient and smooth banking operations while the provision of professional banking advice in investment, cash flow planning and decisions are guaranteed. This will also cause improved internal controls which will extensively reduce bank forgeries and fraud.

This paper examines the meaning of excellent customer services in banks from a practical point of view. It will look at the relevance of Total Quality Management (TQM) in the provision of financial services in addition to those rules and commandments in customer care which are all necessary for Nigerian bank survival after consolidation.

2.1    The Concept of Customer Service

According to the American Bankers Association, customer service reflects the total approach of a staff to a customer. It is regarded as the attitude of professionalism, friendliness and helpfulness that satisfies customers and leads to a repeat business or patronage. In banking, all staff should focus on efficient and effective customer service delivery which results into customer delight. None of the good plans can successful operationally without repeat business from customers.

It therefore goes from the above that for excellent service in a bank, every member of staff should be a marketer, strategic manager and a practitioner of total quality management. Empathy is an essential tool for excellent customer service. This implies that bankers should put themselves in the position of the customer, identifying with their needs and being patient in dealing with them while endeavouring to give error-free services.

3.1    The Concept of Bank Service

Bank services could be conceptualised by visualising it in four levels which will move banking the commodity mind-set to creating unique experiences for the customer at all times. These levels are:

      i.        Core bank Service:- This provides the basic and fundamental benefits which make the service to be of interest;

    ii.        Expected bank Services:- This gives the minimum set of expectation of customer;

   iii.        Augmented bank Services:- This about offering services that are over and above the expectation of the customer; or over what the customer is accustomed to;

   iv.        Potential bank service:- This is about everything which can be done with service that will be of utility to the customer.

The concept of customer service from the perspective of banking services provides a dynamic opportunity toward enhancing customer satisfaction by orchestrating bank services to create endless value for the customer.

4.1    Practical Strategies of Customer Service Delivery

We can group the practical strategies of customer service delivery into two. These are firm-based strategies and individual-based strategies.

4.2              Firm-based Strategies

These are what a bank as a firm, a corporate entity should fashion out in order to provide excellent customer service delivery. This is made up of four strategies pertaining to:

(a)       Cost price of service: The bank can use this to attract customers where the bank management would be required to develop competitive prices that will ensure the good returns on their investment. This is made possible under the current liberalised banking environment.

(b)       Time management of service delivery: Bank customers will always appreciate quick, prompt, efficient and effective service which they will regard as excellent service. In this regard, the bank is required to provide an appropriate environment conducive for service delivery and in which the customer feels wanted. Customers need enhanced time for transacting business with banks. The current practice of extending banking hours is a good           case in point.

(C)       Provision of error-free service: The implication of this is that banks must continually provide equipment that can improve service delivery excellently while training and retraining their staff to improve their capacities of service delivery. The acquisition of modern technologies and up-to-date management techniques are essential in this respect.

(d)       Customer delight: This could caused by total satisfaction of customers arising from excellent customer service. This should be the ultimate aim of bank management in service delivery. Customer delight can be ensured by the involvement of all bank staff in operationalising the marketing concept, total quality management in banking and sound strategic bank management. Bank staff should be motivated to give their best and be continually loyal to the bank’s vision and mission.

4.3              Individual-based strategies

These have something to do with what each bank staff must do in carrying out his/her job. It involves how staff presents themselves, communicate with customers and handle difficult customers. In this regard, bank staff must be conscious of their appearances by ensuring that they are smart, cute and neat. Courteous greetings give lasting impression on customers.

Bankers should be self-confident and be able to see the need to display facts in dealing with customers while showing competence. They should not be necessarily pedantic and overbearing. Practices like frowning while a customer waits, not maintaining eye contact or speaking too low and acting too familiar with a customer should be watched and improved upon. Bankers must learn how to handle the following group of difficult customers:

·         the impatient;

·         the insulting;

·         the angry

·         the complaining;

·         the confused;

·         the frightened;

·         the knowledgeable customers who will always claim his right.

In dealing with all these groups of customers, a golden rule should be applied; and this is that ‘the customer is always right’. In addition to these, empathy from the bankers should be applied.

5.1    Specific Strategies for Customer Care in the Banking Industry

If the concept of customer care is to be elaborated upon, it is necessary to highlight the key concepts relating to:

·         banking process;

·         granting of credit facilities;

·         deposit mobilisation;

·         the environment of banking operation;

·         other bank services.

For each of the above-mentioned strategies, the following steps are vital and important so as to ensure that bankers meet customers’ satisfaction:

·         identifying customers by group, segment and organisation;

·         determining customers’ requirements and expectations;

·         determining how to meet customers’ requirements and expectations;

·         anticipating customers’ needs;

·         gaining customers’ commitment;

·       meeting customers’ needs.

6.1    The Relevance of the Concept of Total Quality Management (TQM) to Customer Service Delivery

Total Quality Management (TQM) is the integration of all functions and processes within an organisation in order to achieve continuous improvement of goods and services; with the primary goal of customer satisfaction. Breaking down the acronyms TQM:

·         Total means every person associated with the bank and every activity.

·         Quality means ‘customer’ who may be internal customer or external customer. It signifies the excellence of products and services to meet customer expectations and requirements. Quality is the conformance to the requirements of the clients and customers now and in the nearest future, at a lower cost.

·         Management means the prevention of faults, errors or mistakes; and direction towards customer satisfaction. It does not include detection and/or correction of errors.

Total Quality Management (TQM) covers the overall aspects of quality service provided to the customer. It seeks to create competitive advantage through the involvement of all internal customers (employees) in the delivery of goods and services to the expectation of all external customers (buyers of the products, goods or services). An underlying principle of TQM is that it is not a programme but a continue process, which is an unending habitual improvement that continuously shifts toward the quality standard dictated by customers. The main objective of TQM is to delight customers by creating an enduring culture of securing superior customer service and an enduring culture for managing change through continuous and rapid improvement in cost, quality services, lead time and flexibility.

If properly implemented, the rewards of TQM are positive, substantial and pervasive. TQM will enhance the morale and sense of belonging of all employees. It will also result into effectiveness in teamwork, communication, productivity, customer relations, profitability and corporate image. The specific competitive benefits of benefits of TQM in terms of market share and customer loyalty are very significant.

A basic assumption and exciting discover in TQM is that the cost of doing business is lower when quality is high. Philip Crosby in his book titled ‘Equity is Free’ said that ‘you can eventually save more money through high quality as you can charge higher price, gain market share while avoiding fixing faults, customer rejection and complaints.

7.1    The Twelve Commandments of Customer Care

According to a Kenyan Professor, Henry M. Bwisa, caring for customer means being:

                      i.        Client friendly – cultivating friendly relations with customers.

                    ii.        Utmost good faith – relating faithfully with the customer.

                   iii.        Secretive – do not divulge customer’s secret.

                   iv.        Tolerant – tolerating all customers.

                    v.        Obligatory – making services to the customer, a duty and not a favour.

                   vi.        Memorable – developing relations that deserve remembrance.

                  vii.        Equity – treating all customers (big or small) equally.

                viii.        Righteous – striving to do what is morally right.

                   ix.        Charming – always wearing a charming face.

                    x.        Adorable – striving to be loveable by the customer.

                   xi.        Rhetorical – using persuasive and impressive language.

               xii.        Empathy – striving to share the customer’s feelings.

8.1    Conclusions

Many pre-consolidation banks in Nigeria were known to have taken the path of high quality and excellent service delivery. The breath-taking advances in electronic banking which is prevalent in industrialised economies are becoming features of many banks in Nigeria in the pre-consolidation era. Excellent customer services in the post consolidation banking scene will boost confidence, which is the major ingredient in banking business. This has an effect of improving the bottom line. Nigerian banks in the current scheme of things will have no choice than to embrace excellent service delivery in its practical sense if they must meet the global challenges and make good returns on the higher level of capital employed.

Published in Ondo State Banker – Journal of the Chartered Institute of Bankers of Nigeria, Akure Branch. Vol 2 No2, January 2006 – ISSN 0794-6171

The Operation of Garnishee Order in Banking

Garnishment is the legal procedure by which a judgement creditor (A) obtains the control of funds that are in the hand of a third party (B) who owes money to the debtor (C). In this case, C owes A some money. There are some funds in the hand or custody of B, which rightfully belong to C. With garnishment, the court is asking B to release C’s money in his hands to A.

A garnishee order is an order given by a court to attach the money of a judgement debtor, which is in the hand of third party, the effect of which the third party is prevented from paying the until directives are given by the court on how the money is going to be applied. This order is obtained by a judgement creditor against the judgement debtor. The third party is the garnishee i.e. the one being commanded. When this order is applied in banking operations, the bank becomes the third party. However, the judgement creditor must swear to the declaration.

As a preliminary step, the court will issue a garnishee order nisi immediately an application for the issuance of a garnishee order is filed. This is a temporary injunction under which the bank is directed not to part with the money attached without directives from the court. The affidavit sworn to when filling the application must state:

      I.        the judgement debtor;

    II.        the amount outstanding;

   III.        that the bank to be served is indebted to the judgement creditor;

  IV.        the branch of the bank where the judgement debtor maintains his account.

The court will then issue the garnishee nisi ex parte i.e. without hearing the plea of, even requiring attendance in court of either the debtor or the creditor, as much as the court is satisfied that the applicant stands to be prejudiced if the order is not issued.

A garnishee order nisi is a warning. It is not an order for the bank to pay. Its effect is to freeze whatever sums are standing to the credit of the customer at the moment when the order is received. When the court makes the order absolute, the bank must pay to the creditor whatever amount the order specifies and may debit the customer’s account with the payment. The payment according to the garnishee order absolute must be made though the court to the judgement creditor. The payment must be the amount of the order plus the cost, or available balance on the customer’s account if less than the order.

A garnishee order may be limited or unlimited. It is limited when it indicates the actual amount to be attached plus the cost such that the bank can know from the order plus the amount plus costs. The order is unlimited if no amount is specified. In this case, the bank must block the entire balance on the customer’s account until the court gives further directives. If the customer knows that his credit balance exceeds the debt in question, he should press the court to convert the unlimited order to a limited order. However, for a limited order where the customer’s credit balance exceeds the debt, the bank can place the amount on the garnishee order in a suspense account and allow the customer to run his account normally.

We need to note the following points as rules in respect of bank accounts that would be attached by a garnishee order:

      i.        The general principle is that an unlimited garnishee order attaches the cleared net sum standing to the customer’s credit and those that are available to him at the bank at the precise moment when the order is received.

    ii.        The unutilised amount of an overdraft limit is attached.

   iii.        The bank is entitled to exercise its right of set-off, if any. In this case, loan already due for repayment and demanded for may be deducted.

   iv.        As regards future credits, the principle is that any credit which has not been cleared to the customer’s account at the time when the order is received is not attached.

    v.        A garnishee order is issued to one party in a joint account does not attach the joint account. In the same manner, the order on one or some of the partners in a partnership business does not attach the partnership account.

   vi.        If the garnishee order names two judgement debtors who are joint account holders, it will however attach the joint account and individual accounts of the joint parties. In partnership, the order attaches the partnership account. It also attaches personal accounts of the partners. It attaches the account of anyone of the partners for the whole sum of the order because of the Principle of Joint and Several Liability.

  vii.        Money held in overseas branches of a bank is not attached. This is because such money is outside the jurisdiction of the court issuing the order. Money held in domiciliary accounts is however attached.

viii.        The order will attach cash paid in at other branches of the bank. This affect cash paid in before the order was served.

   ix.        Money held in a suspense account of a bank for the judgement debtor is attached.

    x.        Deposit account will be attached regardless of the maturity condition, submission of deposit receipt issued to the customer or any other notice requirements. This is because a garnishee order made absolutely cancels such receipt.

   xi.        The order must correctly identify the judgement creditor; if not, the bank will be entitled to ignore it as this can lead to a wrongful dishonour of a cheque drawn on an account that was not intended to be attached. The bank may also ignore corrections made on the order by a party other than the court.

  xii.        The order attaches money held on behalf of another party or on trust as much as the money is held to the credit of the customer (judgement debtor) and the customer (judgement debtor) can withdraw it. (Plunkett Vs Barclays bank Ltd. 1936). However, a trust account so attached can be protected if the beneficiary can prove his interest as in Harrods Ltd. Vs Tester (1937).

xiii.        If a bank confirmed a cheque good for payment if presented, but before the actual physical presentation of the cheque, a garnishee order is served, the paying bank cannot debit the cheque to the account. (Nigerian Bills of Exchange Act, 1990).

xiv.        When a bank issued its own instrument to pay a cheque that was specially presented to it before the receipt of the garnishee order, the amount of the cheque is deductible in calculating the balance to be attached even though not yet debited to the account.

  xv.        Money held in an account opened under a trading name is attached as much as the name attached is the sole owner of the business. This rule does not applied to incorporated companies.

xvi.        The order protects ascertained debts only. It gives no protection to contingent liability.

xvii.        Money which has been conclusively or irrevocably paid from the account will not be attached provided the payment/or transfer of such money has been completed as at the time of serving the order. It was decided in Rekstin Vs Sevro Sibirsko (1933) that a garnishee order revokes an instruction by a customer to transfer fund despite the completion of book entries as much as the transfer has not been informed.  

In conclusion, for an account that is in debit, nothing is attached and the bank must advise the court immediately.                                                   

Published in Ondo State Banker – Journal of the Chartered Institute of Bankers of Nigeria, Akure Branch. Vol 1 No1, October 2004 Pg 13)

Credit Risks Management, Loan Supervision and Bad Debts in Banking

In financial intermediation, when deposited funds are lent out to those who require them, there is an implication of risk taking.  A bank’s loan portfolio is the highest earning asset and at the same time, the most illiquid of bank assets. Lending portfolio is the most risky of bank’s operations. It involves the creation and management of risks assets. It is an important task of bank management. The implied risk in lending is that the repayment of the granted credits may not materialise as planned. As a result of this, the lending institution may be unable to honour withdrawal demands that may be made by the fund depositors. As expectations go far into the future and future events appear uncertain, if follows that the repayment schedules drawn into the future are mere predictions and are full of uncertainties. The uncertainty in the stream of returns from investments makes credit granting by banks a business of risks.

Risk, which could be dynamic or pure, is regarded as the measurable uncertainty identified when decisions are made, be it credit granting or not. Uncertainty is different from risk in that the occurrence and impact of uncertainty cannot be measured and therefore cannot be adequately taken care of in a decision making process. A dynamic risk occurs in a normal course of a bank customer’s business activities like swing in the business cycle, unexpected competition from producers of substitute products, technological changes in the mode of production and distribution, death of a major shareholder or owner, sudden demands for the borrower’s products without a compensatory payment for the products etc. A pure risk can arise as a result of natural disasters like war, fire outbreak, flood, robbery, arson, drought etc.  All these will cause the inability of the borrowing customer to generate the projected cash flow from which the repayment schedule could be met. Consequently, the lending bank will have accumulation of non-performing, doubtful and bad debts and therefore such bank will be unable to meet its statutory functions.   

Most dynamic risks in bank lending exist because of poor analysis of loan proposals. In banking, credit risk is the possibility that a bank borrowing customer will not or willing to fulfill his contractual obligations. Some of the credit risks arise from defaults on loan commitments, violations of written agreements terms, or the abuse of other accompanying conditions. We can view credit risk as an important risk faced by banks. The best way for a lending bank to handle or nip the bud of any credit risk that may arise is to do a pure or thorough loan appraisal before the credits are granted. A good banker must always note that credits are granted with the hope that repayment would follow the agreed terms without recourse to the realisation of the security on offer. Therefore for a bank’s credit risk to be minimised, the credit analyst must do his/her job thoroughly without sentiment or bias while the approval authorities should approve based on verifiable facts as presented by the credit analyst. It suffice to say that the higher the quality of loan management, the quality of loan, competence of loan officers and credit-worthiness of the customer, the less the credit risk.

Credit risk management is an everyday fact of life in banking. However, a lending banker should take the following steps in managing credit risks: (i) proper and articulate loan appraisal and analysis. At least this should follow the cannons of good bank lending (Purpose, Amount, Repayment, Term and Security) and the five C’s of lending (Capital, Capability, Character, Condition and Connection); (ii) proper documentation of all steps taken in the loan analysis and appraisal. This should indicate all factors considered and their likely impacts on the credit; (iii) drawing up the loan agreement and operating modalities for the approved credit. This should be for the knowledge of the customer and the use of the branch that holds the loan account; (iv) perfection of the securities offered by the borrowing customer. This should be carried out by the account holding branch and the relevant legal department of the bank, and should be carried out before loan drawdown is allowed; (v) monitoring of the operations of, and cash flow into the borrowing customer’s account. This becomes the duty of the account holding branch; (vi) disbursement according to the agreed disbursement schedule. Deviations in this respect should be brought to the knowledge of all parties concerned while remedial actions should be taken immediately.

Credit risks can be reduced in banking if banks can: (a) limit their loan and advances primarily to low-risk borrowers; (b) diversify their loan portfolios in order to ensure that credits are not highly susceptible to the failures of a particular industry/sector/segment of the economy. Overconcentration of credit is a sure invitation to unnecessary credit risk; (c) embark on geographical diversification; (d) strike a balance between the kind of assets and liability which they hold so as to ensure that they have sufficient liquidity to meet any likely future demands that could be made on the bank.

From observations and experience, once a borrower notices that his/her operations are not being closely monitored, he/she has every temptation and chances to divert the approved bank loan to other business or riskier activities which could come to nothing but something detrimental to the bank. These, coupled with political and economic environments which bring about uncertainties make it essential and necessary for the lending bank to continuously monitor the borrower’s use of the approved credit.

The management and administration of credits is a very complex matter in banking. This involves the formulation of lending policies and the establishment of loan operating procedures and credit manuals. To a banker, debt management refers to all processes and actions undertaken by a lender/creditor in order to ensure that repayment of loans and advances. A good banker should see the following objectives of debt management as useful and essential guide: (a) to reduce to the barest minimum, the problem loans and advances which are often referred to as non-performing accounts; (b) to keep the incidence of bad debts within tolerable level of total lending portfolio of a bank; (c) to maintain high quality of debt assets (loans and advances). In 1998, the following stages and procedures governing banks’ internal control of credit quality were formulated by the Committee on Banking Regulations and Supervisory Practices: (i) formulation of lending policies and ensuring compliance with the policies; (ii) credit assessment (control of authorisation of new lending); (iii) control of execution of lending (documentation, contracts and collateral); (iv) monitoring of performance of the borrower under the terms of the loan; (v) procedures for early identification of possible losses and for recovery; (vi) application of provision against possible losses.  

To achieve the objectives of debt management in banking, there must be in place, an effective surveillance which entails the twin processes of efficient supervision and monitoring at branch offices, area/regional offices and head office. Loan supervision and monitoring is a very vital function in bank lending. It is prudent for the lending banker to continuously assess the borrower’s use of the credit facility together with the performance of the business of the customer. This will prevent abrupt or sudden collapse. Most collapses show warning sign which only an alert banker could spot before things get worse. A variety of unexpected happenings could develop and the lending banker should be quick to spot these in order to take the necessary action. It is possible for the lending banker to salvage a customer’s deteriorating situation by timely advice and action. The popular saying in banking is that it is easier to revive a flagging account than a dead one.

A lending banker can take the following loan supervision and monitoring steps: (a) regular review of the periodic financial statements of the borrowing customer so as to reveal useful information about the performance of the business; (b) monitoring the compliance of the borrowing customer, with loan agreement; (c) continuous contact with the borrowing customer so as to derive information on the use of fund, the performance, problems and prospects; (d) monitoring the account of the borrowing customer at the branch in order to control the outflow of fund as well as payments into the account; (e) monitoring adherence to the disbursement schedule and other drawdown conditions

A consequence of diversion and misuse of borrowed fund by a borrowing customer is bad debt and bad debts are discovered be more difficult to manage. Virtually all businesses make bad debts. Banks cannot be excluded in this regard. In banking, a customer’s debt to the bank becomes bad when it is apparent that the customer would be unable to make further repayment of credit outstanding against him or her. No matter how well lending is secured at the outset, it can never be completely devoid of risks. Risks of non repayment and non performance are the greatest risks in bank lending. Total elimination of bad debt in banking is difficult but it is believed that it could still be managed to an appreciable level. Danger signal of bad debts are usually not lacking, though sometimes, they descend like sudden thunder. Apart from the instinct, the following points will serve as useful bad debt signal guide to a watchful banker: (i) excessive rigidity in the account (difficulty in obtaining cover for cheques, dwindling monthly swings, low or no turnover on the account); (ii) evidence of delay in payment of trade accounts; (iii) long delays in producing financial statements – particularly audited accounts; (iv) heavy borrowing from other sources; (v) inability to meet loan repayment instalments; (v) increase in number of cheques stopped at customer’s instance or returned for lack of fund; (vi) poor quality of current assets; (vii) failure to honour bank’s invitation to come for discussions, particularly if the customer used to make frequent calls at the bank in the past.

Bad debts in the books of banks could be traced to the outstanding list of risks assets (loans and advances) that are not serviceable by customers. However, bad debts in banks’ credit portfolio are attributed to: (a) poor analysis of lending proposals by the lending banker; (b) poor quality of financial accounts and statements prepared by quack bookkeepers/accountants; (c) insider abuses which include lending to officers and directors of banks without proper appraisals; (d) lending bank’s bad management of customers’ accounts and operations; (e) lending banker’s incomplete knowledge of the activities of the borrowing customer; (f) lending banker’s bad judgement of the lending proposition of the borrowing customer; (g) poor loan supervision and monitoring by the lending bank; (h) lending banker’s inadequate monitoring of the project involved; (i) dishonesty on the part of the borrowing customer; (j) excessive lending by the bank, on security value; (k) concentration of high volume of bank’s fund as credit in the hand of a single customer; (l) Insensitivity of the lending banker to political , economic and other environmental trends; (m) matters beyond the control of the borrowing customer (like fire, burglary, flood etc.); (n) frauds and forgeries; (o) unpaid interests, charges, commission on turnover, allowed by a liberal banker.      

The Prudential Guidelines of the Central Bank of Nigeria categorise banks’ credits into performing and non-performing. While the category of performing loan and advances contains credits which are active as regards loan servicing and repayments, the non-performing accounts represent credits which are possible loss of funds due to loan defaults Debts within the non-performing category are further classified into three categories: (i) Sub-standard loans and advances (repayment of principal and payment of interest outstanding for more than 90 day but less than 180days); (ii) Doubtful loans and advances (repayment of principal and payment of interest outstanding for more than 180 days but less than 360days, and are not well secured); (iii) Lost loans and advances (repayment of principal and payment of interest overdue for over 360 days). Lost accounts are regarded as bad debts. Banks are required under the guidelines, to make 10% provisions of the outstanding principal and interests on sub standard accounts, into a suspense account. Provisions for doubtful and lost accounts are 50% and 100% respectively.

It is important and therefore a good practice in banking for a lending bank to manage its credit risks effectively and embark on effective supervision and monitoring of its loan portfolio in order to avoid the incidence of bad debt that may cause the bank to start witnessing the beginning of the end of its banking business.

Presentation made at the Annual Conference of the Corporate Bankers’ Club of the Federal Polytechnic, Ado-Ekiti, Nigeria on 23 May, 2006.

MANAGING THE FINANCE OF SMALL AND MEDIUM ENTERPRISES FOR SELF RELIANCE: A BUDGETARY APPROACH

1.1   Introduction

The management of finances in any enterprises relates to the managerial activities of planning and controlling the enterprise’s financial resources. Most crucial decisions of an enterprise are those which relate to finance and this makes financial management a vital role in an organisation. Essentially, finance manager is concerned with the raising of funds and the allocation of funds. Since financial decisions are crucial for the survival of the enterprise, these major functions requires a proper planning with control if the financial management role within an organisation is to be meaningful to the overall organisation goals’ attainment.

It is widely recognised that an enterprise should be effectively and efficiently managed. Actually, managing implies coordination and control of the total efforts of an organization towards achieving the corporate objectives. Management can facilitate the process of managing by charting its course of action in advance. A systematic way of attaining effective and efficient performance of management is budgeting which is naturally part of management.

Budgeting should be of interest to finance managers since it assist in regulating flows of funds. To many people, budgeting can also be seen as profit planning. It is essential to state that general management beliefs in plans accompanied by control.

Specifically, budgetary control is required for all budgetary plans. This budgetary approach toward managing the finances of a firm is therefore necessary if the overall objectives are to be met in such organisation.

If the position stated above affects organisations and enterprises generally, this paper will look into how this budgetary approach could be used by small and medium enterprises in Nigeria in managing their finances towards self-reliance. From the point of view of the size and structure of those small and medium enterprises, the paper will focus on budget planning and budgetary control, budget construction, purposes, types, merit, demerits and problems of budgets as they may affect these small and medium scale enterprises’ financial management.

2.1   Descriptions of Medium and Small Enterprises (SMEs)

There had been so many definitions of what qualifies an enterprise to be a small or medium scale enterprise. Many definitions were made based on the number of employees, annual turnover, capital employed or a hybrid of the three.

The CBN (1981) in its Monetary Policy Guidelines defined a small-scale enterprise as one with an annual turnover not exceeding N500,000 (Five hundred thousand naira only). The former Nigerian Bank for Commerce and Industry (NBCI) upgraded the investment by small scale to N1million (including working capital, but excluding the cost of land). In the 1989 Industrial Policy of Nigeria, small-scale enterprises were described as those businesses with investment of between of N1million and N2million (excluding land but including working capital). According to Ozor (2007) there had been little agreement as to what really constitutes a small and medium sized businesses as each of the definitions were made in the light of economic circumstances prevailing in the environment where such definition were made.

Burns and Dewhurst (1989) quoted the 1871 Bolton Report, which described a small business as:

(a) One with a relatively small share of market; (b) managed by its owners in a personalised way and not through the medium of a formalised structure; (c) independent in the sense that it does not form part of a large enterprises and (d) one in which the owners/managers should be free from outside control in taking their decisions. In Nigeria, a current definition of small and medium enterprises was made by the Bankers’ Committee which sees small and medium enterprises as enterprises with a maximum asset base of N500million (excluding land and working capital), and with no lower or upper limit of staff.

According to Paoloni and Dermatine (1999), there had been increasing criticism of the quantitative approach to describing small and medium businesses while the use of more qualitative criteria are being advocated. One of the approaches is the focus on ownership or organisational structure, which is considered far more useful for analysis. However, the Small and Medium Enterprises Department of the World Bank sees small enterprises as those having up to 50 employees, and total assets/ sales of up to US$3million (about N390 million); and a medium enterprises as one having up to 300 employees and total assets/sales of up to US$15 million (about N1,950 million).

3.1   The Concept of Budget and Budgeting

The general overall objectives of an enterprise are agreed upon. After this, plans are drawn up for the organisation to direct its efforts and progress to toward meeting the ends specified in the objectives. Though, it is possible for some of these objectives to be expressed in terms other than in financial and accounting terms. Nonetheless, some of the corporate objectives (such as the attainment of a desired profit level or the attainment of a desired level of asset growth) can be expressed in financial terms. When monetary values are attached to a plan and the plan is expressed quantitatively, it is known as a budget. Anumaka (2007) defined budget as an approved financial and/ or quantitative statement of the proposed plan to be pursued during a defined period for the purpose of attaining a given objective. According to Pandey (1990), a budget is a comprehensive and coordinated plan, expressed in financial terms, for the operatives and resources of an enterprise for some specific period in the future.

Budgeting is periodic financial planning. In a simple sense, budgeting is seen by Wood and Sangster (1999) as the process of converting plans into budgets. Also, Pandey (1990) sees budgeting as the process of preparing and using budgets to achieve management objectives. Budgeting is part of the management process by which managers of small and medium enterprises can ensure that resources are obtained and used efficiently and effectively in the accomplishment of the organisational objectives.

A budget as the plan of an enterprise’s expectation in the future is prepared for various segment of the enterprise, but they are components of the master budget. The budget for a department, unit, or segment of an enterprise will not be of much significance unless it is a part of the master budget for the entire enterprises. A budget is always quantified in financial terms for operational purpose. It is also necessary to add time dimension to a budget since a budget can only be meaningful only when it is related to a specified period.

Budgeting will compel managers of finance in small and medium enterprises to plan in a comprehensive and coherent way. With budgeting, these managers will have an orderly way to proceed to attain goals and also provide a time schedule for future action toward producing measurable results.

Majorly, budget/budgeting is purposed to:

• state the goals of an enterprise in clear and formal terms so as to avoid confusion and to facilitate attainment;
• communicate the expectations (goals) to all concerned with the management of the enterprise so that they are understood supported and implemented;
• provide a detailed plan of action for reducing uncertainty and for proper direction of individual and group efforts to achieve goals;
• coordinate of the activities and efforts in such a way that the use of resources is maximised;
• provide the means of measuring and controlling performances of individuals and units and to supply information on the basis of which the necessary corrective action can be taken.

Lucey (1988) and Pandey (1990) list the following as conditions for successful budgeting in any organisation:

• The involvement and support of top management
• Clear cut definition of long term, corporate objectives within which the budget will operate
• A realistic organization structure with clearly defined responsibilities
• Genuine and full involvement of line managers in all aspects of the budgeting process. (This can include a staff development and education programme in the meaning and use of budgets)
• Regular revision of budgets and targets (if necessary)
• Administration of the budget in a flexible manner
• An appropriate accounting and information system

Although, small enterprises may not see the need for budgetary planning process to be formal in the sense that they may regard the process as an informal process consisting of ideas loosely agreed upon between owners, managers and employees (who may, in fact, be the same people). Except for the smallest organisation, budget plans tend toward a more formal basis as stressed above.

4.1    Budget Construction in Small and Medium Enterprises.

Many enterprises make plans.  Some of these organisations plan in a formal way while others make plans in an informal manner. In general terms, some medium enterprises have a comprehensive system of budgeting where they prepare budgets for all of their important operations.  On the other hand, the small enterprises and some medium enterprises do not have a comprehensive system of budgeting. They prepare budgets for a few of their operations. However, in spite of these, it is not inappropriate for small and medium enterprises to have comprehensive budgets in the form of a master budget that incorporates a complete package of component budget, which comprise of the operating budgets, the financial budget and capital budgets.

The construction of budget in small and medium enterprises will vary between enterprises depending on the size, type of product, type of market, technology, management choice, the degree of uncertainty faced by the enterprise, and many other factors. Anumaka (2007) while stating that all enterprises are unique and that each will produce budgets in an individual manner; gave the procedure that will apply in almost all budgeting situations. He cited the “review of the environment” and the “review of the enterprises” as prerequisites in the process of budgeting.

4.1.1      Review of the Environment

The review of the political and economic environment and conditions under which a small or medium enterprise operates during the period of budget is the first stage in the process of budgeting. At this stage, the small and medium entrepreneurs should consider the following pertinent questions:

·         Are there likelihood for markets to expand, decline or remain static?

·         Will new market open or old ones close?

·         Are customers likely to have increase or decrease in spending powers?

·         Are government policies (interest rates, credit restrictions, public sector spending) affect the enterprise?

·         What will the inflation rate be, in the short and medium term?

·         To what extent will price level changes affect costs, revenue and demand?

·         How will the development among competitors likely affect the enterprises?

·         What are the other features of the economy that will likely affect the enterprises during the budget period?

It may be difficult to provide convincing answers to these questions. But if the enterprise is poised to have a sensible detailed budget it must then provide good answers to the questions because the enterprise concerned will rest its expectations and challenges of the business in the period ahead on the answers. The review of the environment as enunciated above could be regarded as the review of opportunities and threats that are external to the enterprise.

4.1.2   Review of the Enterprise

This is simply an assessment of strengths and weaknesses opened to the enterprise. These will largely determine what the enterprise tackles in near future. This review is inward-looking as it overlaps with the environmental review, but identifies key problems and opportunities with the enterprise.

The first step in the review of the enterprises is the review of recent performance of the enterprises. To a large extent, recent performance review will determine the possible achievements in the approaching budget period. Under this review, Anumaka (2007) opines that it is necessary to ask the following questions in order to establish financial strengths and weaknesses of an enterprise:

• Is the enterprise in strong financial shape?
• Are there any liquidity difficulties?
• Are borrowings excessively high?
• Have recent profit levels been acceptable?

If the recent performance is strong, it may provide the basis for ambitious future budgetary plans, while recent problems like weak cash flow, low profits, will indicate that the budgetary plans have to be restricted to recovery and consolidation.

Apart from the above, the entrepreneurs in small and medium enterprises should identify other important opportunities and problems facing the entrepreneur. The entrepreneur should look at new market or product opportunities, use of improved technology, depressed markets, customer dissatisfaction, inefficient production facilities, shortage of key labour skills etc.

The principal budget factors (which are the major constraints that will operate in the enterprise during the period of the budget) will surface after the process of reviewing the environment and the enterprises. For many enterprises, this key budget factor may be (a) demand for product and service, or (b) finance or cash flows; and these will necessitate the detailed budget plans of sales, working capital, cash, profit and loss, balance sheet, capital expenditure and cash flow statements which are required in the management of finances of small and medium enterprises.

4.1.4   Sales Budget

            This is also called “revenue budget”.  It starts the entire budgetary process.  Since a vital principal budget factor for many enterprises is sales volume, sales budget is the primary budget form which the majority of other budgets are derived (Lucey 1988). Sales budget is the cornerstone for the preparation of other budgets.  Before the sales budget can be developed, it is necessary to make a sales forecast, which is the basis of the preparation of sales budget.  If the forecast is wrong, then the entire budgetary system will be wrong.

            Sales budgets will provide small and medium businesses an analysis of the sales revenue for the budget period, broken down as appropriate for the type and size of the business.  Normally, a sales budget will normally give details of volumes, selling prices and total revenue for the enterprises and these will assist such enterprise to manage its finances.

4.1.5   Capital Budget

            The budget of capital expenditure is also a critical budget statement along with the sales budget.  Capital budget involves the planning to acquire fixed assets such as machinery, building, vehicle computer etc, together with the timings of the estimated cost and cash flow of the entrepreneur.  Capital expenditures requires large sum of funds and have long-term implications for an enterprise.  It is difficult to prepare capital budgets because estimates of the cash flows over a long period of time have to be made and these involve a great degree of uncertainty.

            In capital budgeting, various techniques can be used to determine the profitability of such project.  The techniques used should be objective and free from personal bias of the entrepreneur.

            Capital budgets and sales budgets will be closely related, for customers, the sales potential of a medium size rice seller will, in part depend on the ability of the entrepreneur to buy and develop new outlets through this budgetary planning of its finances.

4.1.6   Production Budget

            This stems from the sales budget.  It is based on sales forecasts.  To prepare the production budget, the sales forcasts for each product are combined with information about the beginning level and the expected level of closing stock of finished goods.

4.1.7   Cost Budget

            Detailed cost budgets could be prepared for an enterprise after preparing sales and capital budgets.  This will encompass the enterprise’s unit production, sales, design, administration, finances etc.  Cost budgeting looks into variable cost (where the cost per unit is subject to changes at all levels of output), and fixed costs (like rent costs, administrative costs, salaries, depreciation) which will remain unchanged despite large changes to output levels.  It is appropriate to analyse these costs monthly in order to show anticipated increases or reductions.

            There could be adjustments to cost budgets to match actual levels of activity.  This is called flexible budgeting.

4.1.8   Working Capital Budget

            Whenever a small or medium enterprise constructs its sales, capital and cost budgets, there will be the need to make decisions that will affect the working capital and the sources of finance of such enterprise. For instance, a sales budget to extend sales to new and untried market will have effect on the level of debtors.  Also, plan to build new outlets in expansion may require additional borrowing facilities for the enterprise.

            For small and medium size enterprises, working capital budgeting should consider:

·         the value of those components of the working capital (stock, debtors, creditors, cash) that will be tied up in working capital during and at the end of the budget period;

·         the likely changes in the value of these components;

·         the evaluation of major finance needs of the enterprises;

·         or the issue of repayment of debts;

·         the credit periods received and given (in respect of creditors and debtors respectively), and stock policies;

·         any plans to raise new funds;

·         evaluation of profit to the entrepreneur.

           

4.1.9   Cash Budget

            First and foremost, when we talk about cash in budgets, cash includes bank funds.  When undertaking a cash budget, “cash” includes both money held in the form of cash and amounts held in the bank.  Therefore, there should not be differentiation between cash and cheque payments and receipts. It is meaningless to budget for sales, capital expenditure, production and so on, if during the budget period, the enterprises runs out of cash funds.  Therefore, cash should be budgeted for in order to know the situation of fund in advance and the action to be taken.  Lucey (1988) indicated that cash budgets are prepared in order to ensure that there will be sufficient cash in hand to cope adequately with budgeted activities.  Pandey (1990) in his words states that major objective of a cash budget is to plan cash in such a way an enterprises always maintain sufficient cash balance to meet its needs and uses the idle cash in the most profitable manner. The cash budget will show the effect of all other budgeted activities on the cash flow of an enterprise.

The cash budget, gives an entrepreneur a clear view of the timing of both the cash receipt and disbursement expected over a given period.  Cash budget allows the entrepreneur to anticipate shortages or excesses of cash in future so that proper action can be planned before such situation become facts accomplished.  If the entrepreneur identifies future shortages, the cash budget allows the entrepreneur to seek additional funds from bank and other sources ion advance of the need for funds.  On the other hand, the entrepreneur can identify future cash excesses for investment opportunities that can be explored in terms of rate of returns and security to the enterprises.  The summary is that a cash budget can reveal:

• if an enterprises will need finance;
• how much finance the enterprises will need and;
• when such finance will be needed.

It is important to state that cash budgeting is a continuous activity with budgets being rolled forward as time progress.

If it is important to keep cash balance at optimum level since too little cash endangers the liquidity of an enterprise and too much cash will impair profitability, it is therefore suffice to state that cash budgeting is a central point of activity which small and medium enterprises can be explored in managing their finances towards self reliance.

            As stressed by Wood and Songster (1999), cash budgeting will therefore offer the following advantage is to a small and medium size enterprise in the management of its finances:

(a)       Having to think ahead and plan for the future and express plans in figure focuses one’s mind in a way and in a general fashion about the future.  A general optimistic feeling that “all will be well” will often not stand up to scrutiny when the views of the future are expressed in a cash budget.

(b)       Seeing that money will have to be borrowed at a particular date will mean that an enterprise can negotiate for a loan in advance, rather that at the time when it has actually run out of cash

(c)        Knowing about the need to borrow in advance also widens the possible pool of lenders.  Such people like friends, relations, businessmen, and investors other than bankers rarely have large sums of cash available.  They need time to turn their own investment into cash before cash could be lent to the enterprise.

(d) Alternatively, the entrepreneur may find out that the enterprise cash funds surplus in relation to what it required.  Knowing this in advance will enable the entrepreneur to investigate properly how the surplus cash could be invested until required; these earn interest and the investment income.

Typically, cash budget has the general form as shown below:

Cash Budget

	Period 1	Period 2	Period 3	etc
Opening cash balance b/f (plus) receipt from debtors (plus) sales of capital items (plus) any loan received (plus) any other cash receipt	XXX	YYY	ZZZ	AAA
Total cash available (minus) payments to creditors (minus) cash purchases (minus) wages and salaries (minus) loan repayments (minus) capital expenditure ( minus) tax ( minus) any other cash payments
Closing cash balance c/f	YYY	ZZZ	AAA	BBB

It could be seen that cash budgeting is a continuous activity with budgets being rolled forward as time progress.

If due consideration are given to all the above issues, there will then be the possibility of preparing the master budget.

4.1.9    Master Budgets

            A master budget is a budgeted set of final account (Wood and Sangster (1999).  In essence, master budgets include profit and loss budget, balance sheet budgets and budgeted cash flow statement. What is summarised in the master budgets are the information from the detailed budgets.  It is possible that when all the detailed budgets have been co-ordinated, the master budget shows a small level of profit which may be unacceptable to the entrepreneur.  These may then bring about the need to recast the budgets to see whether the enterprises can earn greater profit and if possible at all, the budgets can be altered.  Eventually, there will be a master budget which the entrepreneur will agree to and which will in turn, give the targets for the results that the enterprises hopes to achieve in financial term.  Lucey, (1988) described the master budget to be a consolidation of all the supporting budgets which represents the financial effects of the total plan for a business as a whole.

            The profit and loss budget is a forward looking income statement. Its purpose is to project the final profit which serves as the goal toward which all efforts and financial plans are directed.  The balance sheet budget projects the financial position by indicating the status of liabilities, assets and proprietor’s funds at the end of the budget period.  The budget cash flow statement shows the major sources of cash and how that cash would be used.  It shows the total anticipated change to cash and cash equivalents during the budget period Apart from the above benefits of cash budgeting; the general benefits of budgeting to small and medium enterprises could that it:

• compels an enterprise to plan for future;
• helps to coordinate, integrate and balance the efforts of the enterprises in the light of the enterprises overall by objectives;
• facilitates control;
• the quality of communication;
• increases the moral and productivity with the enterprises;
• develops an atmosphere of profit-mindedness and cost consciousness;
• permits to focus entrepreneur attention on significant matters through budgetary reports;
• measures efficiency, permit entrepreneur self-evaluation and indicate the progress in attaining the enterprises objectives.

5.1   Budgetary Control

A budgetary plan cannot carry out itself by the mere fact that it set down on paper.  Control could be exercised through the budget. This could be done by linking the responsibility of an entrepreneur with budgets.  This guide and help an entrepreneur to produce certain desired results, and the actual achieved results can be compared against the expected which is the budget.

            Budgetary control therefore involves the process of comparing actual result with plan or budget, and reporting the variations.  The budgetary control provides some of the feedback necessary to be able to make corrections to current operations and activities in orders to meet the original objectives and plans and some of the feedback upon which alterations to the plans are made, if necessary (Lucey 1988).  Small and medium scale enterprises therefore require a system of budgetary control in order to monitor progress and highlight variances or deviations from budgetary plans.

6.1   Limitations of Budgeting and Budgetary Control

            Apart from the specific merits of budgeting in the management of finances, as discussed above, a small or medium enterprise can encounter the following limitations in the process of budgeting.

(a)       The need to seek support cooperation and involvement of all within the enterprises;

(b)       The need to use human judgment, preparation, interpretation and implementation;

(c)        Inability to develop meaningful forecasts and plans

(d)       Expenditure of a lot of time on budgeting and budgetary control by the entrepreneur.

(e)       Difficulty in establishing realistic objectives, policies, procedures and standards of desired performance.

(f)         The need to educate individuals that would be involved in the process of budgeting.

7.1   Conclusions

            It has been stressed that budget relates estimation of projectional inflows and outflow of any organisation.  It is required so as to draw plans to be achieved by the organisation at the specified period of time.  A well prepared budget will force action within an organisation and also enable easy control of all resources required to carry out all activities within a business organisation.  Cash budgeting and projected statement of sources and application of fund (fund flow statement) are central in the management of the finance of any business organisation and this applies to small and medium scale enterprises.  Actually, the process has served to qualify all of the factors that are likely to affect the financial performance of small and medium enterprises during the period of budget.

8.1   Recommendations

            Given all that was highlighted in this paper, with particular emphasis on budgetary planning and budgetary control as financial management tools and as tools for managing the finances in small and medium scale enterprises, it is therefore necessary to recommend that small and medium enterprises in Nigeria, while considering the process, problems and benefit of budgetary planning and budgetary control, should embrace this budgetary approach in managing their financial toward self reliance.

           

                                               

           

References

Anumaka, N. M. (2007): Budgeting Business Organisations. The Nigerian Banker, October- December 2007, Pg 18-28. Lagos: CIBN

Burns, P and Dewhurst J (1989): Small Business and Entrepreneurship. London: Macmillan Publishing

Central Bank of Nigeria (1981): Monetary Policy Guidelines. Lagos: The Central bank of Nigeria

Lucey T (1988): Management Accounting. London: DP Publication Limited.

Ozor B. M. (2007): The Impact of Deregulation on Accounting for Small and Medium Scale Enterprises: A Review of Related Literature. The Nigerian Banker, July – September,       2007 Pg 15-22.Lagos: CIBN

Pandey, I.M. (1990): Financial Management. New Delhi: Vikas Publishing House PVT

Paoloni M. and Demartine, P., (1999):  Harmonisaing Small Business Financial Reporting in Europe: A Missed Opportunity. Quardeni di Economia Aziendale (Working Papers), Italy Uribino University.

Taiwo, O (1992): The Impact of the Second-Tier Security Market (SSM) on Indigenous Business in Nigeria. NISER Monograph, Series No 4. Ibadan: NISER

Wood F and Sangster A. (1999): Business Account 2. Harlow, England: Pearson Education Limited

A paper presented at the 3^rd National Conference of the School of Business Studies, the Federal Polytechnic Ado Ekiti, Nigeria.