Economics / 2. Finance and Banking
Sedep Mirzhakypova, d.e.s., professor
Turar Ryskulov Kazakh University of
Economics, Republic of Kazakhstan
Aspects of the
budgeting system in Kazakhstan commercial banks
Bank management in a market economy against the
background of the qualitative development of banking technologies, the
emergence of new bank products and high competition in the banking market
requires not only professionalism, but also the availability of effective
methodological tools of work.
The main content of a new stage of banking
sector development, in accordance with the Decree of the President of the
Republic of Kazakhstan dated by February 1, 2010 ¹ 923 "Concept of the
financial sector of the Republic of Kazakhstan in the post-crisis period",
should be improving the quality of banking activities, including the expansion
of the banking products and services, their quality growth and improved ways of
providing, enhancing of long-term performance and stability of the banking
business. The concept focuses on the extensive use of information technology,
further competition growth, transparency and market discipline in the banking
sector, the long-term results and more rationale business practices, the
effective management systems development, including risk management.
One of the main ways of management tasks
solving, achieving of sustainable and profitable bank operation is system of
budgeting. In the latter days, top-managers of a great deal of commercial banks
have to cope with the issues of budgeting because due to declining incomes and
rising risks of banking operations, it becomes difficult to maintain business
efficiency at a given level and use of bank budgeting in business processes
provides additional competitive advantage, reduces costs and improves bank`s
efficiency.
It should be noted that budgeting in management
accounting is a kind of an independent tool, which helps to increase bank
efficiency with sufficient income and reliability. In our opinion, budgeting is
a system of bank management by means of activity planning of all the bank
divisions, through budgeting and monitoring of their performance, record
keeping and analysis of deviations from the plan (standards).
According to Chausov (2003: 16) "the task
of budgeting beneath our very eyes
is being transformed from an insignificantly demanded management technology
into an urgent need for organization of the effective operation of the credit
institution. Planning and accounting procedures are not only applied to
business operations of the bank now, but to the whole range of bank operations.
In order to ensure more effective functioning
of the bank at its sufficient
reliability, budgeting system must meet the following requirements:
- interaction between units in relation to
reallocation of bank resources;
- provision of connection between bank`s
strategy and operational management;
- use of management accounting data bank for
budgeting;
- ability to analyze the effectiveness of
management different levels, as well as lines of business, customers,
distribution channels and financial structure;
- optimal combination
of budgeting with information systems
of the bank;
- effective risk
management system.
Budget system allows executives to assess in
advance the effectiveness of the management decisions, allocate resources in
business areas optimally, outline bank development ways, reduce risks and avoid
crises.
Of special note are the existing differences
in the interpretation
of the term "budget". One
thing is to organize budget
management, based on planning of economic
costs estimates and bank’s budgets of
income and expenses. But quite another thing is a comprehensive budget that not only includes budgeting of income and expenses, but also assets and liabilities of the
bank.
Despite the fact
that the term "budget"
derives from the French word «bougett»,
which means a "leather
bag", it was originally used
in England beginning from
1870 as a title
of document comprising
a Parliament approved
plan of state`s revenues
and expenditures (Balabanov 2000:
184 – 185),
with respect to an individual economic agent
'budget' is
considered as accounting method, which allows to
compare actual results with
targets, also
as an effective tool for
decision-making, through which enterprise top-managers
provide the
most rational use of
the property owners.
According to the Chartered Institute
of Governors of
Management Accountants (U.S.),
budget is "quantitative in
terms of money plan, prepared
and adopted prior
to a certain period,
usually showing
the planned amount
of income that must
be achieved, costs which must
be reduced during this
period, and capital, which
should be involved in
order to achieve this
goal" (Sheremet 2000: 43-44).
A major issue
in the implementation of
management accounting and
budgeting is to determine the
depth of
management tools. It
is one thing to
plan bank activities as a whole,
and quite another to
budget centers
of financial responsibility. With
the shift to a deeper level of
specification not only
the amount of budget
forms, but also the number of procedures
increases.
Introduction and development
of budgeting is
always a difficult task for banks as it forces all
staff to mobilize, alter
the well-established management tradition,
makes the heads of all departments
to think in
a new way.
Budgeting system will function effectively if the bank holds the
following principles of budget planning:
- bank planning system should be attached to the existing system of
financial responsibility centers and controlling;
- adjustment process in the planning system must comply with changes in
the organizational and financial structures and bank management systems;
- planning system should include a motivation system for senior managers
and the bank staff ;
- it is necessary to clearly define the rights, managers duties and
responsibilities of bank business centres;
- calculation of the target values of the budget should be
based on initial situation analysis, achievements, strengths and weaknesses of
bank business units, considering identified reserves of revenue increase, costs
reduction and risks minimization;
- it is important to plan all the necessary measures to compensate for
losses in the risk event;
- plans should be
optimized with regard to the
interests of shareholders, as
well as the economic and investment
criteria;
- the financial activities of the bank should be outlined , that
mathematical modeling techniques could be applied for planning problems
solutions.
Banks should involve as much experts as possible in the budgeting
process. This is due to the fact that the planning function is closely
connected to the other functions of management, especially with of the bank
personnel motivation. The results of the bank's plans realization largely depend on
wages.
The entire procedure of budgeting should be organized in a manner,
allowing obtaining at last stage of the bank's management three main budget
forms as follows:
- revenues and expenditures budget, helping to manage operation
efficiency;
- cash flow budget designed to manage liquidity;
- forecast balance needed to control the value of the assets of bank.
Some banks consider that preparation of only income and expenses or cash
flow budget is enough. However, for the effective planning of bank activity at
the output it is advisable to obtain all three budget forms. Banks economic
efficacy is measured by the revenues and expenditures budget, in cash flow
budget funds flows are planned directly, and forecast balance sheet reflects
the economic potential and the bank financial condition.
It should be noted that budgeting is a part of the administrative
accounting as well as a range of organizational tasks on bank's management.
Budgeting begins from the construction of the financial structure, where
accounting centers are defined (cost centers, profit centers). Budgeting
efficiency largely depends on how the responsibilities between the company`s
divisions are distributed. The composition and the structure of the accounting
centers determine bank`s financial structure, which, as a rule, does not coincide
with its organizational structure.
Vigdorovich (n.d.) points out that an important distinction
between the profit centres and cost
centres is the fact that profit
centres’ revenue part of the income
statement is formed from the"
external" revenues from customers, whereas in the cost centre revenues can be generated solely by"
internal "revenue services provided at the expense of other departments
service.
Afterwards, composition of direct, indirect costs and revenues from
core business activities are determined. Allocation of direct and indirect
costs, fixed and variable income and expenses is an important element of
budgeting technology. The result is a group of items of income and expense,
determined not by the planning and control objectives, but by the implication
of similar technologies of accounting and planning. If necessary, a system of
internal (transfer) pricing is introduced.
Further, a budget plan is developed, indirect
costs posting and income
assignment algorithms on bank business units are approved. The budget plan must include both items of income and expenditure, which are part of the management accounting. Composition of budget plan items reflects management's view on what performance
of bank should be planned and controlled. Usually the basis for developing
the budget plan in banks is reporting form number 2, containing a wide range of items of income and expenses.
Eventually, the development of financial plan is the final stage
of budget planning. During the development of the financial plan the
aggregation of the budget values lines with similar financial
instruments within the planned budget period is conducted. The financial plan,
in its turn is a source of information for work on financial management, as it
contains the information about the funds movement in terms of financial
instruments, and not in the context of revenue and expenditure.
Describing the nature of the budgeting system, Konyaev (2009: 37-41)
notes that the budgeting system of a commercial bank can be viewed from two
perspectives. First, from a functional position, it is a set of budget
relations, forms and methods of budgeting. Second, in institutional terms, it
is a collection of financial responsibility centers, conducting
financial activities.
Therefore, budgeting is a process of resource planning and plans implementation control, based on the bank budget designed for optimal distribution of
available resources in a period of time by business lines. The introduction of
budgeting systems is a complicated and time consuming process, however properly
organized management provides bank boards with the necessary objective
information on bank activities and allows making on its bases optimal
management decisions.
literature
Balabanov,
I. (2000) Financial Analyses and Panning in Economic Entity, Moscow:
Financial Analyses and Planning.
Chausov,
V. (2003) Technology of introduction
of financial planning and budgeting in commercial bank, in `Banks and
Technologies`, No.4, 16-20.
Konyaev,
A. (2009) The organization of the budgeting
system in commercial banks, in `Money
and Credit`, No.10, 37-41.
Sheremet,
A. (2000) Managerial Accounting, Moscow: FBC-Press.
Vigdorovich, M.
(n.d.) Aspects of modern budgeting in the bank, online access at http://www.iteam.ru/index.htm (accessed 06.04.2013).