CHAPTER
ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Every business firm normally will
like to know how it performed over a period of times, thus leading to the
preparation of profit and loss statement. They also ask about their position at
a particular point in time which leads them to prepare balance sheet. Finally,
they will like to know where they are heading, which has led to the preparation
of budgets.
Budget is term used locally by a
lay man. Lay man confuses budgeting with planning. A budget is part of a plan.
A plan can be expressed in monetary and non-monetary term. Any plan that is
qualified in monetary term is a budget. A budget, therefore, can be succulently
defined as a statement of intention qualified in monetary term.
In budgeting there are types of
budget prepared by firms. Such budget includes capital budgets, cash budgets,
sales budget and so on.
The process of preparing capital
budget is called capital budgeting. Capital budgets are long term budgets made
for acquisition and expansion of fixed assets. Capital budgets are prepared by
many firms today. It was originated in the United States of America (USA). In
America it was applied by firms before the Second World War.
After the Second World War many
firms saw the need to plan for capital expenditure, hence it is prevalence
today. Nigerian breweries limited,
Monarch larger beer and other beverages, are not left out in the train of firms
which prepare budgets for its capital expenditure. This is, however, not easy
as it is fraught with a lot of problems.
1.2
STATEMENT OF THE PROBLEMS
The main purpose of setting up a
private firm is to achieve enough sales revenue that will cover fixed and
variable costs as well as leave out enough profit to justify its existence. Brewers
all over Nigeria witness heavy returns on their investments due to export of
their products to neighboring African countries as well as the high consumption
rate of beer in the country. This was before the year 2003.
Ø
The
uncertainty surrounding the continuance and rate of which demand for beer
decrease has become one of the problems encountered in capital budgeting,
especially by Nigerian breweries limited.
Ø
The
problem of tariff or import restrictions on the importation of fixed assets and
spare parts. This singular problem has helped in no small measure in fuelling
the amber of problems encountered by these firms.
Ø
Also,
human encounters problem in the organization which is a function of the state
of mind of the individual in charge of the capital budgeting.
Ø
Due
to the dynamic nature of the economy and consequent effect on interest rate, it
is a problem making cost benefit analysis necessary in capital budgeting.
Ø
There
is problem of obtaining foreign exchange necessary to remit to exporters
exchange rates are never stable. The uncertainty include in this makes it a
problem in capital budgeting.
In view of the above problems the
researcher intends to
1.3 OBJECTIVES OF THE STUDY
The
objectives of this study were to find out the following:-
a)
Factors
responsible for the demand for beer and the effect demand has on capital
budgeting, other operations of the company and its existence.
b)
The
capital budgeting process in Nigerian breweries limited
c)
Why
external sources of finance is used instead of floating stock of shares given
its financial constraints and high interest rate on external financing.
d)
Ways
in which purchased capital assets are paid for (example, through letters of
credit, documentary bills for collection, open transfers etc).
e)
The
effects delaying arrival of ordered assets or pays for them have on the
production of beer.
f)
The
effects over or under – investment have on the firm.
g)
How
they forecast sales or demand given its fluctuation as a result of general rise
in prices.
In connection with the above
objectives was the necessity to formulate hypothesis.
1.4 RESEARCH HYPOTHESIS
The following hypotheses were
formulated with respect to this study (Ho) is the Null hypothesis while (Hi) is
alternative hypothesis.
i. Ho: Change in demand has no effect on capital budgeting of
Nigerian Breweries Limited
H1:
Change in demand has effect on capital budgeting of Nigerian Breweries limited.
ii. Ho: It is not true that the method of company used in paying
for capital assets are letter of credit and documentary bill for collection of imported
plants and machinery.
H1:
It is true that the method of company used in paying for capital assets are
letter of credit and documentary bill for collection of imported plants and
machinery.
iii. Ho: Capital which should have been invested in profit yielding
ventures are not suppose to tied up in fixed assets when over investment is
made on them.
H1:
Capital which should have been invested in profit yielding ventures are often
tied up in fixed assets when over investment is made on them.
1.5 SIGNIFICANCE OF STUDY
The significance of this study is
that, in most cases and situations the success or failure of any organization
depends largely upon their capital budgeting, thus Nigerian Brewery limited
Kaduna is not left out.
The study will highlight the
urgent need to evolve a new approach in the capital budgeting in private organizations
such as to come out with comprehensive result that will benefit the management
of Nigerian Breweries Limited, private companies and other bodies in the
country.
v The study will enlighten readers on the viability of
capital budgeting as an important aspect of strategic decision involving
financial management, efficiency and effectiveness of activities.
v The study still motivates management in private
sector to consider adopting capital budgeting for asset expansion in that, it
involve a substantial outlay of funds. This makes it necessary for a firm to
plan how to raise the needed funds as they are not always automatically
available.
v The study will encourage management to take interest in the work of their capital
budgeting so as to assign to them adequate independence to do their work and
above all, to always endeavour to note accountants’ observation and implement
the recommendations that usually go with them whenever it is been made.
v This study will be beneficial to other private firms
in such a way that, when they pick this research work and apply the techniques
to their businesses.
1.6 SCOPE OF THE STUDY
This study is determined on management
of Private Sector budgeting by using the capital budget of the Nigerian Brewery
limited Kaduna, using the information collected from Accounting department
of the company which will be evaluated,
analyzed and interpreted to answer part of the research questions. In addition,
the study is to find out the capital Budgeting in a private sector of Nigerian
breweries, how breweries in Nigeria prepare their capital budgets, and find out
the effort being made to address the problems of capital budgeting in the
breweries.
1.7 HISTORICAL BACKGROUND OF THE CASE STUDY
First bottle of star lager beer
rolls off the bottling line in June, 1949, 1951 Nigerian breweries introduces
the catoon character, ‘Sammy Sparkle’ then work commences on the Aba Brewery in
May, 1955. The first bottle of Star lager rolls off the Aba plant in May, 1957,
the Nigerian brewery limited becomes Nigerian breweries limited. Expansion work
on Lagos Brewery is completed in the year 1960.
Nigerian Breweries voluntarily
offers 10 per cent of its shares to Nigerian in the year 1962 then obtains a
franchise from Scheppes International to bottle its wide range of products;
which lead to the commission of Kaduna brewery in 1964. It also enters into a
franchise agreement with Heineken and Co. to brew the Heineken lager locally in
Nigeria in the year 1965, another franchise was obtained from L. Rose and Co.
Limited to produce a range of squash drinks in Nigeria. The company registered
the sales of Green Sands Shandy in 1981, in 1982 Ibadan brewery was
commissioned. Nigerian breweries also enters into an agreement with Guinness
(Nigeria) to promote the search for the cultivation of barley around lake Chad
basin. The company introduced Rex Beer in the year 1985 while in 1990 Star news
and NBL News, both company magazines are changed respectively to Nibrew News
after the company becomes Nigerian Breweries Plc. Legend Extra Stout was born
in June, 1992 and in November 1994 Amstel Malta was introduced and the company
established a N100 million Education trust fund for active participation in the
funding of education. The lunch of Maltina variants (Strawberry and Exotic
Fruits) took place in 1996 and yet enters into another franchise with Cadbury
Beverages International of UK to re-introduce the Schweppes range.
Nigerian Breweries wins the
Diamond Award for excellence in recognition of the outstanding performance in
the bottling and marketing of the Schweppes range of carbonated soft drinks in
Nigeria in 1998.
1.8 DEFINITION OF TERMS
Capital
Budgeting: This is a long-term plan made for
expenditures necessary to buy fixed assets for production of goods.
Finance: This
is a term used to denote the acquisition and expending of funds to meet an
economic units objectives.
Cash-inflow: It is used to means flow of cash into a firm such as
revenue from sales.
Capital
Assets: They are assets of long term
nature used in the production of goods.
Outlay
of Funds: Expending of money, Terms were
defined in order to make readers understand the subject under discussion.
Knowledge is cumulative and text
books already write on the subject serve as a precedent for the work. It was in
purist of more knowledge in capital budgeting that the researcher reviewed
literatures written by several authors on the subject.