While extensive research has been conducted on the budgeting process and budgeting techniques (Johnson & Kaplan, 1987; Foster & Gupta, 1990; Hope
& Fraser, 1999; Neely, Bourne & Adams, 2003), research on the utilization of individual budgets is scarce. Budgets are a critical component of business management practice. As such the literature review for this study is extracted from the relevant areas of budgeting (Warue & Wanjira, 2010; Bruwer, 2012;
Bruwer et al., 2015), financial planning and control systems (Berry, 2011;
Mutanda 2014), financial management practices (Agyei-Mensah, 2011; Fatoki, 2012) and management accounting practices (Alleyne, 2011; Ahmad, 2012).
Generally, studies on the utilization of budgets are rare, with only a few conducted, mostly in developed countries.
Manufacturing SMEs
BUDGETS:
Sales Production:
Direct Materials
Direct labour
Factory
Overheads Selling &
Administration Cash Budget Income Statement Balance Sheet
Make sound business decisions leading to
business sustainability
Make unsound business decisions leading to business failure Types of
budgets
Not Utilising budgets Utilising budgets
46 3.6.1 Prior studies from other countries
Joshi (2001) conducted one of the earliest questionnaire surveys on the usage of management accounting practices, including the usage of budgets among 60 large and medium manufacturing companies. The study indicated a 100%
usage of operational budgets, and 100% usage of budget variance analysis.
In a survey of 245 companies, Abdel-Kader and Luther (2006) investigated the usage of management accounting practices in general in the UK’s food and beverage industry. The findings of the study showed that budgets were used for planning and controlling purposes by 73% and above of the 245 companies.
On a larger scale, CIMA (2009) conducted a global survey of 439 companies on the usage of budgets alongside other management accounting tools.
According to the study, the smallest companies surveyed made very little use of operational budgets.
In Barbados, West Indies, Alleyne (2011) studied management accounting practices in three manufacturing companies using a sample of 27 semi- structured interviews. This study concluded that budgeting was used as a control tool with the planning process and for monitoring the cash-flow (Alleyne, 2011). In addition, the study showed that respondents perceived that management accounting practices were very effective and contributed to the success of the entities.
The studies reviewed so far were based mainly on large companies which do not fall under the classification of SMEs. The findings are however relevant in this literature review as an indication of the usefulness of budgets in the management of business in large companies. It is therefore expected to follow that budgets are useful for management of business in the SMEs. Hence the researcher extends the literature review to studies based on SMEs.
In the area of utilization of budgets, Warue and Wanjira (2010) assessed budgeting in hospitality SMEs in Nairobi, Kenya. The study was conducted using 104 structured questionnaires. The findings revealed that firm size is significantly related to budgeting and suggesting that a positive development of the firm leads to better budgeting process and performance of the firm (Warue & Wanjira, 2010:9). Although insightful, the study only investigated
47 factors affecting the budgeting process without evaluating the utilization of budgets for decision-making and sustainability.
Agyei-Mensah (2011) used semi-structured interview questionnaires to study the financial management practices of 80 small firms in Ghana. The findings revealed that only 21.37% of the firms often used cash budgets (Agyei- Mensah, 2011:3786).
Ahmad (2012) emulated Alleyne (2011), investigating the use of management accounting practices by small and medium manufacturing enterprises in Malaysia. The results showed significant uptake of management accounting practices, which include budgeting, (35%-76%) in small firms, and (58%-86%) in medium-sized firms (Ahmad, 2012). This finding by Ahmad (2012) concurs with Warue and Wanjira (2010) that the size of the firm may be a key factor in utilization of budgets. Hence the current study focuses on small and medium entities unlike previous studies (Agyei-Mensah, 2011; Berry, 2011; Fatoki, 2012; Mutanda, 2014; Bruwer et al., 2015) which included micro and very small entities.
Armitage and Webb (2013) in Canada investigated the usage of management accounting tools by 11 SMEs using in-depth interviews. In the process, the study also investigated the usage of budgets for decision-making. Findings applicable to the current study are that operating budgets were perceived as important and were used by 91% of the entities, and that the smaller the entity the more the focus on the cash component of the operating budget.
Although these studies (Warue & Wanjira, 2010; Agyei-Mensah, 2011; Ahmad, 2012) were based on small and medium firms, they broadly investigated financial management practices or management accounting practices, lacking a specific focus on utilization of budgets. In addition the studies were conducted in countries other than South Africa. Accordingly, the literature review turns to studies conducted in South Africa.
3.6.2 Prior studies from South Africa
In the Eastern Cape, Fatoki (2012) researched financial management practices among new micro enterprises in the retail and services sectors. The results indicated that micro-enterprises do not engage in financial planning, analysis and control, which could be one of the major reasons for the high
48 failure rates (Fatoki, 2012). The response rate was low with only 57 respondents out of 128 (44%).
Berry (2011) conducted a study to determine the financial planning and control systems practices among 65 micro and small manufacturing enterprises in Tshwane metropolis. Using a questionnaire survey, Berry (2011), found out that despite 52.4% of the respondents indicating that they used some form of financial planning, more than 52.4% indicated that they used budgets as financial planning tools. This finding was not consistent with the respondents’
understanding of financial planning, rendering the results questionable.
Another study was done in Durban Central Business District by Mutanda (2014) using a structured questionnaire. Mutanda (2014) found out that respondents did not calculate profit, while most of them neither planned their profit, nor practised any financial planning. Mutanda also observed serious problems with financial planning literacy, because, while 62% indicated knowledge about profit planning, 62% did not understand what financial planning is and only 20% knew how to draw up a budget.
Locally, Bruwer (2012) used 30 questionnaires to assess the utilization of budgets in the retail clothing SMEs. The observation was that the use of budgets with regard to decision-making was between 56% and 76%, with the production budget being the least used and the sales budget being the most utilised (Bruwer, 2012). In another study, Bruwer et al. (2015) deployed a larger sample of 51 questionnaires, and researched the usefulness of cash budgets. Unlike Bruwer’s (2012) findings, Bruwer et al. (2015) found that although SME leaders found cash budgets as important to make sound decisions, they made limited use thereof (Bruwer et al., 2015). The study concluded that the cash budget was not effectively used by the respondents (Bruwer et al., 2015). Though recent and reliably informative, the studies used a relatively small sample size and were conducted in industries where the cost of production is not always a critical factor for the entities.