Budgetary control and financial performance of small and medium sized businesses, Study notes for Business Accounting
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Budgetary control and financial performance of small and medium sized businesses, Study notes for Business Accounting

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This and study of the how budgetary control factors affect the financial performance of the small and medium sized businesses
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International Journal of Economics and Financial Management Vol. 3 No. 1 2018 ISSN: 2545 - 5966

www.iiardpub.org

IIARD – International Institute of Academic Research and Development

Page 66

Budgetary Control and Financial Performance of Small and

Medium Sized Enterprises in Rivers State

L. A. Nwanyanwu Ph.D & Ogbonnaya, Agatha Nkiru

Department of Accountancy

Faculty of Management Sciences

Rivers State University, Port Harcourt

adimcvictor@gmail.com

Abstract

This study examined the relationship between budgetary control and financial performance

of Small and Medium-sized Enterprises in Rivers State. A population of 74 members list

(manufacturing, Construction & engineering and services) of Port Harcourt Chambers of

Commerce and sample size of 63 was determined using Taro-Yemen formula. Both primary

and secondary data were used, where the hypothesis testing was mostly based on the primary

data, and secondary data used in supportive role. Management accounting practices were

studied from two dimensions, budgetary control and Marginal Costing while financial

performance was measured by Net profit and Return on equity. Technology was employed as

the moderating variable. Data were analyzed by using both parametric and non-parametric

techniques complementarily. The findings showed that there is a significant relationship at

5% between budgetary control and financial performance. It is the conclusion of this study

that budgetary control can be used to drive growth and sustainability of Small and Medium-

sized Enterprises in Rivers State. The study recommends that Trade Associations and

organized private sectors like the Port Harcourt Chamber of Commerce, Mines & Industries,

Manufacturers Association of Nigeria, etc. should periodically organize sensitization

workshops for Small and Medium-sized Enterprises on the benefits of implementing

budgetary control in their businesses. It is also recommended that private-public-partnership

sponsored internship programmes should be established to serve as pool of skilled manpower

for Small and Medium-sized Enterprises whose recruitments cannot otherwise be afforded by

Small and Medium-sized Enterprises.

Keywords: Budgetary Control, Net Profit, Return on Equity, Small and Medium Sized

Enterprises

Introduction

As today’s business environment become increasingly competitive, business organizations

are becoming more aggressive and dynamic in identifying strategies that will ensure

profitable existence. In order to achieve business sustainability and superior financial

performance in the long-run, the need for strategic management has become imperative of

business managers. To effectively and successfully design and implement strategic

management requires sound management accounting system, the quality of which depends on

the management accounting practice of the organization. Adeniji (2013) asserts that

information is the lifeblood of an organization. Management accounting practice is necessary

for guiding business performance decisions. Anthony & Govindarajan (1997) are of the view

that management control decisions are made within the framework established by

organization’s strategies.

Thus, the management practices of an organization are an indispensable tool in ensuring

International Journal of Economics and Financial Management Vol. 3 No. 1 2018 ISSN: 2545 - 5966

www.iiardpub.org

IIARD – International Institute of Academic Research and Development

Page 67

efficient and effective resource allocation in the implementation of the strategic objective of

the firm. Pricing decisions, operations continuity decisions, product/service portfolio

decisions, profit planning decisions and outsourcing decision are some of the several strategic

management decisions that directly impact the financial performance of the firm. The quality

of these decisions can be enhanced by sound management accounting practices, such as

marginal costing and budgetary control. The reliability of information used by managers in

this regard depends on the accuracy of the variable overhead estimates (Holland, 2005;

Bartle, 2008).

Small and medium sized enterprise (SMEs) are said to be the backbone of all developed and

developing nations. Thus, the development of SMEs sector is of paramount importance for

any country irrespective of their level of development, since this sector has great potential to

generate maximum socio-economic benefits to the country with minimum level of

investment. Management accounting techniques are necessary to ensure that SMEs’

economic resources are used effectively and efficiently.

According to Richard (2000), the most significant reason for this high failure rate is the

inability of Small and medium sized enterprises (SMEs) to make adequate use of essential

management accounting practices. Similarly, Wichmann, (1983) argued that one of the

reasons for business failure is poor management ability which includes accounting problem-

solving. Hopper, Koga, & Goto, (1999) noted that based on the results from Japanese

companies that a failure to adopt management accounting practices in a similar way to their

larger counterparts may be a factor presently high failure rate of SMEs. In recent years due

to the economic crisis and pressures and fierce competition in the market, most SMEs seek

new ways and measures to succeed in their organizations. Research has also shown that

management accounting practices such as budgetary control have important roles in ensuring

the efficiency in the management of the organization and may also improve performance.

Management accounting practices also permit firms to compete in the market place and

reduce the likelihood of business failure (Lybaert, 1998). The purpose of this study therefore

is to examine the relationship between budgetary control and financial performance of small

and medium sized enterprises in Rivers State.

Literature Review

Budgetary Control

The overall purpose of budgetary control is to help managers plan and control the use of

resources in systematic and logical manner to ensure that they achieve their financial

objectives, that is profit satisfying (making satisfactory level of profits) and profit

maximization (making the maximum profit).

Bendney, Hussy and Colston, (1991) as cited by David (2004) argues that small businesses

are relatively easily controlled by one person, usually the owner, but as the business expands,

however, there is a tendency to split the organization into parts and employ a specialist

manager to run it with a number of specialist line manager who are responsible for the

operations of the particular functions. It is important decisions that are made with an overall

plan which will ensure that the business as the whole will achieve its agreed objectives as

budget will force the management to think ahead to anticipate what is likely to happen. It is

essential therefore, that the business develops a formal planning and control system which

will state clearly the objectives for both a business as the whole and for each individual

functional manager.

International Journal of Economics and Financial Management Vol. 3 No. 1 2018 ISSN: 2545 - 5966

www.iiardpub.org

IIARD – International Institute of Academic Research and Development

Page 68

Zheng (2009) demonstrated that budgetary control is vital, not just to verify expenditure or

income against targets but also to identify changing patterns or circumstances that may give

rise to the need for corrective management action or changes in the policy. Consequently, the

head of finance should take all reasonable steps to ensure that regular monitoring of all

aspects of budget takes place, whether it is income, expenditure, borrowing levels, project

progress, operational outcomes or cash flows and the results of such monitoring is

appropriately documented.

Financial Performance

Financial performance can be defined as a subjective measure of how well a firm can use

assets from its primary mode of business and generate revenues (Mills, 2008). This term is

also used as a general measure of a firm's overall financial health over a given period of time,

and can be used to compare similar firms across the same industry or to compare industries or

sectors in aggregation. The performance measurement concept indicates that employees can

increase the value of the firm by; increasing the size of a firm’s future cash flows, by

accelerating the receipt of those cash flows, or by making them more certain or less risky

(Cadbury, 1992).

Carreta and Farina (2010), argue that use of financial performance could still be justified on

the grounds that it reflects what managers actually consider to be financial performance and,

even if this is a mixture of various indicators like accounting profits, productivity, and cash

flow. Financial performance is determined by the following indicators; profit or value added;

sales, fees, budget; costs or expenditure and stock market indicators (e.g. share price) and

autonomy. Management accounting is thus fundamentally involved with the processes of

organizational practice. It must be noted that the major practice system in most organization

is the budget.

Measures of Financial Performance

Return on Equity (ROE)

Ross et al (1996) noted that return on equity is a measure of how the shareholders money

fared during the year. They further assert that ROE is, in an accounting view the true bottom

– line measure of performance. ROE is a measure of profit on investment in equity. Helfert

(1991) call this ratio, return on net worth and states that it is the most common ratio used for

measuring the return on the owners investment. The ratio of net profit after taxes to common

equity measures the rate of return on the stockholders investment (Brigham, 1980).

According to Banker et al (1993) the Du Pont formula has long been used to measure the

financial performance of companies. They are of the opinion that due to the way in which the

profitability ratio is constructed, it provides only a gross aggregate measure and does not

easily capture the impact that the micro-attributes of the operations of companies have on

profitability.

Net Profit

In the business world, profitability refers to the extent to which an organization has added

value in its line of activities. Profitability is most often used to assess the ability of an

organization to continue in business. The main issue in evaluating profitability of an

organization is its profit performance. The term Profit has several definitions, an investor

view it as a measure of return on his money. Economists look at it as reward for

entrepreneurship for taking risk. An accountant is of the opinion that profit is the excess of

income/revenue over expense incurred in producing that revenue.

International Journal of Economics and Financial Management Vol. 3 No. 1 2018 ISSN: 2545 - 5966

www.iiardpub.org

IIARD – International Institute of Academic Research and Development

Page 69

Empirical Review Wijeywardena and Zoysa (1999) in a comparative analysis of management accounting

practices in Australia and Japan investigated the differences in the adoption of management

accounting techniques through a survey questionnaire which was mailed to 1000 largest

manufacturing companies in each country. The size of the company was based on total assets.

A total of 217 Japanese companies and 231 Australian companies responded to the 31

questions asked covering various aspects of managerial accounting techniques. This analysis

involved comparisons of techniques in different cultural contexts. Major cultural differences

identified in the study were collective decision making, unique company philosophy, usage of

small firms as sub-contractors, company specific cost accounting training for each employee,

and the difference in educational background of management 20 accountants as seen in Japan

compared to Australia.

Adler, Everett, and Waldron (2000) conducted a survey that asked management accountants,

in New Zealand manufacturing businesses, to indicate the techniques adopted in their

business. While many studies have focused on particular techniques such as ABC or target

costing, Adler et al. provided a questionnaire that included a vast array of management

accounting techniques to provide a fuller set of response options. Respondents 21 were asked

to rank management techniques on a five point scale from most used to least used.

Methodology A population of 74 members list (manufacturing, Construction & engineering and services)

of Port Harcourt Chambers of Commerce and sample size of 63 was determined using Taro-

Yemen formula. Both primary and secondary data were used, where the hypothesis testing

was mostly based on the primary data, and secondary data used in supportive role.

Management accounting practices were studied from two dimensions, budgetary control and

Marginal Costing while financial performance was measured by Net profit and Return on

equity. Technology was employed as the moderating variable. Data were analyzed by using

both parametric and non-parametric techniques complementarily.

Results and Discussion

Bivariate Analyses

Budgetary Control and Net Profit

As can be observed from Table 4.13, the correlation coefficient between budgetary control

(BC) and net profit (NP) is 0.546. This means that there is a chance of about 29.8% that

variability in the net profits of SMEs in Rivers State can be attributable to variability in their

budgetary control practices. Thus, low net profit, as observed among SMEs in Rivers State,

may therefore be attributable to their low budgetary practices. This trend of association can

be observed in table 4.14, where frequency of observations tends to increase towards the

lower end (i.e., top-left-hand side) of the scale for both column and row variables.”

Table 1: Budgetary Control Vs Net Profit Contingency table

Budgetary Control

Scale 1 2 3 4 5 Row Totals

Net Profit

1 4 31 8 6 0 49

2 12 18 10 6 0 46

3 9 34 5 3 0 51

4 0 0 4 5 3 12

5 0 0 4 5 3 12

Col. Totals 25 83 31 25 6 170

International Journal of Economics and Financial Management Vol. 3 No. 1 2018 ISSN: 2545 - 5966

www.iiardpub.org

IIARD – International Institute of Academic Research and Development

Page 70

Therefore, “based on the BC dimension of management accounting practices, and by using

NP as a measure of financial performance, the correlation coefficient as observed in the

correlation matrix (table 4.13) suggests the notion that, SMEs in Rivers State need to improve

on their budgetary control practices in order to similarly improve their net profits.

Budgetary Control and Return on Equity

Also, the correlation coefficient between budgetary control (BC) and return on equity (ROE),

as obtained from table 4.13 is 0.622, which means that there is a chance of about 38.7% that

variability in the return on equity of SMEs in Rivers State can be as a result of variability in

their budgetary control practices. Also this might likely explains the low level of return on

equity that is observed among SMEs in Rivers State, especially when budgetary control

practices among these SMEs are also poor on the average. This trend of association can be

observed in table 4.16, where the intensity of observation frequency tends to increase towards

the lower end (i.e., top-left-hand side) of the scale for both column and row variables.”

Table 2: Budgetary Control Vs Return on Equity Contingency table

Budgetary Control

Scale 1 2 3 4 5 Row Totals

Return on

Equity

1 9 37 9 7 0 62

2 12 42 13 9 0 76

3 5 32 9 7 0 53

4 0 0 4 5 3 12

5 0 0 4 5 3 12

Col. Totals 26 111 39 33 6 215

Therefore, “from the BC dimension perspective of management accounting practices, and by

using ROE as a measure of financial performance, the correlation coefficient as observed in

the correlation matrix (table 4.13) suggests the notion that, SMEs in Rivers State need to

improve on their budgetary control practices in order to similarly improve their return on

equity.

4.3.1 Results of Analyses: non-parametric approach

Test 1

Null Hypothesis (H01): There “is no significant relationship between budgetary control

and net profit of small and medium sized enterprises in Rivers

State

Level of significance: 0.05

Rejection Criterion: The rejection region is defined by the level of significance and

degree of freedom. At level of significance of 0.05, H0 is

rejected if > ( )( )

Data used: Contingency Table on Budgetary Control and Net profit (Table

4.14 of Section 4.2.2)

Result

Degree of freedom: = (5 – 1) (5 – 1) = 16

= 84.076

P-Value: = 0.00000

Critical value ( ) = 26.296

International Journal of Economics and Financial Management Vol. 3 No. 1 2018 ISSN: 2545 - 5966

www.iiardpub.org

IIARD – International Institute of Academic Research and Development

Page 71

Decision: Reject null of independence

Therefore test result shows that budgetary control of SMEs in Rivers State is NOT

independent of their net profit.

Test 2

Null Hypothesis (H02): There is no significant relationship between budgetary control

and return on equity of small and medium sized enterprises in

Rivers State.

Level of significance: 0.05

Rejection Criterion: The rejection region is defined by the level of significance and

degree of freedom. At level of significance of 0.05, H0 is

rejected if > ( )( )

Data used: Contingency Table on budgetary control and return on equity

(Table 4.16 of Section 4.2.2)”

Result

Degree of freedom: = (5 – 1) (5 – 1) = 16

= 82.121

P-Value: = 0.00000

Critical value( )

Decision: Reject null of independence

Therefore test result shows that budgetary control of SMEs in Rivers State is NOT

independent of their returns on equity.

Discussion of findings

The foregoing analyses involved a test of degree and direction of association between

budgetary control and financial performances of SMEs in Rivers State. Financial

performance was measured with net profit and return on equity. At 5% level of statistical

significance, marginal costing and budgetary control practices of SMEs in Rivers State were

found to be significant in associating positively with their net profits and returns on equity

respectively. Budgetary control account for between 59% and 65% of the financial

performances of SMEs in Rivers State, implying that recording improvements in the

budgetary control practices can result in significant improvement in their financial

performances. The validity of the notion, that improved budgetary control practices will

result in improved financial performance, is true only for a given state of technology

prevailing at a point in time, which is held constant.

Conclusion and Recommendation The study examined budgetary control practices and financial performance of the selected

small and medium sized enterprises in Rivers State. The result showed that budgetary

practices have significant positive relationship with financial performance in SMEs surveyed.

In spite of the numerous benefits that can be derived from adoption of management

accounting practices, most SMEs maintain low profile on budgetary control practices and

consequently their financial performances are poor. Judging from the perspective of Resource

dependency theory, it can be concluded that SMEs’ owners’/managers’ failure to secure the

needed resources is responsible for their managerial ineptitude in the aspect of management

accounting practices application. For instance, if SMEs had invested considerable portion of

their resources in the procurement and training of qualified human resources in the area of

International Journal of Economics and Financial Management Vol. 3 No. 1 2018 ISSN: 2545 - 5966

www.iiardpub.org

IIARD – International Institute of Academic Research and Development

Page 72

management accounting practice, it is highly probable that their financial performance should

have been better than it is.

In a nutshell, budgetary control techniques if properly harnessed by SMEs, can be used to

drive growth and sustainability of SMEs in Rivers State, thereby creating employment and

eventual growth and development of the economy of Rivers State.

Based on the findings from this study, the following recommendations are made to the

management of the various small and medium sized enterprises for improved management

accounting techniques and financial performance. Trade Associations and organized private

sectors like the Port Harcourt Chamber of Commerce, Mines & Industries, Manufacturers

Association of Nigeria (MAN), etc. should periodically organize sensitization workshops for

SMEs on the benefits of implementing management accounting techniques in their

businesses. Private-Public-Partnership sponsored internship programmes should be

established to serve as pool of fresh graduates whose recruitments cannot otherwise be

afforded by SMEs. For instance, ICAN and ANAN should partner with governments at state

level to compel every newly qualified member of their bodies to do a one year internship at

SMEs.”

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