BUDGET AND BUDGETARY CONTROL

Budgeting

A budget is an estimate of income and expenditure for an immediate future period. in co-operative societies, a budget is normally prepared to cover one financial year. there are two types of budgets. They are:

•   the operational budget which shows the income and expenditure of the daily business
operations of the society.

•   the cash budget which shows how money will be raised and how it will be used to finance the items which are not expenses.

Does running out of money count as exercise? :-)

The Annual Operational Budget

This budget is prepared according to the activities that the society is dealing in. The core activity in SACCOs is savings and credit.  The core activity is the activity that the society was established to handle.  It has got direct dealings with members.

Secondary activities are those that are established, normally later, to support the main activity and to offer more services to members.

STEPS

•   The society should have decided on what activity or activities it wants to handle during the year.

•   Always start by budgeting for the expected income. income is the money that the society  earns from its operations.  It includes; interest from loans to members, sale of stationery, interest from bank, any fines etc.

•   The budget for expected expenditure.   this is the money that the society will pay out for expenses in the course of its operations.  the items of the expense may include; purchase of stationery, office rent, salaries, sitting allowance, bank charges, interest on borrowed money, education and training, travel and subsistence, audit fees etc.

•   The expected income should be more than the budgeted expenditure. this is to avoid the society operating at a loss. the excess of income over expenditure will be the surplus/profit for the year.

•   Budgeted figures should be as realistic as possible and income should not be inflated in
order to justify expenses.

•   Past performance and any future expectations will assist to arrive at more realistic budget figures.

•   The annual figures should be broken down into quarterly figures. This will later assist the management in comparing budgeted amounts with actuals. But income and expenditure can vary according to the trend of operations during the year.

•   When expected income is less than expenditure, expenses should be reduced accordingly. Never budget for a loss in income generating activity.

The Cash Budget

A cash budget shows how the society intends to get finance and how it will use the funds mainly for capital items and other cash outflows.

The source of funds in SACCOs will include; entrance fees, members shares and savings, repayment of members loans, disposal of assets, sales of investments, external borrowings etc.

The application/uses of funds will include; issuing loans to members, refund of shares, acquiring fixed assets, investments, repayment of external loans.

STEPS

While pre-preparing the cash budget, the society should have decided and identified, probably from its long term plans, what developments and other cash outflows will fall within the year.   it should also list down the liabilities that will be repaid during the year.

Budgeting for Cash/Sources of Funds

•   Start by getting the figure for the cash that will be available both in hand and bank at the start of the year.

•   Get the figure for any surplus expected from the previous year and which will be available at the start of the year.

•   Get provision for depreciation during the year as part of the funds that will be available.

•   Get all other monies that you expect to flow in during the year, including loan repayments from members, members’ savings contributions/shares, entrance fees and any borrowed funds.

•   The total of all these will be the funds/cash available.

Budgeting for Cash Outflows/Uses of Funds

•   Get the money that will be used to pay loans and to settle other liabilities

•   Indicate the amount you intend to lend to members

•   Indicate the money that will be used to refund members who are withdrawing membership

•   Indicate the money that will be used for investments

•   Budget for any dividends related to the year and that will be paid to members

•   The total will be cash needed during the year

•   the figure for cash available should be higher than the cash needed

•   the annual figures for cash budget should be broken into quarters to show what will be
available and what will be used during each quarter

OTHER IMPORTANT STEPS

After the committee is satisfied that the budget is exhaustive and proper, it should be presented to the members in a general meeting for their approval before use.

After approval by the general meeting, the final draft should be typed and enough copies produced for distribution to relevant offices. the society copy should be filed for use in budgetary control.

The budget should be signed by the officials authorized to sign documents on behalf of the society.

It is the duty of the committee to ensure that the society budget has been prepared and approved by members in a general meeting at least three months before the start of the year in which it is going to be used.

Budgetary Control

This involves comparing budgeted amounts with actuals and noting the differences.    the differences can be either favorable or unfavorable.

When actual income is more than what was budgeted for, the difference is favorable. the society is doing well. But when actual income is less than budgeted, then the society has not achieved its expected target.

When actual expenditure on any item is more than what was budgeted for, then the difference is unfavorable.   But when the actual expenditure is less, the difference is favorable. the society has been able to save money on that item.

Budget figures are found in the society’s annual operational budget prepared for that year.  Actual figures are found in the society’s trial balance prepared from the books of accounts. the trial balance shows the actual income and expenditure of the society on each item as at a particular period from the start of the financial year.

Comparison between the actual and the budgeted figures and noting the differences is called variance analysis.  Management should get reasons for the unfavorable differences on every item of income and expenditures.

The analysis of differences above and the reasons for the unfavorable ones is then presented and discussed in the society management committee meeting.  this is in form of an economic report.

The management committee should then discuss the report and make decisions on how the negative situations will be addressed and turned to positive conditions.

EXCERPT FROM: Savings and Credit Co-operative Societies; Start-up Kit (by Swiss Contact and Department of Co-operatives)

COMPLIANCE ISSUES AS PER THE ACT AND RULES-SACCOS

The latest revised Act and the new Rules of November 2004 have introduced amendments and provisions which should be complied with by all co-operative societies. The compliance issues that affect societies include:-

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  I LOVE BEING COMPLIANT

• every co-operative society shall hold its annual general meeting within four months after close of its financial year (by 30th April for Sacco Societies)
• every co-operative society shall present to members its audited accounts and balance sheet for each year within four months after close of financial year. The audited accounts shall be displayed in a conspicuous place for members to read at least two weeks before they are presented to members in a general meeting.
• the audited accounts and balance sheet shall be presented to the Commissioner for registration before they are presented to members in a general meeting
• borrowing powers shall be fixed by members in a general meeting subject to approval by the Commissioner.
• every co-operative society with employees shall have terms and conditions of service for staff. The terms and conditions shall be approved by the commissioner.
• the manager shall be a counter signatory to all documents and contract of the society.
• all society committee shall file an indemnity-Form V of the Co-operative Societies Act shall be signed by the management committee members agreeing to uphold the values of accountability, honesty and transparency in dealing with the affairs and resources of the society and accepting liabilities arising from lack of upholding such values. This is done within fourteen days after being elected, and if they do not, they will automatically lose their positions. The indemnity figure shall be fixed by members in a general meeting.
• all committee members shall fill wealth declaration forms within thirty days after elections, and if they do not, they automatically lose their positions.
• supervisory committee should write periodic reports (quarterly) and table their findings at management committee meetings. It shall also submit its reports to the commissioner present the report to the general meeting.
• committee members shall be elected for three years, subject to one third retiring annually but being eligible for re-election.
• every society shall have members funds separated into shares and deposits.
• every society shall maintain a reserve fund where one fifth of the net surplus in any years shall be credited. An account should be maintained for the fund.
• no co-operative society shall invest its funds in non-core business except with the approval of the Commissioner and the general meeting through a special resolution.
• estimates of income and expenditure shall be prepared and presented to members for approval in a general meeting at least three months before the end of the preceding year.
• every member of a co-operative society shall appoint a nominee or nominees, who shall inherit his/her shares or interest in the society upon his death.

EXCERPT FROM: Savings and Credit Co-operative Societies Act; Start-up Kit (Swiss contact Co-operatives Department)

OBLIGATION OF CO-OPERATIVE MOVEMENT

1)    To observe and operate within provisions of the Co-operative Societies Act, Rules, Society By-law and the various policy documents.

2)    Operate within the budget, and avail the Trial Balances and Economic reports to the respective Government offices.

3)    To provide efficient, timely and quality services to their members.

4)    The members have obligation to elect leaders who are transparent and accountable.

5)    Committee have obligation of providing minutes of Management, Special and Annual General Meetings to the Sub-County Co-operative Officer at all times.

6)    The committees have an obligation to invite the Co-operative Officers to all their meetings.

7)    The society has an obligation to provide accurate, timely and up to date information to the Sub-County Co-operative Officer.

8)    The society has an obligation to pay audit and supervision fee to the Ministry of Industrialization and Enterprise Development Department of Co-operative Development and Marketing.