ABSTRACT

This study sought to analyse the effect of budgeting on the financial performance of small and medium size enterprises (SMEs) in the Buea municipality. The study was carried out using questionnaires administered to owners and employees of these enterprises. Theories that supported this study were the resource base view, institutional theory and the signalling theory. Statistical technique for data analysis like descriptive and inferential statistic based on the mean, standard deviation, skewness, correlation matrix, with a linear regression analysis to draw the conclusion of the study were applied. The financial performance of SMEs was capture in terms of sales growth and budgeting in terms of the budgeting process as budget planning, budget implementation, budget monitory and budgetary performance review. We found that budgeting has a strong effect on the financial performance of SMEs in Buea municipality. This is depicting by the model summary which gives us a probability value less than the alpha value of 0.05 the strong positive relationship is seen at the level of our R2 with a value of 0.7096 which signifies that 70.9% of variations in sales growth is as a result of variations in budgeting. Another major finding of this study is the effect which budget planning and budgetary performance review has on the sales growth of these SMEs. Budget planning and performance review have a correlation coefficient of 0.408 and 0.480 respectively which is higher than that of budget implementation and budget monitoring. The findings recommend that they should be two-way flow of information and other facets of a properly organized budgeting system to help in promoting a coalition of interest and to increase motivation.  Budgeting process , financial performance  small and medium size enterprises, budget planning, budget implementation budget monitoring  and budgetary review.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The subject of financial performance has received significant attention from scholars and practitioners in various areas of business and strategic management. Financial performance has implications on any business organization’s health and ultimately its survival (Onduso, 2013). Financial performance is explained as the degree to which financial objectives are being or have been accomplished. Extensive literature regarding the firm’s objectives, places much emphasis on profitability or the firm’s ability to generate sufficient income from its resources. Thus, in order to achieve this, Naser and Mokhtar (2014), highlighted that management effectiveness and efficiency in making use of company’s resources will matter a lot.

In order to achieve its strategic goals and objectives business design financial plans which describe each of the activities, resources, equipment, materials, financial projections, strategies and methods the business intends to implement to achieve stated targets and timeframe to achieve them (Ross & Westerfield, 2010). Financial resource is one of the key elements in achieving organizational goals (Drury, 2010) and in order to efficiently allocate these resources firms need a proper financial planning cycle and a strategic role of financial management. Fortunately, financial budgets were created as a tool for planning, implementing, and controlling activities for the optimum utilization of scarce financial resources in a business.

A budget is essential for any business to operate at peak efficiency (Ganti, 2021). It’s a financial projection that helps to keep track of business income and expenditure for a defined period. Budgets explains company’s objectives and the course of action it will choose to achieve its goals in detail (Hongreen, 2017). Also, it mention the controls to be put in place for achieving its successful implementation. The budgeting process is the process of putting a budget in place. This process involves planning and forecasting, implementing, monitoring and controlling, and finally evaluating the performance of the budget. Performance evaluation becomes easy as there is a set target or goal to achieve in the budget for the predetermined period. The management can question any deviation from the set goals. The budgeting process helps to take corrective actions timely in case of under-achievement of income or excessive expenditures. Thus, the budget helps to ascertain that business financial resources are well spent and invested correctly, and financial goals of the business are achieved (Mbuthia & Omagwa, 2019).

Budgeting now occupies a prominent and permanent place in the field of business management. Modern budgetary techniques and principles have major stages of development through which budgeting has passed in its evolution. A brief account of its origin and growth will provide a desirable perspective and introduction to the study of modern budgetary principles and procedures. Although budgeting, in the modern sense, was a postwar development in business management with extensive application first in the United States, the concept has its origin in England during the 18^th century, not in business, however, but in government.

Thus, on a historical perspective, budget was originally used in England as a means of controlling government expenditures. As early as 1760, the Chancellor of the Exchequer presented the national budget to parliament at the beginning of each fiscal year containing an accounting report of governmental expenditures of the past fiscal year, an estimate of the expenditure for the coming year, in the form of an accounting statement and recommendation as to methods of levying taxes that would be needed to provide funds for the estimated expenditures. By then, budgetary procedures were adopted in the management of national finances to check the king’s power to levy burdensome taxes upon his subjects and to control more effectively the spending of money by public officials. Today, budgets are designed and implemented by all organizations be it governmental or non-governmental, business and individuals to estimate their revenue and expenses over a specific future period of time and to ensure efficient management of financial resources (Ganti, 2021).

A detailed and realistic budget is one of the most important tools for guiding business operations. It provide essential information for operating within resources, managing unexpected challenges and making profits. A proper budget will identify available capital, estimate expenditures, and anticipate revenues. According to Carlson (2021), business owners must continually refer to their budget as a way of measuring forecasted budget figures against actual budgetary results in order to know where to make adjustment. Budget is among the major tools for implementation of the objectives and policies of businesses. In other words budget provides the basis for decision making in the businesses. Budgeting plays importance not only to businesses but also to individuals on how to spend in relation to the resources available. Further, budgets play other managerial roles such as planning, controlling, communication and motivation. A well formulated budgeted system enables the organization to reach its goals more successful (Drury, 2010).

Budgeting processes and procedures varies across businesses and activities. However, common budgeting process steps include; planning, coordinating, communication, controlling, and evaluation. The planning process involves; identifying the objective to be achieved, formulation of the strategies to achieve them, implementation and monitor progress, done before implementation of project (Dunk, 2010). Coordinating process involves consolidating the actions or resources and different parts of the firm together or into a common plan. Budgetary control process involves developing a spending plan which should be used for periodic comparison with the actual expenditure to determine if it needs changes or if it is optimal (Hancock, 2011). Communication in budgeting is also important since it ensure understanding clearly the role every personnel plays to ensure budgeting process compliance. Budget evaluation on the other hand ensures that the entire process is effective and transparent through ensuring active involvement.

Small and medium enterprises (SMEs) varies significantly  from country to country depending on factors such as the country‘s; number of employees, the value of fixed assets, production capacity, basic characteristics of the inputs, level of technology used, capital employed, management characteristics, economic development, and the particular problems experienced by SMEs (Eniola & Entebang, 2015). However, through their investments, production and distribution they are responsible for creating employment, boosting economic development, economic innovations and wealth distribution.

The World Bank estimates that formal SMEs contribute up to 60% of total employment and up to 40% of national income (measured by the GDP), in emerging economies. These numbers are significantly higher when informal SMEs are included. SMEs are the main engine of economic growth in most developing countries. Developed countries enjoying a growing and booming economy attributemost of their achievements to a flourishing SMEs sector.

Small & medium businesses also play an important role regarding labor absorption, market penetration, and expand economies in innovative ways (Hussain & Ullah, 2021). In both advanced and developing economies, small and medium businesses are considered as the “engines of growth” and a key source of innovation, flexibility, and dynamism” for their colossal share towards total Enterprise and many contributions to new market development & job creation, actual GDP growth, and poverty reduction (Hailu & Venkateswarlu, 2016). SMEs are really important towards the future financial sustainability and the unceasing evolution of a modern knowledge-based economy.

In Africa in general ― Sub-Saharan Africa in particular ― SMEs account for more than 90% of the total number of firms. It is estimated that more than 70% of African SMEs are micro-firms or very small enterprises (Forentia, 2019). Small Businesses have become the significant clout of sustained, instantaneous and bracing growth of Cameroon’s economy. Moreover, they performed an unparalleled role in advancing the country’s economic growth, and serve as a breeding ground for entrepreneurs and a provider of solutions to address the problems of unemployment in all consuming labour and promoting marketing growth.

In Cameroon, SMEs make up 95% of the country’s economy, affirms Minister of SMEs, social Economy and Handicraft in the 2016 annual statistic. They are considered to be engines of growth, and make up 36% of the Cameroon’s GDP.  Being the major actors in the Cameroonian economy, Small and growing businesses create around 80% of the country’s employment, establishing a new middle class and fuelling demand for new goods and services thereby reducing the rate of unemployment in the country.

Cameroon’s vision is to become an emerging economy by 2035. Thus, the country has taken major reforms to boost the growth and development of SMEs, like the introduction of Small Business law in 2010―that was revised in 2015 and a further revision in 2017, a well-established Ministry for Small and Medium Size Enterprises, Social Economy and Handicrafts (MINPMEESA) which was set-up in December 2004, and a state-owned and managed commercial bank to meet the finance needs of small businesses known as Banque Camerounaise des Petites et Moyennes Entreprises (BC-PME). The Research and Analysis Center on the Economic and Social Policies of Cameroon in its 2016 study show 61366 SMEs were created in Cameroon between 2010 and 2016, with 59200 being local enterprises and 2166 foreign.

The performance and growth of Small and Medium Sized Enterprises (SMEs) have throughout the nations, been of great concern to, among others, development economists, entrepreneurs, governments, venture capital firms, financial institutions and non-governmental organizations (Eniola & Entebang, 2015). Increasing the chances of success among Small and Medium size Enterprises (SMEs) has huge implications on the growth and socio-economic wellbeing of a country (Asian-pacific economic cooperation, 2014).

The economic, social, and political environment surrounding SMEs impact on their performance (Bouazza et al., 2015). The future development of the SMEs is connected with the policies and procedures that insure dependability and supporting the industrial sector. SMEs are accounted for 90% of the world’s enterprises and provide employment opportunities of about 50% of the organized employment (Word Bank Group, 2017). Researchers concentrated on investigating different factors influencing the performance of SMEs in developed and developing countries (Almansour, 2019) and ensure to provide innovative approaches to improve the performance of these enterprises.

1.2 Statement of the Problem

It is generally accepted that SMEs are becoming increasingly important in terms of employment, wealth creation, and the development of innovations. However many SMEs in the Buea Municipality encounter performance constraint during their lifetime and as a result, many perform dismally and fail to grow (Molonge, 2016).  In addition, it is generally known and accepted that there is a high mortality rate of SMEs within the first two years (Kamunge et al., 2016).

According to findings published by Groupement Inter-patronal du Cameroun (GICAM) in 2014, both small and medium size enterprises in various economic localities in Cameroon encounter performance problems such as; insufficient financing, lack of proper financial management knowledge and skills, inadequate business strategies, intense competition, inadequate information as well as poor financial attitudes.

Despite the country’s major reforms to boost the growth and development of SMEs, like the introduction of Small Business law in 2010―that was revised in 2015 and a further revision in 2017, a well-established Ministry for Small and Medium Size Enterprises, Social Economy and Handicrafts (MINPMEESA) which was set-up in December 2004, and a state-owned and managed commercial bank to meet the finance needs of small businesses known as Banque Camerounaise des Petites et Moyennes Entreprises (BC-PME), SMEs still lack in intangible resources such as entrepreneurial financial planning, knowledge, skills and procedures necessary to manage financial resources efficiently and achieve financial performance.

Poor management of funds, including absence of budget for preparation and control, frequently leads to poor financial results and subsequent firm failure (Foster, 2017). Profit-making bodies consider budgets and fiscal controls to be core elements of their policy-making. Modupe (2017) notes that SMEs continue to blunder and struggle because they have poor financial preparation and control mechanisms that they do not understand. However, small and medium-sized enterprises do not pay any relevant attention to the budgetary and budgetary control systems and therefore impede their performance and development.

Most enterprises fail to understand the effect of budgets and budgetary control over performance results (Agbenyo, Danquah, & Shuangshuang, 2018). These firms move ahead without paying further attention to enhancing their efficiency through their budgets. Budget preparation and budgetary management are resources that could be used by a business organization to accomplish its profit plan, which sadly is not being adequately used by many business organizations. This research is therefore motivated to find out if budgeting can be a solution to better off the financial performance of small and medium size enterprises. In order to address this problem, this research will have to provide answers to the following questions.

1.3 Research Questions

Main research question

What are the effects of budgeting on the financial performance of SMEs in Buea Municipality?

Specific research questions

• What is the effect of budget planning on the financial performance of SMEs in Buea Municipality?
• What is the effect of budget implementation on the financial performance of SMEs in Buea Municipality?
• What is the effect of budget monitory and control on the financial performance of SMEs in Buea Municipality?
• What is the effect of budgetary performance review on the financial performance of SMEs in Buea Municipality?

1.4 Objectives of the study

The objectives of this study shall be divided into the main and specific objectives.

Main objective

The main objective of this study is to assess the effects of budgeting on the financial performance of SMEs in Buea Municipality.

Specific objectives

• To examine the effect of budget planning on the financial performance of SMEs in Buea Municipality.
• To establish the effect of budget implementation on the financial performance of SMEs in Buea Municipality.
• To investigate the effect of budget monitory and control on the financial performance of SMEs in Buea Municipality.
• To analyze the effect of budgetary performance review on the financial performance of SMEs in Buea Municipality.