38 International Journal of Accounting and Taxation, Vol. 1 No.

1, December 2013

Budgetary Control as a Measure of Financial Performance of State

Corporations in Kenya

Kenneth Odour Adongo1

Ambrose Jagongo PhD, MKIM2

Abstract

The importance of financial stability in enabling an organization to function efficiently

and maximize the potential for service delivery cannot be underestimated. The quest
for better service delivery under new public management in public organizations in
Kenya necessitates the need for public organizations to have proper financial standing
in order to run operations and motivate workers through better remuneration as well as
improved working conditions. Critique of literature on factors affecting financial
performance reveal that gaps remain on the influence of budgetary control on financial
performance of public institutions. This study sought to investigate the relationship
between budgetary controls and financial performance of state corporations in Kenya.
The study sought to determine the salient features of budgetary controls in state
corporations, establish the human factors within budgetary controls, establish the
process of budgetary control in public organizations, and determine the challenges
affecting budgetary control. A descriptive survey design was used to gather data from
the state corporation’s managers of the sampled state corporations. 14 corporations
were selected from the 138 to participate in the study. Purposive sampling was used to
select 42 corporate services manager, finance manager and budget officer from each
corporation to participate in the study. A questionnaire, whose content validity was
checked through an expertise opinion and reliability through test pre-test methods, was
used to gather information. Findings indicate that a positive significant relationship
exists between budgetary control and financial performance of state corporations.
Budgetary features reflect ability to predict financial milestones of organizations.
Human factors within budgetary controls thus managerial commitment, employees’
motivation, employee training, competence as well as the attitude affect the budget
control process. Budgetary control process exhibited a positive significant influence on
financial performance of state corporations through influence on financial objectives,
the allocation of funds as well as investment ventures that organization undertakes. The
study recommends sensitization of management and employees of state corporations on
the importance of budgetary controls in enhancing financial performance, avoidance of
political interference in the budgetary process and use of budgets as tools for
management efficiency.

Key words: Budgetary control, budgetary process, financial performance, state corporations

1
Department of Accounting and Finance, Kenyatta University, Kenya.
2
Department of Accounting and Finance, Kenyatta University, Kenya.

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International Journal of Accounting and Taxation, Vol. 1 No. 1, December 2013 39

1.1 Background information

Many developing countries in Africa have engaged in detailed planning exercises of various
types in the period after independence and this has resulted in a wide range of literature on planning.
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 (Schick, 1999). This recognition has led to a series of budget reform systems that have a
broader focus on public expenditure management. Budget reforms have been attempted in Kenya from
as far back as the early 1970s but the results have not been encouraging. In recent years, a key
recommendation has been to shift the focus from the annual budget to a Medium-Term Expenditure
Framework approach to budgeting. Kenya adopted the MTEF approach in 1999 and implemented it for
the first time in the budget in June 2000 (Kiringai,2002). According to Kiringai (2002 ) the goals of of
adopting the MTEF approach was to achieve Fiscal discipline - expenditure by line agencies must
adhere to hard budget ceilings in order to remain within aggregate resource constraints. Allocative
efficiency-expenditure allocation should address national development priorities and Operational
(technical) efficiency- public expenditure should achieve explicit outputs at minimum cost by applying
performance targets of output relative to inputs.
These goals however seem far from being met as public orgarnizations in Kenya continue to
face finance related challenges linked to budgetary controls . This has been evidenced by striking of
employees as a result of unmet salary demands and poor working environment. An example of such
incidences reported in Kenya include doctors strike, Dixon ( 2011 ) in the health sector and lectures
strike in the education sector reported by (Standard Team ,2011). This situation presents a worrying
concern as the problems seem to spiral among many other public orgarnizations. It seems that many
public institutions lack enough finances to faciliate adequate remuneration to workers and provide
efficiency in service delivery. While there has been attempts to address financial performance
challenges in public institutions , there is hardly any concrete study that has adressed the relationship
between budgetary control and financial performance of state corportations. A study by public
oversight authority recommended a critical assessment on role of budgetary controls in Kenya’s public
orgraniations. According to Surajkumar (2011) a budget is based on estimates, it may or may not be
true. It is not substitute of management because, the efficiency and utility of the budgetary system
depends on the skill and experience of the management. It cannot be executed automatically because
continuous efforts are necessary for the execution of the budget. This makes orgarnizational managers
to focus more on management issues than on budgetary control .
The need for accountability , and efficiency of service delivery in public orgranizations across
Africa and in Kenya , put’s public orgranizations at the fore front in establishment of control
systems.Most of the public sector reform programmes that have taken place in developing countries
during the 21st century were introduced as part of the Structural Adjustment Programmes (SAPs) of the
World Bank in the 1980s. However, most of the more recent reforms, under the influence of the New
Public Management (NPM), have been driven by a combination of economic, social, political and
technological factors, which have triggered the quest for efficiency and for ways to cut the cost of
delivering public services. Additional factors, particularly for Africa, include lending conditionalities
and the increasing emphasis on good governance. With budgetary control systems being at the center of
increasing orgarnizational efficiency and controlling costs , then the need to examine the role of the
system in orgarnization’s financial performance is of paramount importance .

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40 International Journal of Accounting and Taxation, Vol. 1 No. 1, December 2013

This study sought to examine the effects of budgetary control systems on orgranizations
financial peformance in Kenya with reference to state corporations in Kenya

1.1.1 Structure of Public institutions in Kenya

According to Dehn (2002), most public sectors have multiple tier structures with different tasks.
In most cases, tasks and interests at each tier of organizational structure of public sector may conflict
with each other from the viewpoint of limited resources and finite time, and various stakeholders may
also have conflicting interests. At the same time, the outputs of public service agencies are often
difficult to measure and systematic information is rarely available about specific inputs and outputs of
service delivery, particularly in developing countries. In Kenya, the public sector consists of the central
government, local authorities, state-owned enterprises and extra-budgetary institutions. The government
structure can be split into two namely, administrative and economic structures. The administrative
structure is exemplified by the provincial administration. Here, the government links to the grassroots or
village level through Provincial Commissioners, District Commissioners and District Officers. The
District Officers complete the chain through their link to Chiefs and Assistant Chiefs. The economic
structure on the other hand is more complex than the administrative one. This comprises ministry
headquarters at the top with provincial departmental heads and district departmental heads at the
province and district levels, respectively. These links to the lowest levels through field officers like
extension workers, hospital workers and teachers. The provincial departmental heads mainly provide an
operational link to the districts. Not many projects and programs are implemented at the provincial
level. Implementation mainly takes place at the district level. The ministry headquarters have a second
line of service provision to the people through state-owned enterprises (state corporations). Funds for
service provision and budget implementation can therefore be channeled to the targeted areas through
the ministry headquarters, through the district offices, or through state corporations as grants. The
process through which funds flow from Treasury to the facilities where service provision. State
corporations which form the second line of service provision to people and act as income generating
enterprises for government form the focus for this study.
1.2 Statement of the Reseach Problem
Despite the introduction of planning systems after attaining independence in Kenya, very little
attention has been given to budgetary controls as a tool for achieving plan targets (Kiringai,2002).The
implementation of Medium-Term Expenditure Framework approach budgetary control system requires
institutional arrangements that provide correct incentives and assist in balancing priorities with
affordability. It has however proved to be practically difficult to establish suitable institutions and
sustain them over time especially due to perceived low financial standing of the public sector (World
Bank ,2004). From the foregoing background information it’s evident that,the need for accountability ,
and efficiency of service delivery has been faced by financial challenges that according to Dixon,(2011)
has led to spiral of strikes among workers due to unmet salary demands. However there is scanty
systematically documented information where the relationship between budgetary control system and
financial performance are clearly outlined . The literature reviewed largely reveal that Kenya has made
attempts to adopt budgetary reforms seeking to address resource constraints ,national development
priorities, and operatioal efficiency ,but a gap remain on the influence of the budgetary controls on the
financial performance of state corporations This study therefore sought to investigate the relationship
between budgetary control and financial performance of state corporations in Kenya, Specifically aimed
to:
i. determine the relationship between salient features of budgetary controls and financial
performance of state corporations in Kenya
ii. establish the factors affecting budgetary control systems and financial performance of state
corporations in Kenya

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International Journal of Accounting and Taxation, Vol. 1 No. 1, December 2013 41

iii. establish the relationship between budgetary process and financial performance indicators of
state corporations in Kenya
iv. determine the relationship between challenges affecting budgetary controls in and financial
performance state corporations in Kenya

1.3 Hypothesis
Using the model developed on section ..... of this research project, it was hypothesised that
i. β1=β2 =β3= β4 =Zero. Meaning there is no relationship between the variables
ii. β 1, β2, β3, and β4 are not equal to Zero or at least one of them is not equal to Zero

1.4 Theoretical framework

This study was based on the budget theory by Henry C Adams ( 1985) which explains the
social motivation behind governement budgeting. “Budget” and “Budgeting” are concepts traceable to
the bible days, precisely the days of Joseph in Egypt. It was reported that nothing was given out of the
treasure without a written order. History has it that Joseph budgeted and stored grains which lasted the
Egyptians throughout the seven years of famine. Budgets were first introduced in the 1920s as a tool to
manage costs and cashflows in large industrial organizations ( Bartle , 2001). The emergence of
scientific management philosophy however laid emphasis on detailed information as a basis for taking
decisions thus leading to tremendous development of management accounting and budgeting techniques
(Bartle, 2008). At early stage of development, budgeting was concerned with preparing and presenting
credible information to legitimize accountability and to permit correct performance evaluation and
consequently, rewards (Hindereth, 2002 ), However, over the years, the function and focus of budgeting
has shifted considerably as business organization became more complex and their environment become
dynamic.
Bartle (2008) indicates that budgets today provide a focus for the organization, aid in the
coordination of activities and facilitates control. Through budgeting, at both management level and
operation level looks at the future and lays down what has to be achieved. Control checks whether the
plans are being realized and put into effect corrective measures, where deviation or short-fall is
occurring (Bartle, 2001). Bartle emphasized that without effective controls, an enterprise was at the
mercy of internal and external forces who can disrupt its efficiency, and be unaware; such enterprise
will not be able to combat such forces. When a budgeting and control system is in use, budgets are
established which set out in financial terms, the responsibility of managers in relation to the requirement
of the overall policy of the company. Continuous comparison is made between the actual and budgeted
results, which are intended to either secure, thorough action of managers, the objectives of policy or to
even provide a basis for policy revision.
The theoretical framework gave a rationale for development of budget concept, and highlights
the development of the budget concept from a tool of directing actions within an organization to a more
complex managerial tool that managers would use to provide focus for organizations, set objectives and
undertake performance evaluations. This framework provides a basic perspective through which the
researcher viewed budgetary controls as tool for influencing organizations financial performance.
1.5 Budget control process in Kenya
According to Kirira N (2002) the government budgetary process is a deliberate and systematic
attempt to allocate public resources to various ministries and departments in order to finance activities
and programs within their specific mandates. The Principal law on public finance specifies procedures
for realising money from consolidated fund for accounts of operating ministries. The minister of finance
has an obligation under the constitution to provide parliament with drafts estimates of revenues and
expenditure for approval before start of financial year.

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42 International Journal of Accounting and Taxation, Vol. 1 No. 1, December 2013

According to GOK (2008), the national budgetary framework is composed of five level and
actors. The cabinet which formulates national policies and objectives followed by planning and
budgetary steering committee which consists of permanent secretaries and coordinates policies and
objectives. Macroeconomic working group which makes economic forecasts and determines the
resources available and sector working groups working as coordinating hubs for group of ministries
whose function overlap. The MTEF secretariat and lastly line ministries and departments.

There are eight sector working groups which include; agriculture and rural development,
physical infrastructure, human resource development, trade industry and tourism, public administration,
public safety laws and order, national security and information technology .A typical SWG consist of a
chairman, a secretary (Both from MOF) and members drawn from line ministries or department that
have programs and activities in the sector. The figure below indicated actors national budgetary
framework.

Cabinet

Planning and budgeting steering committee/ macroeconomic working group

Sector working Groups

Medium –Term Expenditure Framework secretariat

Line Ministries and department

Figure: 2.1 Actors in national budgetary framework; Source MOF ( 2002 )

According to KIPPRA (2004) , the budget process in Kenya passes through three major phases
(i.e. stages): which include; budget planning and preparation, budget presentation and approval by the
parliament and budget execution. In the first stage, budget planning and preparation is done by the
Ministry of Planning and National Development alongside other players. The medium term expenditure
framework (MTEF), the latest budgetary system in Kenya, links policy making with planning and
implementation of budgeted projects in a three-year rolling framework. The actual budget preparation
begins with a Treasury circular which defines the broad parameters of the budget and sets expenditure
ceilings to be adhered to. This, inter alia, spells out the budget finalization calendar, which includes
public hearings as one of the activities, and proposed estimates by government departments and state
corporations. At this stage, citizens have an opportunity to generate and contribute issues of interest in
the budget. For state corporations, the budget preparation is coordinated by budget officer and facilitated
by finance department which is later submitted to line ministries. The proposals from the districts are
then consolidated with those of the line ministries and thereafter sector negotiations for allocation of
resources commence. The sector hearings are presided over by Treasury to give guidance to the
participants. These sector hearings lead to bidding for resources, which are then allocated according to
expenditure items in the budget.

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International Journal of Accounting and Taxation, Vol. 1 No. 1, December 2013 43

In the second stage, the Minister for Finance presents the Budget Speech to Parliament, usually
accompanied by the Appropriations Bill, the Finance Bill, the Fiscal Strategy Paper, the Statistical
Annex to the budget, and the Financial Statement. The Statistical Annex indicates, among other things,
the government’s indebtedness to various lending institutions, both domestic and external, while the
Financial Statement gives a summary of proposed revenue and expenditure measures. The budget is
presented as a motion to Parliament, debated and approved, sometimes with amendments. Upon
approval and the passing of the Finance and Appropriations Bills, the government is effectively
authorized to raise revenue through taxes and to spend them in accordance with the approved estimates.

The final stage (stage 3) of budget process includes execution which involves implementation,
supervision and audit, follows parliamentary approval. This entails the final disbursement of funds to
various implementing departments and ministries. Budgetary resources are disbursed to line ministries
and departments through exchequer issues. The Permanent Secretaries are then allowed to grant
Authority to Incur Expenditure (AIE) to various district departmental heads to implement the
government programmes at the district level.
1.6 Features of budgetary controls in public orgranizations
Budgeting is a set of procedures by which governments ration resources among claimants and
control the amount each claimant spends (Kiringai, 2002). Within this context, the budget can be used
for three purposes: as an instrument of economic policy; as a tool for economic management; and as an
instrument for accountability. The budget is an allocation mechanism that attempts to maximize the
contribution of public expenditure to national welfare (Surajkumar, 2005). This can be achieved by
ensuring that the budget process successfully allocates scarce resources so that the marginal unit of
expenditure achieves the same marginal benefit in each category of expenditure.
In determining resource allocations, the budget should reflect the development agenda of a
country through which it influences the attainment of national growth and investment targets (Needles,
2011). The task of budget preparation is often seen as an accounting activity that concentrates on the
annual recurrent budget while planning is seen as a medium-term activity. In this approach, the annual
budget ensures control over aggregate expenditure and generates detailed financial statements on
resource utilization but is not concerned with broad strategic development over the medium-term
(Needles, 2011). (Preetabh, 2010)
The budget format and classification depends on the system adopted in each country (Nafula,
2004). The IMF Manual of Government Financial Statistics describes both the economic and functional
categories of expenditure: Economic classification; distinguishes between two broad categories:
recurrent expenditure (including wages and salaries, other goods and services, interest payments,
subsidies and transfers), and capital expenditure and net lending. This classification reflects the inherent
difference between creation of capital assets and ongoing activities especially as projects give rise to
additional recurrent expenditure (both to service and maintain the asset) once they are completed.
1.7 Factors affecting financial performance
Financial performance describes a subjective measure of how well a firm can use assets from its
primary mode of business and generate revenues. It is also a general measure of a firms overall financial
health over a given period of time and thus can be used to compare firms across the same industries or
sectors in aggregation. The importance of financial stability according to Anderson (2011) ranges from
enabling an orgarnization to have sufficienct resource for quality service delivery, maximising the
potential of service delivery , enhancing the ability to pay staff, vendors and creditors on time and
maintainance of good credit risk . This makes financial peformance an important area of concern that
has attracted the attention of researchers, orgarnizational managers, government and the public at large .

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In an attemmpt to address the critical issues affecting financial performance , various authors
have had documentation on factors affecting financial performance . A study carried out by Skandalis
(2008) examined the effect of export activity, location, size and index for management competence on
firms financial performance. Another study by Skandalis, ( 2010) examined the effects of foreign direct
investment and openess in developing country’s on firms financial performance.The study focussed on
the extent to which firms in developing country’s engage or merge foreign investors in their company
operations and how this affected orgarnizations financial performance . Ashok (2009) examined the
effects of farm’s operator and household characteristics along with farm type and regional location of
the farm and their effect on financial performance of new and beginning farmer and ranchers. Studies
related to factors affecting financial performance by public orgarnizations were undertaken by (Aiken,
2008). Aiken looked at the performance factors motivation, privitization of public orgarnizations, in
which he established that public orgarmizations lacked efficiency in development of management
systems that could facilitate effective service delivery .

This was because profit making was not mainly their primary goal and therefore financial
peformance was undertaken for the sake of accountability and not for the benefits associated with the
measurement. While financial performance is an important tool in measuring an orgarnizations overall
performance, it is evident that studies covered have not been exhaustive enough in addressing the
factors affecting financial performance. One of the factors given little emphasis on the extent to which
it affects financial performance is budgetary control which forms the main focus for this study. Huselid
(2005) did a comprehensive evaluation of the links between systems of high performance work
practicces and firms financial performance. Results based on a national sample analysis indicated that
these practices had economically and statistically significant impact on both immediate employee
outcomes ( turnover and productivity ) and short and long forms of measures of corporate financial
performance. Webster (2001) notes that important management fuctions such as communication,
determination of corporate goals and objectives, resource allocation, appraising of performance
functions and financial performance have been found to have positive relations with budgetary controls
in place.
1.8 Benefits of budgetary controls
According to Scarlett, (2008), budgetary controls refer to the principles, procedures and
practices of achieving given objectives through budgets. The budgetary control system helps in fixing
the goals for the organization as a whole and concerted efforts made for its achievements. It enables
economies in the enterprise. Preetabh,(2010), highlighted the benefits of budgetary control as profit
maximization; a budgetary control aims at maximization of profits or an organization through, proper
planning and co-ordination of different functions, proper control over various capital and revenue
expenditures and putting resources into best use. Coordination; achieved through working of different
departments and sectors. Waren,(2011) noted that within an orgranization , differenbt departments have
a bearing on one another, this therefore makes cordination of variours excecutive and subordinates
necessary in achieving of budgetary targets. Other budgeraty benefits as indicated by preetabh ( 2010)
include ; Specific time aims; the plans, policies and goals are decided by the top management. All
efforts are put together to reach the common goal of the organization. Every department is given a target
to be achieved. The efforts are directed towards achieving come specific aims. If there is no definite aim
then the efforts will be wasted in pursuing different aims. As a tool for measuring performance,
budgetary controls provide comparisons between the budget targets and actual targets and deviation
determined; performance of each department is reported to the top management which enables
introduction of management by exception
Margah (2005) assert that bugdgetary controls are important tools for a county’s economy This
is because it allows planning for expenditure thus facilitating systematic spending . Finances are put into
optimum use , extending the benefits to industry and national economy .

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This reduces wastage of national resources . A budgetary control could help in determination of
orgranizational weakenesses. According to Merika, (2008), the deviations in budgeted and actula
performance will anable the determination of weak spots. This anables an orgranization to cincentrate
on those aspects where performance is less than stipulated . The management moreover takes a
corrective action measures whenever there is a discripancy in perfomance. By fixing targets for the
employees, they are made conscious of their responsibility. Everybody knows what he is expected to do
and he continues with his work uninterrupted.
1.9 Human factors in budgetary controls
Human factors within budgetary controls may revolve around the the degree to which
orgarnizations top management accepts the budget program as a vital part of company’s activities. It
can also be viewed in the context within with orgarnizatinal management uses budgeted data .
According to Perrin, (2012), if a budgetary control program is to be successful, it must have
complete acceptance and support of the persons who occupy key management positions . If lower or
middle level management personnel sense that top management is lukewardm about budgetary controls,
or if they sense that the top managemet simply tolerate budget as a necessary evil, then their own
attitude will reflect similar lack of enthusian. Perrin further notes that budget is hardwork and if top
management is not enthusiastic and commited to budget program, then it is unlikely that anyone in the
orgarnization waseither .Egan (2007) commented that in the adminstration of a budgetary control
program, it is particulary important that the top management does not use budget as a club to pressure
employees or as way to blame someone if something goes wrong . He further asserted that using
budgets in such negative ways will breed hostility, tension , and mistrust rather than greater
cooperation and productivity. Reid (2002) critically evaluated the effect of employee participation is
budget participate in target setting in an effort to increase probability of organizations goals being
achieved .In so doing he considered some theories of motivation such as Maslovs, equity and
expectancy theories. He concluded that participation of employees did not have overall effect on perfect
budgeting system. This contradicts the opinion of prior studies examined and thus creates a need to
clarify through this study the relationship between human factors in budgetary control systems and
financial performance.
2.3.4 Budgetary control process and financial performance of state corporations
According to Ashok (2009) financial performance is subjective measure of how well a firm can
use assets from its primary mode of business and generate revenues. The term (financial performance)
measure’s firm’s general financial health over a given period of time and can be used to compare similar
firms. Different methods used to measure financial performance as indicated by Needles, (2011)
include; Profitability – return on investment (ROI), earnings before interest and tax (EBIT), gross profit
margins. Growth - market share growth, Sales Growth. Efficiency – return on sales (ROS), return on
equity (ROE). Among the indicators of an effective budget is the process undertaken before realizing
the overal budgetary control system to be used in an orgarnization. Ghosh ( 2005 ) outlines four steps
that is undertaken during development of a budgetary control system. This include; Setting up plans and
budgets for each functional area, like production, sales, purchase, personnel etc as indicated in the
orgarnizational chart, measuring and recording actual performance and measuring the deviations or
variance, comparing the actual performance with planned performance and measuring deviations and
indentifying the person / function responsible , taking corrective action and ensuring that deviation do
not arise in future. According to Ghosh ( 2005 ) the comparison of actual performance with plans may
indicate the need to change policies. It is however unclear the extent to which orgarnizations undertake
policy changes promted as a corrective as indicated by a budgetary control process. Waren (2011)
presented the purpose of budgetary control as planning, cordination, responsibility and performance
evaluation.Of particular relevance to this study is performance evaluation in relation to financial
performance .

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According to Ghosh, (2005) a budget presents a commitment by manager the superior. It

therefore presents a benchmark against actual performance which is an excellent starting point to
performance appraisal .
2.3.6 Challenges affecting budgetary control in state corporations
Existing literature has evidently revealed that budgets controls have myriad of challenges that
can at times be a hindrance towards achieving the overall effects of budgetary control. According to
Margah (2005) many of the increasing problems experienced by orgarnizations attempting to manage
their budgetary control procedures have been laid at the door of the budget , presenting a fixed (Preset
and unchanging target ). In a world of constant change and uncertaininty, Margah, notes that a budget
can become outdated during the budget year or even before it begins thus rendering little or no value to
its intented purpose. Present day economic environment demands that organization adapt new practices.
Given the new competitive realities, there is need for management to embrace flexible and adaptable
budgetary planning and control system which has the ability to quickly respond to environmental
changes and complexities.
A good budgetary planning and control system must involve not only an analysis of capital
allocation requests, but also an analysis of all the capital needed to generate information such as market
research, prior implementing budgeted activities. Neely (2001) carried out a study on weakenesses of
budgetary controls. The study was primariry based on review of emperical literature from similar
studies. Neely’s finding mantained twelve cited weaknesses of budgetary control systems which poses a
challenges in the use of the systems. These weaknesses included ; restraining of responsiveness and
acting as barriers to change, budgdet are rarely strategically focused and often contradictory , they add
little value especially given the time required to prepare them, they concentrate on cost reduction and
not value addition, they strengthen vertical command and control, they do not reflect emerging network
structure that orgarnizations are adopting, they encourage gaming and perverse behaviours, they
reinforce departmental barries rather than ecourage knowledge sharing , and make people feel
undervalued. Prendergust ( 2002) claimed that budgeting for planning and control purposes have a
number of problems. First a lot of focussing is involved in the budgeting process, the uncertainities in
business environment may provide a challenge in bringing out reliable and accurate predications and
could bring meaningful effect to an orgraniation.
A study on challenges facing budgetary control systems in developed country’s by OECD,
(2007 ) showed that budgets fail due to reasons such as bugdets used as pressure tool , central decision
making process, lack of job security and managers’ lack of training. Nafula (2004) noted that public
insitutions in Kenya are faced with problems related to efficiency in financial transfers from districts to
the facility and this affects the execution of the budget goals. Nafula, did not however indicate the
overall effect of intefered bubdget excecution process on financial performance . According to
McMillan (2001) most often, capital budgeting and expense budgeting are distinct processes. For,
instance, organizations that do practice capital budgeting make assumptions about future cash flows that
are dependent on certain advertising and sales promotion outlays. However, these outlays are typically
covered by the expense budget. Boquist (2008) noted that even in organizations in which the
determination of the expense request is tied at the outset of capital request, the people approving the two
requests do not necessarily try to ensure consistency between the two budgets

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2.4 Conceptual framework

Independent Variables Dependent Variable

Features of budgetary controls

 Tool for economic policy

 Economic, management
 Instrument for accountability

Human factors within budgetary controls

 Managerial commitment
 Employee attitude towards budget
 Knowledge about budget among
employees Financial performance

 Net profit Margin/Surplus

Budgetary control process in state  Return on investment
corporations  Development Index

 Planning and preparation

 Presentation and approval
 Execution

Challenges of budgetary control systems

 Lack of flexible budgetary structure

 Failure to involve the finance function
In the initial process

In this study the researcher interelates budgetary control that an orgranization put’s in place
with financial performance.The financial peformance of an orgranization in this study was defined as
the subjective measure of how well a firm can use assets from its primary mode of business and
generate revenue (Powers,2010). The measures of financial performance according to Venanci, (2012)
include company’s total earnings or profit , share value and growth index. Similary, Needles (2011)
highlights non financial and financial measures of financial performance . In his classification , return
on investment, net income as a percentage of sales as well as cost of poor quality as a percentage of
sales is grouped as financial measures of an orgarnization’s financial performance . Non finanancial
measures of financial performance according to his classification include number of times an activity
occurs and the time taken to perform a task. For the purpose of this study , financial performnance was
examined through financial measures which will include ; net profit margin/surplus , return on
investment and the development index.
2.1 Research design
The researcher used a descriptive survey design to examine the effect of budgetary control
systems on financial performance of state corporations. A descriptive survey was suitable in this study
owing the fact that several public organizations was sampled.

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According to Kothari (2004) a descriptive study is concerned with finding what, where and how
of a phenomenon. Descriptive surveys are used to develop a snapshot of a particular phenomenon of
interest since they usually involve large samples which are characteristic of this study.

2.2 Target population

The target population for this study was state corporations in Kenya. According to Ndumbai,
(2010), there are one hundred and thirty eight (138) state corporations in Kenya. The corporations were
grouped into three categories based on performance rating of various government agencies, categorised
as excellent, good and fair on their performance (Ndumbai, 2010)
2.3 Sampling of state corporations
The researcher used stratified sampling method to select the state corporations to participate in
the study.This is because there was a need to represent all the three categories of state corporations
mentioned above. The method enabled the researcher to improve the accuracy /efficiency of estimation
and focus on highly performing, moderately performing as well as less performing subgroups of state
corporations. The corporations will thus be grouped into excellent, good and fair performing. A
sampling of 10% was then selected from each strata as per Babbie (2005), and Kothari (2004)
recommendations 10 % for sample size. After determination of the required sample size for each
category, systematic random sampling was used to select the specific state corporations to participate in
the study. This was done by determining the sampling interval i.e. the Kth element in each of the three
categories. This was done using the formula
K = N /n where n is the sample and N is the population size: For excellently performing
category of state corporations K = 63/6= 10: Thus in the randomised list of excellent performing state
corporation, a corporation to participate in the study was picked after an interval of 10 corporations
For those categorised as good in their performance, K= 70/7 = 10: A corporation was picked
after an interval of 10 corporations until 7 of corporations have been picked. One corporation was
picked in the category of fair performing corporation which are only 4 in the population. This generated
a total of 14 state corporations for the study.
2.4 Sampling of the respondents and data collection
After the organizations to participate in the study were identified, purposive sampling was used
to select the employees in the finance department as well as those in management positions to
participate in the study. The use of purposive sampling enabled the researcher to gather information
from respondents with sufficient understanding on budgetary control systems due to the role they play
in developing, monitoring and ensuring the implementation of budgetary control systems in an
organization. Each corporation provided a corporate services manager, a finance manager as well as
budget officer to respond to research instrument. The researcher used both secondary and primary data
to accomplish the research objectives. Primary data was collected through questionnaires administered
to corporate managers and finance officers in the sampled state corporations. With the help of a
research assistant, the researcher issued the questionnaire to the targeted respondents to fill. He also
closely monitored the process and clarified any issues that arose during the answering of the
questionnaire.

2.6 Data Analysis techniques

Quantitative and qualitative techniques were used to undertake data analysis. Qualitative data
analysis involved explanation of information obtained from the empirical literature as well as financial
reports of state corporations examined. Quantitative analysis involved use of numeric measures in
establishing the scores of responses provided.

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This entailed generation of descriptive statistics after data collection, estimation of population
parameters from the statistics, and making of inferences based on the statistical findings, with help of
Statistical Package for Social Sciences (SPSS).

3.0 Research Findings and Discussions

3.1.Response rate
The response rate for the study was 83.3%. This implied reliability of the results in terms of
representing the study phenomenon. According to Mugenda (2003) response rate above 50% is adequate
enough to accomplish study objectives. This study achieved a response rate above 50% hence adequate
enough to establish the relationship between budgetary control and financial performance of state
corporations.

3.2 Relationship between budgetary controls and financial performance

The study establishments on the relationship between budgetary control and financial
performance was based on various parameters which included ; features of budgetary controls in
relation to financial performance, human factors within budgetary controls and financial performance,
budgetary control process and financial performance, as well as challenges of budgetary control process
in relation to financial performance. In each of the parameters examined, respondents were asked to
indicate their agreement on various assertions related to the parameter in question. The results have been
discussed in the following subtopics.
3.2.1 Features of budgetary controls in relation to financial performance
Budget control has as set of defined feature of which when met are likely to have financial
implications for a company. The feature of a budgetary control according to Surajkumar, (2005) is its
ability to be used as an instrument of economic policy, a tool for economic management and an
instrument of accountability. This study examination the features were reflected in organizations
financial performance was presented in table 4.3 below.
Table 4.3 Budgetary control features and financial performance
Majority of the respondents were in agreement that the feature of budgetary control is having
effect on financial performance of state corporations. Among the budgetary control feature examined in
this study included; ability of budgetary control to lead into cost effective procurement which 77.8%
majority agreed that it led to surplus revenue for organizations. 77.6% majority however agreed that
surplus revenue was not assured through increased budgetary controls. “Fitness of budgetary control to
organizations cost saves cost” this was an assertion that 68.9% majority of respondents agreed with.
This could imply that budgetary controls should not only have general feature, but rather features that
are organizational specific in order to meet financial objectives of the organization.

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Std
Frequency Mean Deviation Percentage
Budgetary control has led to cost effective Strongly agree 5 2 0 10.0%
procurement, thus surplus revenue Agree 25 3 1 77.8%
Neutral 5 2 0 12.2%
Surplus revenue is not assured through Strongly agree 5 3 0 12.1%
increased budgetary controls Agree 25 4 1 77.6%
Neutral 5 2 1 10.3%
Fitness of budgetary control to Strongly agree 5 2 0 14.8%
organization’s situation saves cost Agree 25 2 0 68.9%
Neutral 5 2 0 16.4%
Accurate budget prediction through Strongly agree 5 3 0 13.5%
budgetary control does not increased net Agree 25 3 1 68.5%
profit margin Neutral 5 4 0 18.0%
Budget controls provide cash expenditure Strongly agree 5 1 0 9.2%
tracking and reduces operational costs Agree 25 2 1 70.8%
Neutral 5 3 1 20.0%
Budgetary control provide an Strongly agree 5 2 0 17.2%
organization’s with avenues to invest in Agree 25 2 1 68.8%
income generating ventures Neutral 5 2 0 14.1%
Budgetary controls do not necessary Strongly agree 5 3 1 12.0%
increased employee productivity through Agree 25 3 1 75.9%
internal motivation Neutral 5 3 1 12.0%
As management tools budgets facilitate Strongly agree 5 2 0 11.5%
prediction of financial milestones by the Agree 25 3 1 75.9%
company Neutral 5 2 0 12.6%

Accurate budget predication act as a tool for measuring expected financial results of an
organization against the achieved. 68.5% of the respondents were however in agreement that it did not
necessarily increase the profit margin of organizations examined. This was an indication that it can have
either negative or positive implication on financial performance of an organization. An organization
operational cost is important in determining its financial performance. One of the budget feature
examined in this study is the ability of the budgetary controls to provide cash expenditure tracking and
reduce operational cost. Majority (70%) were in agreement that operation costs for their organizations
were reached through budgetary controls which in turn could have a positive implication on financial
performance. Financial performance is subject to returns on investments. Budgetary controls have as a
tool for economic efficiency was found to provide an organization’s with avenues to invest in income
generating ventures as indicated by 68% of the respondents.
While budget are supposed to be tool for management and gauging of employees achievements
verses the set targets , it was found from majority (75.9%) of respondents that it did not necessarily
increase internal motivation among employees , an aspect that could positively or negatively affect
employees performance. Budgetary control was however found to be a financial tool that facilitated
prediction of financial milestones for organizations. This could imply that organizations could use
budgetary controls to plan towards financial growth.
3.2.2 Human factors within budgetary control and financial performance
Budgetary controls need the inputs of the management and employees in order to accomplish
intended results. The study finding on human factors within budgetary controls and financial
performance was presented on table 4.4 below

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Table 4.4 Human factors within budgetary control and financial performance

Std Percentage
Human factors with budgetary controls Frequency Mean Deviation %
Managerial commitment to budgetary controls Strongly
5 4 0 17.4%
has not increased profitability of our agree
organization Agree 14 3 1 37.4%
Neutral 12 4 1 38.3%
Disagree 4 2 0 7.0%
Complete acceptance of budget controls by Strongly
5 5 0 18.9%
management has not led to profits agree
Agree 14 5 1 49.6%
Neutral 12 3 0 25.2%
Disagree 4 2 0 6.3%
Use of budgetary control to pressure employees Strongly
5 4 1 13.0%
has led to mismanagement of funds agree
Agree 14 4 1 43.5%
Neutral 12 4 1 31.9%
Disagree 4 4 0 11.6%
Meaningful involvement of employees has not Strongly
5 5 0 17.7%
ensured increased productivity agree
Agree 14 4 1 36.9%
Neutral 12 4 1 34.0%
Disagree 4 4 0 11.3%
Use of budgetary control to achieve Strongly
5 3 1 16.9%
organizational goals has led to increased agree
profitability Agree 14 2 1 31.2%
Neutral 12 3 0 41.6%
Disagree 4 2 0 10.4%
Management values employees in budgetary Strongly
5 2 1 17.6%
controls thus increased revenue agree
Agree 14 1 1 29.4%
Neutral 12 2 0 29.4%
Disagree 4 4 0 23.5%
Profitability has been affected by use of Strongly
5 3 1 13.1%
budgets to blame employees agree
Agree 14 4 1 40.8%
Neutral 12 4 1 33.8%
Disagree 4 4 0 12.3%
Profitability in our organization is affected by Strongly
5 3 1 11.5%
degree of top managements preoccupation by agree
technical aspects of the budget Agree 14 3 1 38.9%
Neutral 12 4 1 38.9%
Disagree 4 3 0 10.6%
Favourable cost variance is due insight and Strongly
5 2 1 12.5%
sensitivity by the administration agree
Agree 14 3 1 41.7%
Neutral 12 3 1 37.5%
Disagree 4 2 0 8.3%

The findings revealed that majority (38%) of respondents were neutral on the assertion that
managerial commitment to budgetary controls had not increased profitability of their organization.

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This could mean that there was probability that management played a role in enhancing
profitability of state corporations through budgetary controls. Though management of organization can
accept the budget, it is not guaranteed that complete acceptance would lead to profits and thus
consequent implication on financial performance. This was backed up by majority (49.6%) of the
respondents who agreed with the assertion that complete budget acceptance among the management led
to profits. Ashok (2009) noted that budget as management tools can be used as performance measures
among employees. He further noted budgets can also be used by managers as a fault finding tools which
may have negative implications on intended budget purpose. The study finding with regard to this
concurred with Ashok’s observation in the sense that 43.5% majority of the respondents agreed with the
assertion that use of budgets to pressure employees has led to mismanagement of funds a situation that
could lead to negative financial performance. Majority of the respondents further indicated that
meaningful involvement of employees had not led to increased productivity which is an important
attribute of financial performance.
Majority of respondents were not sure that using of budgetary controls to achieve organizational
goals had led to increased profitability. This would imply that budgetary controls may or may not
necessarily be attributed to financial performance of State Corporation. Just like any other kind of
organizational policies, it is imperative for organization to consider positive involvement of employees
and acknowledge their valuable contribution (Waren, (2011).The study finding on effect of human
factors on budgetary controls indicated mixed opinion amongst employees on the assertion that
management valued employees in budgetary controls and thus increased revenue. It was also agreeable
by 40% majority of the respondents that profitability among state corporations had been affected by use
of budgets to blame employees.
Ghosh (2005) notes that at times management of organizations may be focus too much on
technical budgetary aspects which can affects the organizations profitability. There were equal majority
of respondents who agreed and were not sure about this assertion. They could imply the importance of
both the technical part of the budget as well as its ability to facilitate financial growth in an
organization. It was also agreeable amongst majority of respondents that favourable variance in budget
was due to insight and sensitivity of the management
3.3 Regression analysis on the relationship between budgetary controls and financial performance
The regression analysis was conducted to find, how budgetary control affected financial
performance. The respondent’s overall mean score on financial performance was considered the
dependent variable and budgetary controls the independent variables. Thus mean aggregate scores for
respondents’ opinion on features of budgetary controls, human factors within budgetary controls, the
process of budgetary control and challenges facing budgetary controls were regressed on the overall
score for financial performance. The beta coefficients provided the relative importance various
budgetary control aspects. The highest beta coefficient value of budgetary control aspect was expected
to have highest influence on financial performance, while the second highest beta coefficient stands
second in terms of relative significance and so on. The overall model was also statistically significant,
where (R2 = .4, p<.001), the adjusted R Square value 0.450, which shows that this model has accounted
for 45.0% of the variance in the dependent variable. The Regression results are shown in tables below
Table 4.7 Summary of regression model
R R Adjusted R Std. Error of Change
Model Square Square the Estimate Statistics
R Square Change F Change df1 df2 Sig. F Change
1 .737 .405 .450 .48973 .405 48.255 5 339 .000
a. Predictors: (Constant), features of budgetary control, Human factors within budgetary control, process of
budgetary control, challenges facing budgetary control
b. Dependent Variable: financial performance of State corporations

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Table 4:8 Regression Coefficients

Model Unstandardized Standardized t Sig.

Coefficients Coefficients
B Std. Error Beta
1 (Constant) .430 .281 2.021 .050
Features of budgetary 0.205 0.55 0.780 3.372 0.001
control
Human factors within 0.483 0.59 0.350 6.102 0.000
budgetary control
The process of 0.120 0.51 0.119 2.434 0.025
budgetary control
Challenges facing 0.460 0.55 0.109 2.087 0.040
budgetary control

Y (Financial performance) =0.430+0.205 (Features of budgetary control) +0.483 (Human

factors within budgetary control) + 0.120 (The process of budgetary control) +0.460 (Challenges facing
budgetary control) + €
On general aspects within budgetary controls were found to have positive influence on financial
performance of state corporations. Human factors within budgetary control had the highest beta
coefficient of 0.483. Other factors with high influence on financial performance included challenges
faced in budgetary controls which reflected a beta coefficient of 0.460, features of budgetary control
with a beta coefficient of 0.205 and the process of budgetary controls with a beta coefficient of 0.120.
3.4 Overall trend in net profit / surplus for the last 3 years
The trend of net profit / surpluses’ in the organization for the 3
years Increasing
Decreasing
Constant

37.1

48.6

14.3

Figure 4.5: Trends net profit / surplus for the last 3 years

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54 International Journal of Accounting and Taxation, Vol. 1 No. 1, December 2013

Respondents were asked to indicate their overall rating on the trend of financial performance in
their organizations. The results indicated that 48.6% majority of the respondents said it was increasing,
14.3% said it was decreasing while 37.1% said it was constant. The 40% attributed this to budgetary
controls while 60% trend was not attributed to budgetary controls.
Summary of Findings,Conclusion and Recommendations
5.1 Summary of findings
5.1.1 Background information on the respondents
The study sampled 42 respondents selected purposively from different state state corporations.
The response rate for the study was 83.3%. The study findings indicated that 25.71% of the respondents
were from corporate services, 48.57 % were indicated that finance managers while 27.715 were budget
officers. The period of work for the respondents ranged from one to over 15 years of service. Majority
(37.14%) of the respondents had worked in their respective state corporations for a period of 1-5 years.
5.1.2 Features of budgetary control and financial performance
Majority of the respondents were in agreement that the features of budgetary control had effect
on financial performance of state corporations. (Y (Financial performance) =0.430+0.205 (Features of
budgetary control) +0.483 (Human factors within budgetary control) + 0.120 (The process of budgetary
control) +0.460 (Challenges facing budgetary control) + €).
Beta coefficient for Features of budgetary control was 0.205 in the regression results, reflecting
a positive relationship. Among the budgetary control feature examined in this study included; ability of
budgetary control to lead into cost effective procurement which 77.8% majority agreed that it led to
surplus revenue for organizations. 77.6% majority however agreed that surplus revenue was not assured
through increased budgetary controls. “Fitness of budgetary control to organizations cost saves cost”
this was an assertion that 68.9% majority of respondents agreed with. This could imply that budgetary
controls should not only have general feature, but rather features that are organizational specific in order
to meet financial objectives of the organization. 68.5% of the respondents were in agreement that it did
not necessarily increase the profit margin of organizations examined.
Majority (70%) were in agreement that operation costs for their organizations were reached
through budgetary controls which in turn could have a positive implication on financial performance.
Financial performance is subject to returns on investments. Budgetary controls as a tool for economic
efficiency was found to provide an organization’s with avenues to invest in income generating ventures
as indicated by 68% of the respondents. While budgets are supposed to be tools for management and
gauging of employees achievements verses the set targets, it was found from majority (75.9%) of
respondents that it did not necessarily increase internal motivation among employees , an aspect that
could positively or negatively affect employees performance.
5.1.3 Human factors within budgetary control and financial performance
The findings revealed that majority (38%) of respondents were neutral on the assertion that
managerial commitment to budgetary controls had not increased profitability of their organization.
Though management of organization can accept the budget, it is not a guaranteed that complete
acceptance would lead to profits and thus consequent implication on financial performance .This was
backed up by majority ( (49.6%) of the respondents who agreed with the assertion that complete budget
acceptance among the management led to profits .

The study finding with regard to this concurred with Ashok’s observation in the sense that
43.5% majority of the respondents agreed with the assertion that use of budgets to pressure employees
has led to mismanagement of funds a situation that could lead to negative financial performance.

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Majority of the respondents further indicated that meaningful involvement of employees had not
led to increased productivity which is an important attribute of financial performance. Majority of
respondents were not sure that using of budgetary controls to achieve organizational goals had led to
increased profitability. The study finding on effect of human factors on budgetary controls indicated
mixed opinion amongst employees on the assertion that management valued employees in budgetary
controls and thus increased revenue. It was also agreeable by 40% majority of the respondents that
profitability among state corporations had been affected by use of budgets to blame employees. Ghosh
(2005) notes that at times management of organizations may be focus too much on technical budgetary
aspects which can affects the organizations profitability .There were equal majority of respondents who
agreed and were not sure about this assertion .
5.1.4 The budgetary control process and financial performance
Majority (46.2%) of respondents agreed with the assertion that financial performance was based
on budget goals in the planning stage. It was also agreeable from majority of respondents that involving
all players in budget planning had connection with favourable cost variances. Respondents were not
sure of the relationship financial standing of the corporation and financial policy in the budget process.
This was evidence by 42.4% majority of respondents who were neutral on the assertion that link
between financial policy in the budget process was determined by financial standing of the corporation.
There could be indication that budgetary process did affect financial goals of the company. This was
agreeable by 46% of the respondents who indicated that budget approval did not consider financial
goals of the companies they worked for.46% majority of the respondents agreed with the assertion that
budget allocation was based on sector priorities and not necessarily financial needs of the organization.
Budgetary process in Kenya normally passed through the parliament for members to approve of
disapproves of it. This could mean that budgetary controls may at times be exposed to procedures made
to address political interests and not necessary out of good faith. Majority (38%) of the respondents
agreed with this by indicating that politicising of budget approval had led to unfavourable variances
which could have implications on the organizations financial performance.
It was noted that the budgetary control process lacked tools for monitoring disbursed funds.
39.4% majority of respondent agreed with the assertion that lack of monitoring tool for disbursed fund
has affected of our corporation. It was however agreed by 45.8% of the respondents that budgets
allocated in state corporations acted as bench mark towards financial performance. Budgetary process is
supposed to ensure that organization is allocated funds within which they could undertake their
investment programs. 50% majority of respondents agreed with the assertion that fixed allocation of
funds for all projects had improved the organizations financial performance. It was agreeable that there
was a delink between budgetary control process and resource allocation which adversely affected
profitability of state corporations studied.
5.1.5 Challenges of budgetary control and financial performance
Among the challenges indentified in the study was failure of budget process to focus on
organizational long term goals. Majority (41.5%) of the respondents said this had led to undefined
financial goals which could lead to negative financial performance. Lack of well functioning
accountability framework was found to affect financial performance as revealed by 43.2% majority of
respondents. Managerial commitment towards budgetary controls was found to increase operational
costs and consequently the affected the organizations financial performance. The effectiveness of
budgetary process was found to be derailed by lack of teamwork between the management and finance
function, thus implicating on the organizations financial performance. 42.5% majority of respondents
agreed with the assertion that financial performance was largely influenced by changes within the
organization and was highly restricted to budgetary controls.

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5.4 Policy Recommendations

There is a need to increase the level of sensitization among management and employees of state
corporations on the importance of budgetary controls in enhancing financial performance. The process
of budgetary control should not only consider sector needs in the planning stage but also parameters
within implementing organizations in order to facilitate sound financial standing. It is important not to
over subject the process of budgetary control to political scrutiny as this may divert the core purposes of
a budget. Budgets should not only be used as tool for management and indicators of management, they
should also be viewed as practical tools within which organizations should used to enhance their
financial goals.

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