1.1 Introduction
Definition of Budgeting and Budgetary Control
Nwadighota (2005) defines budget as a plan expressed in quantitative and usually monetary terms every a specific period of time. Normally the period covered is one year and this makes it a short term plan. Practically all large organization both in the private and public sectors prepare annual budgets. He is of the view that budget is a short term financial plan which guides manager in achieving the objectives of a firm.
Omolehinwa (2004) defines budgetary control system which uses budget as a planning in controlling all aspect of producing and or selling commodities or services. Preplanning is a cardinal facture of budgeting control and that each budget has the action of the people their performance and the cost they incur. Budgetary control is a tool which enables the management or an organization to monitor its expenditures.
Ama (2003) defines a budget as a quantitative expression of a plan of action prepared in advance of the period to which it relates. Budgeting may be prepared for the business as a whole, for department, for functions such as sales production or for financial and resources. The process of budgeting is a means of translating the overall objectives of the organization into detailed feasible plans if actions.
Adams (2009) defines a budget as a future plan of action for the whole organization or section thereof. Budget can also be defined as a financial statement of the sources (revenues) and uses (expenditure) of fund of the government. It is prepared by the minister of finance and the presented to the parliament for discussion and approval. It is unlawful to spend government fund without the approval of the parliament.
Osisioma (2000) defines budget as an expression of managerial plan in quantitative and financial terms, encompassing different phases of business and aimed at helping management towards the attainment of organization objectives, in their own contribution. Godwin (2001) defines budget as a systematic and formalized approach for accomplishing the planning, coordinating and control of responsibilities of management.
Horngreen (1982) defined a budget as a quantitative expression of a plan of action and an aid to coordination and implementation. Adams (2001) defines budgeting as a plan of action set by an organization to enable it to achieve its objectives by using available financial resources. Financial resources will be allocated to specified actions with the aim of achieving set goals.
Batty (1982) defines budgetary control as a process which uses budgeting as a framework for planning and controlling the utilization of financial resources within an organization. The main objectives of budgeting and budgetary control are to improve the utilization of financial resources within an organization in order to translate the objectives of the organization into reality.
Pandy (2008) defines budgetary control as the continuous comparison of actual budgeted result either to secure by individual actions. The objective of that policy is to provide a firm basis for its revision. Osisoma, (2000) opined that budgeting is a systematic and formalized approach for accomplishing the planning, co-ordination and control responsibilities of management.
Budget is defined as the estimate of income and expenditure, which are planned by the organization for a specific future. Budgetary control is a system of ensuring that actual expenditures made by an organization matches up with budget projections. Lockyer (1983) defines budgetary control as a system of accounting that ensures that expenditures within an organization adhere to the approved budget.
The Role of Budgeting and Budgetary Control
Budgeting as a tool in financial management regularly prepares performance plans and budget requests that describe performance goals, measures of output and outcomes in various activities aimed at achieving performance goals. This helps in the sense that annual plans set forth in measurable terms form the levels of performance for each objectives in the budget period (Larson, 1999).
The budgeting process in manufacturing companies incorporates a policy in financial welfare. For instance, it indicates how money is distributed by the management to the different departments and key areas to focus on. This helps the management in planning and forecasting in order to reduce costs and unnecessary spending and also to increase profits so that the company may fulfill its corporate vision and mission.
Types of Budgets
Operating Budget
Godwin (2001) defines operating budget is a major part of master budget that focuses on the income statement and its supporting schedule. The aim of this budget is to compare the actual and expected performance of an Organization.
Financial Budget
Collins (2009) defines a financial budget as budgeted capital expenditures, the cash budget, the balance sheet and statement of changes in financial position. That is to say that financial budget is concerned with financial implications of the operating budgets, which are expected cash inflows and cash outflow, financial position and other operating results.
Capital Budget
Capital budget is the planning of capital expenditure which normally undertakes a long term basis and is prepared for several years in advance. Capital budget is in respect of such thing like the replacement or increase in planet and machinery building, acquisition of existing business etc. they involve the plan to acquire worthwhile project together with turning of the estimated costs and flows of each project.
Short term budget
Short term budgets are budgets established for the purpose of being used for a short period of time, normally a year.
Long term budget
Long term budgets are budgets prepared for the purpose of being used for a longer period of time usually 5 years. These are prepared as part of government development plans or company strategic plans.
Fixed budget
A fixed budget is a budget set prior to a control period and not subsequently changed in response to changes in any activity costs or revenues. It may serve as a benchmark in performance evaluation.
Flexible budget
A flexible budget is a budget designed to change in accordance with the level of activity attained. This budget recognizes the existence of fixed, variable and semi-variable costs and is designed to change in relation to the actual volume or output or level of activity in a period.
Rolling Budget
A rolling budget is a budget that involves continuously updating budgets by reviewing the actual results for a specific period in the budget and determining a budget for the corresponding time period. Under this period, instead of preparing a budget annually, there would be budget every three or six month so that as the current period ends, the budget extended by an extra period.
Activity Based Budget
An activity based budget is a budget that is based on an activity framework and utilizing cost driver data. An activity based budget is part of the planning and controlling system which is set to ensure continuous improvement and it also a form of development of conventional budgeting system and is characterized by the recognition of activities that drive cost with the aim of controlling the causes of cost directly.
Importance of Budget
According to Emeka (2009), the importance of budgeting within an organization is that it provides the organization with a tool for planning and the performance is compared with budget outcome, this assist the organizational performance because it serves as a the yard stick for the measuring actual performance in respect of budgeted through the analysis of variance.
1.2 Background of the study
At a global level, modern budget systems originate from the rise of the modern state in
Western Europe in the 16th and 17th centuries, Great Britain firstly adopted the practice of an annual national budget in 1780s. The past two decades have seen a clear trend among western countries toward the use of budgeting and budgetary control as a tool for enhancing financial accountability.
During the 18th Century, New Zealand, United States, France, Canada and Denmark were among the countries which adopted the use of budgeting and budgetary control as a tool for ensuring financial accountability for public finances. Other countries which followed in the adoption of budgeting include India as well as the Arab countries.
Among African countries, Egypt was the first country to adopt the use of budget and budgetary controls in accomplishment of national economic and political tasks. This was followed by other African countries which inherited the use of budgeting from their colonial masters mostly British and French colonialists. After independence, African countries continued to use budgeting as a tool for controlling public funds.
Apart from the use of budgeting as a financial planning and control tool at national level, budgeting has been adopted by both, State Owned Enterprises (SOEs) and private enterprises as a tool for ensuring fiscal discipline in the planning and utilization of financial resources, and in doing so, contribute to attainment of financial objectives of the organizations, hence better financial performance.
Among SOEs operating in Tanzania is the Tanzania Electric Supply Company Limited (TANESCO). Being a SOE, TANESCO’s budget is prepared as part of the overall budget of it’s parent Ministry namely the Ministry of Energy and Minerals. Together with other SOEs, under the Ministry, each year, TANESCO prepares annual budget and submits it to the Ministry before being tabled at the Parliament for approval.
Therefore, budgeting and budgetary controls play a crucial role and is used by the Ministry and TANESCO itself as useful tool for controlling the financial affairs of TANESCO. The budgeting and budgetary control system used by TANESCO has a financial control system for monitoring the financial situation of the organization so as to ensure good financial performance of the organization.
Little attention was paid to budgetary controls although this is generally recognized as the main instrument for allocating resources to specific recurrent and development activities. In recent years, however, budget systems have received more attention and literature on public expenditure management has become more common. The budget is increasingly recognized as the key tool for economic management (Kiringai, 2002).
It is nevertheless also recognized that a country can have a sound budget and financial system and still fail to achieve its intended targets. This suggests that the rules of the game by which the budget is formulated and implemented are equally important and that they do influence outcomes. This recognition has led to a series of budget reform systems that have a broader focus on public expenditure management (Kiringai,2002).
According to Kiringai (2002), among the goals of budgeting and budgetary control is to achieve fiscal discipline whereby expenditure by line agencies must adhere to budget ceilings in order to remain within aggregate resource constraints. Expenditure allocation should address priorities and operational efficiency to as to achieve maximum output.
These goals however seem far from being met as public organizations in Kenya continue to face finance related challenges linked to budgetary controls. This situation presents a worrying concern as the problems seem to spiral among many other public organizations. It seems that many public institutions lack sufficient budgetary controls which result in poor performance.
1.3 Statement of the Problem
In recent times, companies have performed poorly due to lack of efficient budgetary control systems to meet organizational goals and maximize performance. Companies continue to do blunder and fail because they have imperfection in both Planning and Control systems which they actually fail to recognize. As a result, corporate strategy and capital allocation become misaligned hence hindering financial performance.
Most of State Owned Enterprises (SOEs) in developing countries performed poorly due to lack of proper budgetary control techniques to adequately control limited resources to meet organizational goals. A study conducted by Mudunga (2014), one of the causes of poor performance of State Owned Enterprise in African Countries is the weak internal controls.
Internal processes in African Government Institutions are mostly invalid and highly unproductive; it failed to identify business risks and how can be mitigated. Not only that but also long bureaucratic procedures involved in improving government processes, the controls are slow in keeping up with the modern business environment. The growth of population automatically leads SOEs to expand and serve more citizens better.
Budget controls provides comparisons of actual results against budget. Variance from budget can then be investigated and the reasons for the variance can be divided into controllable and non-controllable factors, this is essential in order to reduce inefficiencies and poor budget practices that lead to efficient allocation of scarce resources (Joshi and Abdulla, 1996).
Controller and Auditor General (CAG) (2011) identified several weaknesses which contribute to poor budgetary control in parastatal organizations including low level of understanding of the budget system by middle and low level of management staff. Other weaknesses were identified as shortage of qualified accounting staff and poor management. There are also weaknesses in monitoring and evaluation of budgets.
While there has been an attempt to address budgetary controls in organizations, few studies have been conducted on the impact of budgetary controls on organizational performance. As a result, there is a knowledge gap which needs to be addressed. It is thus the objective of this study to fill that gap by conducting a study to assess the impact of budgetary control on organizational performance.
1.4 Objective of the study
1.4.1 General objective
The general objective of this study is to examine the impact of budgetary control on achievement of State Owned Enterprises (SOE’s) objectives by focusing on Tanzania Electric Supply Company (TANESCO) as a case study.
1.4.2 Specific objectives
The study will be guided by the following specific objectives;
a) To investigate the relationship between Responsibility Accounting (RA) and achievement of TANESCO’s objectives
b) To investigate the relationship between Variance analysis and achievement of TANESCO’s objectives.
c) To investigate the relationship between Budget adjustment and achievement of TANESCO’s objectives.
1.5 Research Questions
The study will be guided by the following research questions;
a) Is there significant relationship between Responsibility Accounting (RA) and the achievement of TANESCO’s objectives?
b) Is there significant relationship between Variance analysis and the achievement of TANESCO’s objectives?
c) Is there significant relationship between Budget adjustments and the achievement of TANESCO’s objectives?
1.6 Significance of the Study
Most of the researchers have found this area of study very important as it assist the State Owned Enterprises like TANESCO to understand the role of budgetary control in achieving goals. Care must emphasis when dealing with this kind of matters because without proper budgetary controls an organization will be inefficient and ineffective, and hence affect organizational performance.
In addition, the study will serve as a source of reference for other researcher or members of the general public who need information on this subject. More important, public sectors employees in Tanzania may find it useful in the successful operation of their institution as the study will unveil some of the reasons why some State Owned Enterprises in Tanzania fail to achieve organization goals through budget control.
The findings of this study will also add to the existing body of knowledge on the role of budgeting and budgetary control on organizational performance of state owned enterprises such as TANESCO. The findings will also serve as a stepping stone for future researchers on the same or similar topics by providing them with a source of empirical literature review.
1.7 Scope and Limitation of the Study
During the study, the researcher expects to face time and financial limitations which will in one way or another affect the study. Due to time and financial limitations, this study will only focus on one organization so as to allow the researcher to finish the study within the academic calendar of the university. Also, the researcher expects to face the limitation of availability of data which might be difficult to obtain