CHAPTER ONE

GENERAL INTRODUCTION

1.1 Background to the Study:

Micro finance institutions (MFIs) are financial companies that provide small loans to people who do not have any access to banking facilities. Therefore, microfinance institutions are out to help low income earners. “Microfinance has proved its value in many countries as a weapon against poverty and hunger. It really can change the lives of people especially the lives of those who need it most” (Kofi Annan, UN Secretary General 18^th November 2004). Despite the rapid growth of MFIs in Cameroon, they face a lot of problems when it comes to budgetary control and implementation.

There are several goals that many businesses seek to achieve (or should be trying to work toward) when they create and implement a budget. These goals include control and evaluation, planning, communication, and motivation (Lucey, 2004). (Kariuki, 2010), suggests that budgeting is a process of planning the financial operations of a business. Budgeting as a management tool helps to organize and formulize management’s planning of activities. Budgeting as a financial tool is useful for both evaluation and control of organizations for the planning of future activities. Application of these tools can greatly impact the performance of a company. Budgeting as a tool in financial management regularly prepares performance plans and budget requests that describe performance goals, measures of output and outcomes in various activities aimed at achieving performance goals. This helps in the sense that annual plans set forth in measurable terms form the levels of performance for each objective in the budget period. Budgetary control is the establishment of departmental budgets relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, to ensure that individual actions of the objectives of that policy provide a firm’s basis for its revision (Enya, 2012). Budgetary control is one of the approaches to the control of firm’s financial activities (Karen and Dr. Oluoch,2017).

Enya (2012) argued that; to ensure that the firm’s actual performance coincides with expected performance, it is necessary to initiate a system of controls. This method is used to ascertain budgetary control looks at the future and lays down what has to be achieved. Controls check whether the plans are being realized and put into effect corrective measures and determines where deviation or short-fall is occurring (Egan, 2010). Egan emphasized that without effective controls, an enterprise will be at the mercy of internal and external forces that can disrupt its efficiency. 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.

According to Cook (2008), budgetary control involves continuous planning and control after which the relevant information on the real results is passed to managers for comparison purposes against the planned budget. A developed and broad system of budget control is increasingly being recognized by many organizations as it ensures minimal differences between the planned budget and the outcome as well as increasing firm efficiency and reducing cost (Alesina & Perotti, 1996).

According to Bremser (1988), budgets are known to have an important role to transmit the expectation of top management to lower levels and are used to communicate top management’s expectations to managers and employees. According to Lucey (1993), it is a quantitative expression of plan of action prepared in advance of the period to which it relates, expressed in money terms approved prior to the period.

Budgeting is very essential in regulating the day to day operations of any business (Pimpong & Laryea, 2016). It is a framework for ensuring achievement of programs concerned with business goal and objectives, under a given time period, by use of specific availed resources. The budget outlines the available resources as well as the future required resources (Smith & Lynch, 2004). The budget framework incorporates firm activities that are essential to the wellbeing of the organization (Koech, 2015). The components of the framework include budget control, budget planning, budget implementation and budget review.

Generally, firms operate using several resources including financial, human, capital and others. Financial resource is one of the key elements in achieving organizational objectives and goals (Drury, 2008). However, in order to achieve the objectives, the budget has to be prepared effectively and adhering to a properly managed budget can promote sustainable profits in many business organizations. The actions that follows managerial decisions normally involve several aspects of business, such as the marketing, production, purchasing and finance functions, and it is important that the management should coordinate these various interrelated aspects of decision-making. If the management fails to do this, there is danger that, managers may each make decisions that they believe are in the best interests of that organization when, in fact, together they are not. For example, the marketing department may introduce a promotional campaign that is designed to increase sales demand to a level beyond that which the production department can handle (Asantina, 2018).

The rapid changes in today’s business environment render a rigid approach to budgetary control obsolete. It is no longer helpful to compare actual results to that forecasted anything up to 15 Months previously (Pandey, 2002). He argues that amongst the requirements of a more appropriate system, would be the building in of accountability to explain the differences between actual and planned performance.

Management involves providing the financing necessary to support assets (Van Horne & Wachowicz. 1998). Financing is classified as either debt financing or equity financing. Funds, on the one hand, are raised by borrowing from creditors in the form of long-term notes, mortgages, leases, or bonds. Funds, on the other hand, are obtained in exchange for ownership in the firm (selling shares of stock). The collected funds through debt financing and equity financing are used to finance investments in projects and the ongoing business (Yang, 20).

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 control (Anthony, 1965; Flamholtz, 1983; Otley and Pollanen, 2000; Otley, 2003). Alesina & Perotti, (1996) state that the process of managing is facilitated when management charts its future course of certain objectives in advance and takes decision in a professional manner, utilizing the individual and group efforts in a coordinated rational manner. One systematic approach for attaining effective management performance is budgeting.

Recent developments, such as a global market, technology advances and e-Commerce, shorter product life cycles and intense competition have transformed the business operating environment. As a result, various financial management systems, including budgeting, cost allocation methods, financial reporting systems and others have come under greater scrutiny (Gibert, 2015).

Seldin (2001) argues that for the smooth implementation of an organizations budget, budgetary planning and control must be properly done. Under budgetary control, evaluation which is a process by which an appraisal of performance is systematically conducted with a view to measure individual, department and organizational contribution should be done.

1.2. Statement of the Problem

Micro finance institutions in Cameroon have grown rapidly for the past years. This is as a result of changing and improving economic growth both nationally and internationally.  Micro finances go a long way to reduce poverty in Cameroon as a result of their activities. Though this is very encouraging, from my observation, they find it difficult to effectively budget for planning, organizing, and controlling of its activities to meet set objectives.

Budgeting and firm’s performance are key elements to a firm’s success. However, in order to achieve organizational objectives using a budget, it has to be prepared and adhered to totally (Lazaridis, 2014). Though studies have been carried out to show the effects or relationship between budgeting control and a firm’s performance, but the researches are still scanty giving rise to problems pertaining to budgeting and financial or overall performance of firms.

The effect of budgeting on the performance of financial institutions has been studied in various countries across the world. However, not much research has been covered in this area and micro-financial institutions in Bamenda. Whereas (Kenis, 1979) supported the argument that budgeting is positively and significantly associated with performance, (Milani, 1975) found that there is a weak positive association between budget and performance.

Micro finance institutions in Cameroon face an array of problems with the most important being lack of implementation of budgetary process, and effective budget control. This therefore, has gone a long way to reduce their performance both financially and overall performance. As a result of the scanty research in the area of budgetary control on the performance of micro finance institutions, the study then seeks to add more flesh to this area.

1.3. Research Questions

1.3.1 Main Research Question

What is the effect of budgetary control on the performance of micro finance institutions?

1.3.2 Specific Research Questions

The specific research questions are as follows

1. What effect does budgetary planning have on the performance of micro finance institutions?
2. What is the effect of budgetary implementation of the performance of Micro finance institutions?

1.4. Research Objectives

1.4.1 Main Objective

The main objective of the study is to determine the effect of budgetary control on the performance of microfinance institutions.

1.4.2 Specific Objectives

The specific objectives of the study include:

1. To determine the effect of budgetary planning on the performance of micro finance institutions
2. To examine the effect of budgetary implementation on the performance of micro finance institutions.