Abstract:
The objective of this study was to establish the effect of budgeting practices and
financial performance of manufacturing firms in Kenya. The following specific
objectives were addressed by this study: to establish the effect of budget planning on
financial performance of manufacturing firms in Kenya, to examine the effect of
budget monitoring & control on financial performance of manufacturing firms in
Kenya, to determine the effect of budget evaluation on financial performance of
manufacturing firms in Kenya, to evaluate the effect of budget communication on
financial performance of manufacturing firms in Kenya, and to assess the firm size as
a moderating factor on the financial performance of manufacturing firms in Kenya.
This study was anchored on four theories, namely; Incremental Budgeting Theory,
Goal Setting Theory, Agency Theory, Resource-Based Theory, and Theory of the
Growth of the Firm. Most researches have concentrated mainly on single budgetary
control on the financial performance of manufacturing firms. It is on this premise
that there existed a knowledge gap on the collective budgeting practices by
manufacturing industry, hence the need for this study. This study utilized a mixed
research design. The study used primary data and secondary data collection sheet.
The study target population were 741 manufacturing firms operating in Kenya. The
unit of observation were finance managers, accountants, and supervisors from the
supervisory level management. Questionnaires were administered as the main tool
of data collection. Secondary data was administered from the financial reports in the
books of sampled manufacturing. To check the validity and reliability of the
questionnaires, a pilot study was carried out. Descriptive statistical methods were
applied to describe application of budgeting practices in the sampled manufacturing
firms. Inferential statistical techniques such as correlation analysis and regression
analysis were applied to test the hypotheses of association and differences. The
collected data was processed using the statistical package for social science (SPSS).
The study findings revealed that budget planning, budget monitoring & control,
budget evaluation, and budget communication, have significant positive effect on the
financial performance of manufacturing firms in Kenya. Furthermore, the firm size
significantly moderates the relationship between budgeting practices and financial
performance of manufacturing firms, with R-Squared value increasing after
including the interaction terms. The budgeting practices ‘null hypotheses were all
rejected implying a significant effect on financial performance. This study
recommends that by setting spending limits and monitoring actual expenditure
against budget, firms can prevent overspending and ensure resources are used
efficiently. The study suggests the need for further research on other external
economic factors besides the budgeting practices that affect the financial
performance of manufacturing firms and other companies.
