Budgeting Practices and Financial Performance of Manufacturing Firms in Kenya

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.