Abstract

This study examines the effect of budgetary control on the performance of SMEs in Buea municipality. Budgetary control was looked at from the perspective of budget planning, budget monitoring and control, and budget evaluation whereas performance was focused on Profitability.

The specific objectives included; to examine the effect of budget planning on the performance of SMEs, to evaluate the effect of budget monitoring and control on the performance of SMEs, and to examine the effect of budget evaluation on the performance of small and medium size enterprises in Buea.

The research target population consisted of the accountants, store keepers, SMEs owners or managers, supervisors and operating employees of these businesses. Sixty staffs of in the enterprises were selected using random sampling technique.

Questionnaires were used to collect primary data and data collected analyzed using correlation and presented through tables. The data was analyzed using both descriptive statistics (frequency tables, percentages, mean and standard deviation) and inferential statistics (correlation and regression analysis) with the help of statistical package for social sciences (SPSS).

The hypothesis was tested through a correlation test, and it revealed that there is a moderate positive relationship between budgetary control dimensions (budget planning, budget monitoring and control, and budget evaluation) and performance (profitability) of small and medium size enterprises at Pearson correlation coefficient. This implies that budgetary control affects performance of SMEs by 57.8% and 42.2% by other factors.

The study therefore recommends that Policy makers need to be sensitized employees on how budgetary controls enhance the performance of businesses. The study further recommends that organizations should develop more formal practice in the development of budgetary controls.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

In the business world today, organizations have developed a variety of processes and techniques designed to contribute to the planning and control functions. One of the most important and widely used of these processes is budgeting. Budgeting involves the establishment of predetermined goals, the reporting of actual performance results and evaluation of performance in terms of the predetermined goals.

Budgetary control systems are universal and have been considered an essential tool for financial planning. The purpose of budgetary control is to provide a forecast of revenues and expenditures this is achieved through constructing a model of how our business might perform financially speaking if certain strategies, events and plans are carried out (Churchill, 2001).

The whole idea of budgeting could be comprehended if we elicit information on the basic concepts underlying the establishment of companies, the reasons for employing resources available to the company and the reasons for making these corporate bodies stay afloat and achieve a perpetual life. The origin of budgeting was necessary to plan for the implementation of government policies based on the resources available (Brown and Howard (1982), However, budgeting generally is a part of the decision making process of an entity. The idea of budgeting is an offshoot of the necessity to plan to direct the resources of management to achieve maximum result in areas of interest. It is a financial plan for achieving set objectives of management.

Essentially, the first control purpose explains that a business whose budget shows potential expenditures of a particular amount for the year and who has a lesser amount for the financial resources is forewarned. The knowledge of this will enable the managers to find ways of adjusting/augmenting the resources or expenses.

On the second control purpose, there is no sign saying that organizational plans are carried out by people. Control is therefore exercised not over operations, revenue and costs but over the persons responsible for various business functions and the revenue and expenses results attained. To this end, budget provides a yardstick against which a manager’s actual performance may be compared.

Organizations use budgets in setting priorities through assigning limited resources to those events and activities that are most crucial to the organization’s operations, thus effective management of the firm’s budget ensures effective allocation of resources (Goldstein, 2005). Among SMEs, budgeting is used as a planning tool (Flamholtz, 2014). There is a high rate of failing by small and medium firms soon after they are established. Poor budgeting process is given as one of the major reasons causing this phenomenon.

According to Uyar and Bilgin (2011), budgets are used to aid longer planning, co-ordinate the operation, control expenses, profitability, aid short-term planning, evaluate performance, motivate managers, motivate employees and communicate plans with employees. Organizations should have both recurrent and capital budgets in order to control and plan for both short term and long term cash flows.

A properly managed budget can promote sustainable profits in many business organizations like SMEs. The actions that follows managerial decisions normally involved several aspects of business, such as the marketing, production, purchasing and finance functions, and it is important that the management should coordinate these various interrelated aspect of decision-making.

If the management fails to do this, there is danger that managers may each make decisions that they believe are in the best interests of that organization when, in fact, together they are not; for example, the marketing department may introduce a promotional campaign that is designed to increase sales demand to a level beyond that which the production department can handle. The various activities within a company should be coordinated by the preparation of plans of actions for future periods. These detailed plans are usually referred as budgets (Drury, 2004).

According to Scott (1970), the term budgetary control is applied to the system of management control and accounting in which all operations are forecast and so far as possible planned ahead and the actual results compared with the forecast and planned ones. The plan of operations is the best that can be devised in the particular circumstances, and reasons and remedies in the actual results.

For this to form an effective control in the hands of the management the different figures should as far as possible be forecast by the persons responsible for the achievement. All executives should have planned conditions to aim at and improved upon and the degree to which this is being attained should be regularly brought to their notice.

Taylor and Sharing (1983), wrote that budgetary control working side by side with the accounting system is primarily forward looking, and aims to provide all ranks of management with all instrument for recording plans measuring performance in relation to those plans. It represents therefore, an extension of the managerial function and has been described as the long arm of management.

Budgetary control is the process of developing a spending plan and periodically comparing actual expenditures against that plan to determine if it or the spending patterns need adjustment to stay on track. This process is necessary to control spending and meet various financial goals. Organizations rely heavily on budgetary control to manage their spending activities, and this technique is also used by the public and the private sector as well as private individuals, such as heads of household who want to make sure they live within their means (Dunk, 2009).

Budgetary control is a system of management control in which the actual income and spending are compared with planned income and spending, so that the firm can make decisions if plans are being followed and if those plans need to be changed in order to make a profit.

Budgetary control is the one of best technique of controlling, management and finance in which every department’s budget is made with estimated data. Then, the management conducts a comparative study of the estimated data with original data and fix the responsibility of employee if variance will not be favorable. Organizations can use budgetary control in forecasting techniques in order to make plan and budget for the future (Epstein and McFarlan, 2011).

The management of the organizations implements budgetary control to prevent losses resulting from theft, fraud and technological malfunction. These instructions also help management to ensure that expenses remain within budgetary limits. The importance of budgetary control is that it can be implemented by three departments in an organization to enhance effective realization. These departments are accounting department, statistical department and management department. Accounting department provides old data. Statistical department provides the tools and techniques of forecasting like probability, time series other sampling methods. Management department uses both department services to estimate the expenditures and revenue of business under the normal conditions of business (Suberu, 2010).

It’s therefore worthy of note that budgeting and budgetary control is essentially concerned with planning. This involves taking into account the various limiting factors that could possibly inhibit the accomplishment of goals. In the course of executing the plans, these factors are continually being watched for any possible abnormality and where any is encountered; there might be deviations from plans if prevailing circumstances require it.

At the end, comparisons will be made between conditions encountered with those expected. The experience gained will be used in further planning. However, to facilitate effective implementation of budgetary control, the management should define proper budgetary control processes, this is achieved through planning, monitoring and control and evaluation (Carr and Joseph, 2000). Therefore, this study seeks to evaluate the effect of budgetary control on the performance of SMEs in Buea Municipality.

1.2 Problem Statement

Budgetary control is used by most organizations as a tool for proper management of resources in the organization and its activities. A firm with well formulated budgetary controls easily assigns its managers the responsibility for the use of designated financial resources to achieve their assigned operational objectives. Budget controls provides comparisons of actual results against budget plan.

Departures from budget can then be investigated and the reasons for the differences can be divided into controllable and non-controllable factors, this is essential is reducing inefficiencies and poor budget practices leading to efficient allocation of scarce resources (Joshi and Abdulla, 1996).

Most SME’s in Buea have shifted focus to budgetary control as a way of enhancing effectiveness in their services. Recognizing the role of budget and budgetary control has gained attention which has led some organizations to establish departments for implementation. This has attributed budget monitoring and project implementation committees as an integral part of the administrations to most SME’s in Buea.

Budgets are very essential to judiciously manage limited financial resources and equally serve as a medium of approval, regulation and assessment of expenditure. Income generating establishments; consider budgets and budgetary controls as significant components in their strategy development. Budget can therefore shape the direction of firms and thus make firms successful or fail.

The failure or success of an organization hinges generally on budget preparation and powerful budgetary controls. The absence of or weak budgets and budgetary controls in most organisations characterized by managerial, financial, administrative and production constraints has led to failure of these organisations recently (Bradstreet, 2004)

Despite all the benefits of budgeting and budgetary control to small and medium scale industries in Buea, most organization has failed to achieve goals because management overlooked the budgeting techniques in decision making process.

With sound budgeting system management is required to implement plan and accomplish organizational goals. Budgeting serves as an index for measuring the effectiveness, efficiency, productivity and profitability of small and medium scale industries in Buea. This means that the actual performance is compared with the budgeted performance to provide a feedback.

Studies have been done in relation to budgeting and budgetary control globally and locally: Carolyn, et al. (2007) examined the association between effects of budgetary control on performance using a sample of large US cities Financial Bonds and found that effective level of budgetary control is significantly and positively related to bond rating.

Dunk (2007) carried out a study in Europe on budgetary participation and managerial performance in nonprofit making firms and concluded a positive correlation between budgetary participation and managerial performance in nonprofit making organizations.

Theoretically, budgeting prompts a chain of activities and attains multiple goals and objectives in a firm for instance planning, coordınating, communication control and evaluation (Yang, 2010). Wildavsky (1996) in his work on the incremental theory suggested that budgeting process should start with the projected amount of the current year so us to know the areas of improvement which enhance firm performance.

Other scholars such as Maillard, Roncalli & Teiletche (2010) suggest for the inclusion of risk in the entire process for it to be effective and enable the firm to achieve the set objectives. This suggests that the firms budgeting process has a positive relationship in its performance although other scholars such as Hope & Fraser (2003) disagree with this suggestion.

The lack of proper budgeting in micro and small enterprises has been the cause of the reduced service delivery which has been demonstrated by increased low quality, customer dissatisfaction, low growth prospects and closure on some of the young and newly incorporated firms.

While many local and international studies have concentrated on budgetary control techniques and how budgeting affects organizational performance both at the public and private sectors, the role of budgetary control in management of small and medium size enterprises has been neglected despite its importance thereby leaving this area of study grey. Therefore, from the review of past research most studies have concentrated on budgeting and budgetary control and how it affects organizational performance in both the public and private sectors.

This study is determined to fill this gap by trying to establish whether there is any relationship between budgetary control and SME’s performance in Buea. To achieve this objective this study attempted to answer the following research questions:

1.3 Research Questions

1.3.1 Main Research Question

What is the effect of budgetary control on the performance of small and medium size enterprises in Buea?

1.3.2 Specific Research Questions

1. What is the effect of budget planning on the performance of small and medium size enterprises in Buea?
2. What is the effect of budget monitoring and control on the performance of small and medium size enterprises in Buea?
3. What is the effect of budget evaluation on the performance of small and medium size enterprises in Buea?

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