BUDGETING, BUDGETARY CONTROL AND PERFORMANCE EVALUATION: A CASE STUDY OF ALLTERRAIN SERVICE GROUP (ATS).
The prevailing uncertainties in Africa business environment today, most managers and stakeholders must poised to compete favourably under these rapidly changing conditions. In order to survive under these environmental complexities and vagueness, managers and stakeholders of the hospitality industry need a sharp tools, proven management techniques to forecast the major changes which are likely to affect the business while they choose future directions and dimensions of resources needed to attain selected goals. This research was work conducted with special reference to Budgeting, Budgetary Control and Performance Evaluation system of Allterrain Services Group with the view to ascertain the role that the budget plays in the company and how the key actors of the budget engage its uses in their daily operational activities. Budget as a profit planning device sets standard of performance of managers, while budgetary control is a tool implored by management to keep track of actual performance to ensure budgeted standards are met. In the course of this research work 44 workers at various managerial levels were taken as sample population. A well designed questionnaire was used to obtained data through personal interview and administration of the questionnaires, both qualitative and quantitative methods were used in analysing the data collected, secondary data source was also used. The analysis of the findings conclusively indicates that most of the key actors do not work with the budget due to lack of proper induction and proper role profile of the office they occupied.
TABLE OF CONTENTS
TABLE OF CONTENTS vi
LIST OF TABLES ix
CHAPTER ONE 1
THE PROBLEM AND ITS SETTING 1
1.0 Introduction 1
Background of the Study2
Objectives of the Research8
Scope of the Study9
Significance of the Study9
Organization of the Study10
CHAPTER TWO 12
LITERATURE REVIEW 12
Literature Review and Theoretical Framework12
The Concept of Budgeting and Budgetary Control16
Main Types of Budget19
Other Types Budget20
The Principal Budget Factors/Forecasting22
ATS Budget Manual23
Budget Cycle - 'Finding Time'23
Budget Manual Objectives24
Budget Process, Roles and Responsibilities27
The Basic Principles29
Budget Review Process Flowcharts30
Budget Review: Key Dates31
Quarterly Review: Key Dates: First Week in below months32
December: Budget Review Meeting - Management33
Budget Review Meeting - Main Board33
Budgeting: Financial and Human resources34
Problems associated with budgeting and control35
Performance of Allterrain Service (ATS): General Overview38
Budgetary Control and Variance Analysis39
The Causes of Variance in ATS Operation40
Data Presentation and Analysis of Variance42
CHAPTER THREE 46
Source of Data48
CHAPTER FOUR 50
RESULTS DISCUSSION AND ANALYSIS 51
4.1 Introduction 51
4.2. Skills, Knowledge and Abilities 51
Analysis of Budget-based Knowledge52
Analysis on Monthly Performance Report.54
ATS Budget - Based Motivation (Bonus)56
ATS Activity-Based Budgeting Approach Analysis61
CHAPTER FIVE 66
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS 66
Summary of findings66
Limitations of the Study70
Suggestion for Further Research71
LIST OF TABLES
Table 2.1: Monthly performance report for April 2012. (ATS Monthly Report) 22
Table 2.2: Hierarchy of Variances (Financial Management Development, David Palmer 2000) 41
Table 2.3: Actual vrs Budget performance in millions of US Dollars (Turnover) (ATS Budget Report) 42
Table 2.4: Graphical representation of the data in Table 2 43
Table 3.1 Source: Chika Agu 'budgeting and budgetary Control in Business Organisation' 44
Table 3.2: The population size of the research 49
Table 4.1: Sex distribution of the respondents 51
Table 4.2 Responds to Q1 “do you know there is a budget for your project?" 53
Table 4.3: Q5 Responds 55
Table 4.4: Budget Review and Participation. 58
Table 4.5 Do you feel discourage if the performance is bad 60
Table 4.6: An overview of Activity-based budgeting approach 63
THE PROBLEM AND ITS SETTING
Following the uncertainties prevailing in Africa business environment today, managers and stakeholders must poised to compete favourably under these rapidly changing conditions. In order to survive under these environmental complexities and vagueness, managers and stakeholders of the hospitality industry need a sharp tools, proven management techniques to forecast the major changes which are likely to affect the business while they choose future directions and dimensions of resources needed to attain selected goals. Budgetary control as a proven management tool (Chandler, 1990) helps organization management, enhances improved performance of any economy in a different ways. Its primary function is to serve as a guide in financial planning operation; it also establishes limits for departmental excesses. It helps administrative officials to make careful analysis of all existing operations, thereby justifying, expanding, eliminating or restricting present practice (Musselman and Hughes, 1981).
Budgeting and control entails a distinct pattern of decisions in an organization which is capable of determining its objectives, purpose or goals, and how these goals are achieved by establishing principal policies and plans. However, the inability to recognize the problem concerned and fixing a boundary of investigation creates an obstacle for the successful implementation of budgeting and control. Some organizations only look for narrow ranges of alternatives which they arrive at from their past experiences and present situations, other management levels even avoid
long-term planning and budgeting in favour of today‟s problems thereby making the problems of tomorrow more severe (Steward 1993). The foregoing reflects on the need for organizations to set up a formal mechanism for scanning its environment for opportunities and give early signs of future problems, this course of action will improve the system of budgeting and control, resulting in an a priori expectation of improved performance in the hospitality industry and in ATS for that matter.
Background of the Study
This research intends to deep-dived and gained deeper understanding of how budgeting affect performance measurement of Allterrain Services Group, what kind of budgetary control measures is been put in place and how effective the control measures are. There will be two areas of concern in this study, that‟s budgeting in business organization (catering/ hospitality industry) for that matter, and how performance is measured or evaluated against the budget.
The primary characteristic of businesses all over the world involves setting goals to which money are connected or allocated. From these goals, specific objectives are delineated and funds are subdivided among them. Budgeting also provide information and data of past performance and thereby proceeds to allow for meaningful comparisons between „expected‟ and „actual‟ progress. Adjustments are at times made to the current budget or the future budget preparations cycle to close any performance gaps that may exist. In all, the budget provide a vital tool for project evaluations, for any ad hoc many measures to be taken if the need arise which is a vital tool for decision makers, more especially the management and main board members of the organization.
To narrow it down to ATS as a corporate entity, budgeting will serves as:
i. An indicator of costs and revenues that are linked to the daily operational activities of the project managers in the various camps of operation
ii. A way of providing information and supporting management decisions throughout the year
iii. And a means of monitoring and controlling the business, particularly analyzing the differences between the budget and actual.
The geneses of ATS budgeting always originate from the scope of work (SOW) in the tender document of the client. And tender budget is then designed form this scope of work which inform management decision on the viability of the prospective project, whether to bid or not to bid. The source of revenue on this budget emanate from the senior and junior catering sales, shop and bar sales, expediting sales, management fixed fee, party catering sales, room, offices and recreational centres cleaning and employees charged out, whilst the cost of sales normally, is a constitute of senior and junior catering consumptions, shop and bar consumption, expediting expenses, party catering consumption and that of cleaning. Also included in the cost of sales are food spoilage, stock variance, and non-stock consumables. The scope of work mainly centred on:
i. The number of senior and junior mandate
ii. The senior and junior casual meals to be served
iii. Whether there will be bar and commissary services
iv. The number of room to be cleaned
v. The total area per square meters to be cleaned for offices and recreational centres.
This scope of work gives an idea as to the calibre and number of employees needed to execute the task imbedded in the scope of work, how many local and foreign chefs to be recruited depending on the multi-cultural nature of the camp and the type of menu that the client requested. Camp or Project managers needed for the project are most at times left at the discretion of ATS or at times are a requirement from the client. The number of expatriates on a particular project informs the management fixed fee to be charged.
The budget CaPex enumerate the type of assets that is required of the project depending on the type of project and facility which are readily available and this will in effect inform ATS about the amount of mobilization fee that will be needed to procure the assets. There are two types of mobilization fees
i. A mobilization fee is given for the acquisition of the assets that would belong to the client at the end of the contract;
ii. A mobilization fee will be paid back on the monthly basis which is deducted from the monthly invoices where the assets will be owned by ATS.
Budgeting and Accounting have different meaning among managers and planners and the personnel who use these. Both are critical components that must interact to achieve the goals and objectives of the organization. Accounting is a system use to record, classify, and summarize business operation (Meigs 1996). The role of keeping the financial information and on-going analysis necessary to provide management and outside interest with the facts necessary for decision making is also considered (Grig, 1988). Relying on certain standard and Generally Accepted Accounting Principles (GAAP), the accountant of the company will develop and
report data to measure firm performance; to assess its financial position, to comply
with and file report needed by security regulators; to file and pay taxes; and to prepare a balance sheet, financial statements and the cash flow of the company to recognize sales revenue, expenses etc. when they incurred. Therefore, accountants provide accounting information used for individuals external to an organization such as shareholders, customers, suppliers, tax authorities as well as for employees and the internal managers of the organization. Financial accounting will ensure that the assets and liabilities of the business are properly accounted for, and provide information about the profits etc. to shareholders and other interested parties. In contrast, management accounting system provides information specifically for the use of managers within an organization to assist in decision making (Ryna et. al 2002). Based on classification above, budgeting is, traditionally, classified under management accounting domain by the existing accounting literature. In this sense, budgeting is a narrower concept with more specific focus. (Hrongren 2002) budget focuses on a forthcoming accounting period, rather than on the past period on which accounting is based to make records. Therefore, budget planning focuses more on a forecast purpose to estimate what is likely to occur and how organizational resources are allocated to realize future operations. Moreover, another important aspect of budgeting will be that of the feedback, in which both the plan and the action will be compared, providing the opportunity to revise future budget in line with experienced.
Budgeting in finance literature is concerned with the planning and management of firm‟s financial needs, concerning the alternative sources of and cost of finance. The financial needs of the firms are embodied in capital budgeting decisions on projects within the firm. The money flow are from the capital market into the firm and into the project, the project in turn generate funds which are used to pay interest on loans
and repayment, as well as to fund non-capital costs. Any surplus can be used either as a profit/dividend payments or re-invested.
As a common example of a financial plan in management accounting, however, budgeting pays attention to the administrative function internal to a firm, especially in terms of planning and control. Budgeting is viewed as a critical element of management as mentioned by a number of scholars (Anthony, 1965; Flamholt, 1983; Otley and Pollanen, 2000; Otley, 2003). Given the control-required standards against which performance could be assessed, the budget will be the natural standard of comparison. This leads to using the budget with an annual planning period; in practice in many organizations this was subdivided into quarters or sometimes months, as the fundamental building block of the control measure, but this happens quarterly in ATS.
Budget provide a basis for directing and evaluating the performance of individuals or segment of organizations and also will structure the decision making environment (Bruns & Waterhouse, 1975), so they appear to be appropriate as a control devices impacting performance of organizations. Therefore, a considerable stream of research (Schiff & Lewin, 1970; Onsi, 1973; Brownell, 1985; Merchant & Manzoni, 1980; Kren, 1992; Van der Stede, 2000) emphasize the function of budgeting in management control process and sought to explore the influence of budgetary controls on organizational behaviour. Shield and Young (1993) define budgetary participation as the involvement of managers in the budgetary process and their influence over setting budgetary targets. They state that participative budgeting is a control response to the need by organizations to gain an understanding of their
environment, to assist in problem solving, more importantly to promote information sharing among administrative levels and finally to enhance performance.
There is no gainsaying the fact that ATS assess the viability of each project based on comparing the actual against the budgeted from which the decision are made either to kill the project or to revisit the negotiation table for a better deal. Bonus to motivate employees to put up their best in the operation which is also based on performance measurement is also not left out. The Key Performance Indicators (KPIs) are also centred on the budget. The budget therefore, for ATS is the engine of decision making, the core pillar around which every decision on any project is derived. Sensing the sensitivities of the role of the budget in ATS operation and the decision-making body, it is incumbent on the budget manager to get very reflective budget information that throws more light on the actual situations on the ground.
This research therefore is, set out to investigate factors contributing to budgetary ineffectiveness. The study examines the budgeting, budgetary control and performance at ATS which gives rise to the following questions:
i. How is the budgeting participatory process at ATS?
ii. Do managers neither understand the principles underlying the budget nor understand the importance of budgeting and budgetary control in relation to their projects.
iii. What are the manager‟s approaches to information requested to address their budget challenges.
iv. How do the project managers link their daily operational costing to the benchmark set in the budget?
v. How do managers factor the addendum in relation to changes in scope of work to the budget?
Meanwhile the lack of budget information flow from the project managers as an input into the budget process can be very gravy to the company decision. A new interactive approach to information collation should therefore be adopted, next alternative could be site visit by the Budget Manager as well as to work with the Project accountants for the update; engage project managers in education on the relevance of budget to project performance and its effect on bonus payment. Hence this exercise is meant to go beyond the financial report and investigate the vast differences between the operating budget and the actual, the role of project managers in the budgeting process and the understanding of the budget and the budgetary control measures by the project managers.
Objectives of the Research
The main purpose of this study is to establish the relationship between budgeting, budgetary control and performance measurement/evaluation. The exploratory inquiries into the activities of the project managers will be an attempt to discover or identify potential variables regarding the budgeting and performance relationship. The studies compare the actual performance to the budgeted and try and relate the gaps to the theoretical budget. The objectives of this study is:
i. to explore the theoretical impact of budgeting on performance measurement in ATS
ii. to establish the relationship between a change in scope and theoretical budget
iii. to unravel the essence of participatory budgeting and
iv. finally, to further investigate how effective are the budgetary control measures in budgeting
From the problem statement above, the central question to this study is to understand
„how the change in scope of work affects theoretical budget and performance evaluation? There are four sub questions to derive from this:
i. what are the budgeting procedures in ATS
ii. how do we define the role of project managers in the budgetary procedures
iii. what are the fundamental causes of changes in scope of work
iv. how do we measure performance in ATS
Scope of the Study
In order to understand the challenges of project managers in participatory budget process, this dissertation will focus and be limited to project managers working in various projects in ATS.
Significance of the Study
The significance of this study will enhance and contribute to realistic budget and budgeting procedures in ATS. It will improve and present a clearer picture of daily activities of the project managers on site. This exercise will help ATS to be in a better position to take a decisive decision on the futuristic state of any project.
Human resource allocation and project managers reshuffling among the group will be
based on the performance of the project and this research will help management in effective delivery of this task.
This research will also help ATS management to include certain clauses in the contract during their round-table negotiations, more especially when scope of work is hike in a tender document of the client in terms of meal numbers for which the benefit of economy of scale is awarded, ATS should be able to withdraw such benefit and give a full rates when the actual turn out to be -10% of the numbers budgeted for after the contract is awarded. This research will also help investors to have confidence in the budget figures because of its participatory process that will show the true picture of situation on the ground in terms of cost and revenue and the types of corrective measures been put in place to shape and direct the shortfalls in the operation.
It is therefore envisaged that the outcome of this finding will contribute tremendously to the search of solutions to the crippling effect on budget, budgetary control and performance evaluation/measurement. This research will trigger a review of project manager recruitment policy, a review of job description of project accountant to be an agent of budget information delivery on each project.
Organization of the Study
This dissertation is organized into five (5) chapters. The chapter one (1) covers the introductory aspect of this research and gave an in-depth knowledge of why this topic worth investigating. Chapter two (2) will look at the theoretical framework of the necessary literature review. This will basically focus on existing theories and knowledge related to budgeting and performance measurement in ATS. The
researcher will then attempt to find the impact of budgeting on performance while considering other potential variables interference. Chapter three (3) will explain the chosen methodology design for all empirical questions in detail. It will also include the rational for chosen a combine research method; deciding on the methods of data collection and what data have to be collected; will describe the function of qualitative data and quantitative data in this study; will discuss how to provide questionnaires and conduct interview. The fourth (4th) chapter will represent a comprehensive presentation of data analysis whilst chapter five (5) which is the last chapter will summarize the contribution of this research to the existing budgeting and performance literature and ATS budgetary practice, pointing out the limitations of this research and also give recommendation for future research..