Budgeting Practices and Challenges in Dairy Co-operative

8/10/2019 Budgeting Practices and Challenges in Dairy Co-operative

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DECLARATION

This Project is my original work and has not been submitted for a degree in any otheruniversity.

GATHIGE I!"# #$%#G%

$&'()**+(,--&

igned . $ate

This /roject has been submitted for e0amination with my a//roval as a university su/ervisor.

SUPERVISOR! J.O. ADUDA

S"#$%&' *************** D%&*************..

S+ / B'"$

U$"1"& / N%"3"

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DEDICATION

I dedicate this work to the 1ord God Almighty who generously /rovided me with good

health and all the resources I re2uired during my /eriod of study. I also dedicate it to my wife

Grace3 my daughter 4oy and son Praise3 for their encouragement3 su//ort3 /atience and

/erseverance throughout the course.

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ACKNO4LEDGEMENT

I wish to register s/ecial gratitude to my su/ervisor and 5hairman of the 6inance and Accounting

$e/artment !r. 4.". Aduda3 for his guidance3 encouragement and /atience in reading3

correcting3 re7reading and refining this work. I highly acknowledge my /arents for im/lanting

the seed of knowledge in me and my family for their continued su//ort and missing my

/resence.

Thanks to all my lecturers in all the subjects for delivering learning with all the humour which

made it a joy to learn. Thanks to my colleagues for often taking me as a team member in the

various assignments and sharing the workload together.

A number of /eo/le contributed to the success of this research /a/er. !y sincere thanks go to

many /eo/le who hel/ed me directly and indirectly with the /re/aration of the research /roject

/articularly the res/ondents who made time to answer the lengthy 2uestionnaire.

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ABSTRACT

Poor financial /erformance in business is attributed to /oor business /lanning3 unrealistic and

conflicting goals and targets3 absence of stringent monitoring and evaluation of activities.

However3 through effective budgeting and stringent budgetary control /rocess3 these activities

can be efficiently and effectively managed. The situation amongst the dairy co7o/erative

societies in 8enya is not different and more often we have had various co7o/eratives close down

due to /oor financial management.

The objectives of the study were to establish the budgeting /ractices and challenges facing dairy

co7o/erative societies in 8enya. The study targeted a sam/le of *9 dairy farmers: co7o/erative

societies in 5entral /rovince out of whom *' res/onded giving a res/onse rate of )).9;.

6rom the findings3 the study established that )*.


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TABLE OF CONTENTS

DEDICATION .............................................................................................................................."""

ACKNO4LEDGEMENT ..........................................................................................................."1

ABSTRACT ....................................................................................................................................1

TABLE OF CONTENTS .............................................................................................................1"

LIST OF TABLES ......................................................................................................................."5

LIST OF ABBREVIATIONS ....................................................................................................... 5

CHAPTER ONE ............................................................................................................................6

INTRODUCTION TO THE STUDY ...........................................................................................6

'.' >ackground of the study ........................................................................................................ '

'., tatement of the /roblem .......................................................................................................=

'.* "bjectives of the study ........................................................................................................... 9

'.= ignificance of the study ...............................................................................................9

CHAPTER T4O ........................................................................................................................... 7

LITERATURE REVIE4 ........................................................................................................7

,.- Introduction ...........................................................................................................................&

,.' >udgeting3 budgetary control and res/onsibility centers ..................................................... &

,., Im/ortance of budgeting ......................................................................................................+

,.,.' 5oordination ....................................................................................................................+

,.,., 6ramework for 4udging Performance ..............................................................................+

,.,.* !otivating !anagers and "ther Em/loyees ................................................................... )

,.,.= Human as/ects of budgeting ............................................................................................)

,.,.9 Goal congruence ..............................................................................................................udgeting ..................................................................................................'-

,.*., Activity >ased >udgeting ?A>>@ ....................................................................................''

,.*.* Planning Programming and >udgeting ystems ?PP>@ ..............................................''

,.*.= Performance >udgeting ................................................................................................''

,.*.9 ero7>ased >udgeting ?>>@ .......................................................................................',

,.*.& trategic /lan and 5a/ital budget ..................................................................................'*

,.*.+ !aster >udget ................................................................................................................'*

,.*.) 5ontinuous or Bolling budgets ......................................................................................'=

,.=. The >udgeting Process ........................................................................................................'=

,.=.' The ales >udget ...........................................................................................................'=

,.=., The /roduction >udget ..................................................................................................'9

,.=.* The !anufacturing or Production 5ost >udget ............................................................'9

,.9 $isadvantages of >udgets ....................................................................................................'9

,.+Theories of budgeting ............................................................................................................'+

,.) Em/irical tudies on budgetary /ractices ...........................................................................,,

,.< Em/irical tudies on challenges of budgeting .....................................................................,+

5onclusion from literature review ..........................................................................................,)

C%8& & ...............................................................................................................................96

RESEARCH METHODOLOGY ...............................................................................................96

*.- Introduction .........................................................................................................................*'

*.' Besearch $esign ...................................................................................................................*'

*., Po/ulation and am/le siCe ..................................................................................................*'

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*.* $ata 5ollection ..................................................................................................................*'

CHAPTER FOUR ........................................................................................................................99

DATA FINDINGS, ANALYSIS AND INTERPRETATION ..................................................99

=.' Introduction ..........................................................................................................................**

=., 6indings from the survey ......................................................................................................**

=.& 6indings on 5o7o/erative >udgeting Practices and 5hallenges ..........................................*+

CHAPTER FIVE ......................................................................................................................... :0

CONCLUSIONS AND RECOMMENDATIONS .....................................................................:0

9., 5onclusion ............................................................................................................................9-

9.* Becommendations ................................................................................................................9'

R/$+ .....................................................................................................................................:;

A88$


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LIST OF TABLES

Table =.'D %se of strategic /lan in the management of the co7o/erative society

Table =.,D !embershi/ of dairy co7o/erative societies

Table =.*D Total alue of assets owned by co7o/erative societies

Table =.=D Average milk deliveries in liters /er member in co7o/erative societies

Table =.9aD !anagerial taff em/loyed by co7o/erative societies

Table =.9bD u/ervisory taff em/loyed by co7o/erative societies

Table =.9cD 1ower level taff em/loyed by co7o/erative societies

Table =.&D Im/ortance of budgeting to the success of the dairy co7o/erative society

Table =.+aD Pre/aration of 5ash budget

Table =.+bD Pre/aration of budget for ac2uisition of fi0ed assets

Table =.+cD Pre/aration of income and e0/enditure budget

Table =.)D Partici/ation in budget /re/aration

Table =.udgeting tools mostly used in dairy co7o/erative ocieties

Table =.'-D Partici/ants education in budgeting /rocess

Table =.''D >udget a//roaches used

Table =.',D %se of standard total cost /er litre to measure actual costs /erformance

Table =.'*D >udget negotiation between higher level managers and de/artmental heads

Table =.'= 5ommunicated of budgeting /rocess to Em/loyees

Table =.'9D 5hallenges faced by the res/ondents society during budgeting

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LIST OF ABBREVIATIONS

A>>D Activity >ased >udgeting

5I!AD 5hartered Institute of !anagement Accounting

855D 8enya 5o7o/erative 5reameries

8$>D 8enya $airy >oard

PP>D Planning Programming and >udgeting ystems

%AD %nited tates of America

>>D ero7>ased >udgeting

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CHAPTER ONE

INTRODUCTION TO THE STUDY

6.6 B%+>#'$< / & &'udgets maybe /re/ared for the business as a

whole3 for de/artments3 for functions such as sales and /roduction3 or for financial and resource

items such as cash3 ca/ital e0/enditure3 man/ower /urchases etc. The /rocess of /re/aring and

agreeing budgets is a means of translating the overall objectives of the organiCation into detailed3

feasible /lans of action.

The budgetary /rocess is an integral /art of both /lanning and control. Too often budgets are

associated with negative3 /enny7/inching control activities whereas the full /rocess is much

broader and more /ositive than that. >udgeting is about making /lans for the future3

im/lementing those /lans and monitoring activities to see whether they conform to the /lan. The

key features of a sound budgetary system include fre2uent feedback on /erformance3 fle0ible

budgeting3 availability of monetary and non7monetary incentives to motivate those involved in

the budgeting /rocess3 /artici/ative budgeting3 setting of realistic standards3 controllability of the

budgetary /rocess and the use of multi/le measures of /erformance ?Hansen et al '


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organiCations are clearly different from develo/ment organiCations due to differences in donor

funding and re/orting re2uirements. The study revealed that more stringent controls e0ists in

relief /rograms than in develo/ment ones. !uleri ?,--=@ concluded that financial

mismanagement in the develo/ment /rograms ?#on Governmental organiCations@ is never taken

too seriously. "bulemire ?,--&@ found out that3 /ublic schools in #airobi use budgets mostly to

im/lement short7term o/erational /lans with majority of the long7term /lans being im/lemented

without /rior budgets.

8enya:s agricultural /olicies have been changing over the years as sti/ulated in the various

national develo/ment /lans and sessional /a/ers. 5ommon themes in 8enyaFs agricultural /olicy

have included increased food su//ly3 security and self sufficiency3 growth in agricultural

em/loyment3 e0/ansion in e0/orts3 resource conservation and /overty eradication. The release of

the wynnerton Plan in '


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became a guaranteed market to all raw milk and buyer of last resort enjoying unlimited

government su//ort. The growth in smallholder /artici/ation was the result of a deliberate

government effort to build a strong dairy sector through the /rovision of highly subsidiCed

animal health3 /roduction and breeding services. >y ' ,-- ,--oard licensed 9, milk /rocessors. However3 only *= of these

are active /resently /rocessing '3---3--- liters /er day. However the total inbuilt ca/acity of

8enyan /rocessors is estimated at ,.9 million liters /er day. These /rocessors /roduce a wide

range of /roducts namely 6resh !ilk3 oghurt3 !ala3 Ice 5ream3 5heese3 %HT3 Powder !ilk3

>utter3 and Ghee. !ilk /roduction in 8enya is based mainly on cattle3 more so the dairy herd

contributing &-; of the total /roduction. !ilk is also obtained from camels and goats. 8enya

has an estimated cattle /o/ulation of '* million heads of which *.* million are dairy grade cows

and


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6.2 S&%&?$& / & 83?

8a/lan ?'


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in the develo/ment /rograms ?#on Governmental organiCations@ is never taken too seriously.

"bulemire ?,--&@ found out that3 /ublic schools in #airobi use budgets mostly to im/lement

short7term o/erational /lans with majority of the long7term /lans being im/lemented without

/rior budgets. This /osition is contrary to !baru P.. ?,--9@ findings that confirms e0istence of

ca/ital budgets in >amburi /ecial Products 1imited3 but /ointed out that the highest level of

achievement was about +; of 5a/ital budget. The above studies reveal that the /ractices ado/ted

by various organiCations and the challenges of budgeting faced are different. There is need to

establish the budgeting /ractices and the challenges of budgeting in the dairy co7o/erative

societies in 8enya.

6.9 O3@+&"1 / & &'


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CHAPTER T4O

LITERATURE REVIE4

2.0 I$&


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agreeing budgets is a means of translating the overall objectives of the organiCation into detailed3

feasible /lans of action.

The budgetary /rocess is an integral /art of both /lanning and control. Too often budgets are

associated with negative3 /enny7/inching control activities whereas the full /rocess is much

broader and more /ositive than that. >udgeting is about making /lans for the future3

im/lementing those /lans and monitoring activities to see whether they conform to the /lan

?1ucey ,--,@. !anagers monitor organiCation functions through res/onsibility centers. A

res/onsibility center is any functional unit headed by a manager who is res/onsible for the

activities of that unit. These centers com/rise of Bevenue centers3 e0/ense centers3 Profit centers

and Investment centers ?5arter et al3 '


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benchmark used to evaluate /erformance. !any com/anies also consider /erformance relative to

/eers as well as im/rovements over /rior years. The /roblem with evaluating /erformance

relative only to a budget is that it creates an incentive for subordinates to set a target is relatively

easy to achieve. "f course managers at all levels recogniCe this incentive3 and therefore they

work to make the budget more challenging to achieve for the individuals who re/ort to them.

#egotiations occur among managers at each of these levels to understand what is /ossible and

what is not. The budget is the end /roduct of these negotiations ?Horngren et al ,--9@.

2.2.9 M&"1%&"$# M%$%# %$< O& E?8

Besearch shows that challenging budgets im/rove em/loyee /erformance. That is because falling

short of budgeted numbers is viewed by em/loyees as failure. !ost em/loyees are motivated to

work more intensely to avoid failure than to achieve success. As em/loyees get closer to a goal3

they work harder to achieve it. Therefore3 many e0ecutives like to set demanding but achievable

goals for their subordinate managers and em/loyees. 5reating a little an0iety im/roves

/erformance3 but overly ambitions and unachievable budgets increase an0iety without

motivation that:s because em/loyees see little chance of avoiding failure. General Electric:s

former 5E"3 4ack elch3 describes challenging budgets that subordinates buy into as

energiCing3 motivating3 and satisfying for managers and other em/loyees3 ca/able of unleashing

out7of7the7bo0 and creative thinking ?Horngren et al ,--9@.

2.2.; H'?%$ %8+& / 3'


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motivation is increased when the reward7/enalty system of the organiCation is consistent with the

organiCation control system of which budgetary control is a /rimary e0am/le. It the control

system is seen to be unconnected to the reward7/enalty system3 ?ie3 /romotions 3 salary increases3

bonuses3 J/erks3@ then the control system will be /erceived to be of little im/ortance by the

managers concerned and conse2uently it will be ignored and so3 by inference3 will the

organiCation:s objectives ?1ucey ,--,@.

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base is then adjusted for changes which are e0/ected to occur during the new budget /eriod. The

concern is on incremental o/erations and e0/enditure in the ne0t budget /eriod. In this a//roach

/ast inefficiencies and waste inherent in the current way of doing things are /er/etuated.

2.9.2 A+&"1"& B%< B' involvesK establishing the overall objective3 identifying the /rograms to achieve these

objectives and determining the costs and benefits of each /rogram so that budget allocations are

made on the basis of costs and benefits of the different /rograms. This a//roach is more

a//licable in non7/rofit organiCations as it enables management to make more informed

decisions about the allocation of resources to meet their objectives ?$rury ,--=@.

2.9.; P/?%$+ B'


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/ers/ective by recogniCing the relationshi/ between strategic /lanning and resource allocation

and focuses more attention on longer time horiCons. 5ommon characteristics of /erformance

budgets includeK agency identification of mission3 goals3 and objectivesK 1inkage of strategic

/lanning information with the budgetK develo/ment and integration of /erformance measures

into the budgetK and disaggregation of e0/enditures into very broad areas ?such as /ersonnel3

o/erating e0/enses3 and ca/ital outlays@ rather than more s/ecific line7items. 4ordan and

Hackback ?'

can be a//lied in both /rofit seeking and non7/rofit seeking organiCations. The techni2ue gained

wide /ublicity when the then President 5arter directed that all %nited tates government

de/artments ado/t Cero based budgeting. In a manufacturing firm3 >> is best a//lied to service

and su//ort e0/enditure includingK finance and accounting3 /roduction /lanning and so on.

These activities are less easily 2uantifiable by conventional methods and are more discretionary

in nature. !anufacturing costs such as direct materials and labour and /roduction overheads can

be more easily controlled by well established methods which com/are /roduction out/uts with

resource in/uts rather than using Cero based budgeting.

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>> can successfully be a//lied on service industries and to a wide range of non7/rofit seeking

organiCations. 6or e0am/le3 local and central government de/artments3 educational

establishments3 hos/itals and so on. According to Horngren ?,--,@ there are several different

ty/es of budgets used by business. These includesK strategic /lan3 ca/ital budget3 master budget3

and continuous budgets.

2.9.7 S&%"+ 8%$ %$< C%8"&% 3'


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statements. It includes forecasts of sales3 e0/enses3 cash recei/ts and disbursements and balance

sheets ?Horngren ,--,@.

2.9. C$&"$'' R"$# 3'udgeting thus becomes an ongoing

instead of /eriodic /rocess. 5ontinuous budgets force managers to always thing about the ne0t

twelve months3 not just the remaining months in a fi0ed budgeting cycle. As they add a new

twelfth month to a continuous budget3 managers may u/date the other eleven months as well.

Then3 they can com/are actual monthly results with both the original /lan and the most recently

revised /lan ?Horngren ,--,@.

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2.;.2 T 8udgets can be seen as /ressure devices im/osed by management3 thus resulting in bad labor

relations. >udget could result to de/artmental conflict arising due to dis/utes over resource

allocation3 and de/artments blaming each other if targets are not attained. It is difficult to

reconcile /ersonal(individual and cor/orate goals. >udget could forces managers may

overestimate costs so that they will not be blamed in the future should they overs/end ?websiteD

htt/D((www.accounting7financial7ta0.com(,--)(-+(@

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2.7 C%$# / B'ased >udgeting a//roach may lead toK develo/ment of strategic /lans aligned with the school

system:s educational strategies3 strategic /lans that clearly identify /rojects ?current and

envisioned@ and maintenance of service efforts3 directors building budgets from the ground u/

from Cero that are focused on the /rojects and maintenance efforts in the strategic /lans3

budgets being reviewed by the entire leadershi/ team3 regular review of strategic /lans3

/erformance results3 and s/ending. Another budget strategy includes centraliCe account

management to ensure /ro/er oversight3 then decentraliCed after Cero7based budgeting3 realigned

staff to fulfill strategic /lans and address /rogram /riorities3 abandon /rojects if they were not

aligned with system /riorities3 training /lan should be centraliCed for oversight3 alignment3 and

leveraging skills and im/lementation cost3 !arketing cam/aign to raise awareness of staff3

community3 and /olitical leaders to the need for technology3 e0ternal reviews and

recommendations for o/erations e0cellence3 Increase efforts to secure grant and cor/oratesu//ort3 restructuring technology funding through bonds or s/ecial ta0es3 Increase in

entre/reneurial activity3 and ensuring >> efforts are s/onsored and su//orted at the to/. To

ma0imiCe su//ort and understanding3 ma0imiCe involvement in the /rocess. The challenge in

Cero based budgeting is how to achieve new /riorities3 retain essential /rograms3 and Lthrow

e0tra baggage off the wagonM. The other challenges of >> include oversights which

necessitates a contingency fund to cover them es/ecially in the first year ?Porter ,--)@.

According to !inister for 6inance3 Be/ublic of outh Africa ?,--=@ the challenges of budgeting

in a develo/mental state do not sto/ at the need to get money to the school. The challenge is to

ensure that the money is translated into 2ualified teachers3 school books3 water3 electricity and

s/orts e2ui/ment. The challenge even goes further. It is to ensure that education that is relevant

and of a high 2uality gets to the children in the school. This is indeed a tough challenge. In

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investing in e0/anding economic o//ortunities3 we also have to be mindful that we must invest

both in the long7term ability of societies to work3 /ro/er and invest and more immediate means

of raising economic growth and em/loyment. "ften3 investments in education and skills

develo/ment take generations to yield an im/act. 6ocus must also be on the shorter7term

measures to boost growth. This re2uires careful regulation of markets3 investment in roads3 /orts

and rail systems3 research and develo/ment and e0/anding energy ca/acity. "ne of the criticisms

of our /resent budget framework is that we have not focused sufficiently on ensuring that our

state enter/rises are efficient3 that our markets are functioning without being burdened by red

ta/e3 that we have the /orts to take the goods we make3 roads that link the /laces of /roduction

with markets. In yielding to Patrick Heller:s call to manage the delicate balance between growth

and social develo/ment3 my worry is that at the /resent time3 we are strong on social

develo/ment3 strong on long7term human develo/ment3 but weak on investing in economic

growth in the medium term.

"ne of the key strategic decisions we need to take in budgeting over the ne0t few years will be to

im/rove the balance in our /resent budget structure3 moving resources towards investing in

economic growth and fostering the ty/e of growth that can increase em/loyment. It is not about

either ( or. The challenge of budgeting is not about all on social grants or all on road buildingK it

is not about just s/ending on education versus s/ending all our money on fi0ing the /orts. It is

about managing this delicate balance. He concluded that managers have a critical role to /lay in

translating financial resources into real in/uts. ou have the task of ensuring that these real

in/uts lead to better 2uality education3 an im/roved health /rofile and in the final instance3

genuine em/owerment of /eo/le to lift themselves out of /overty ?!inister for 6inance Be/ublic

of outh Africa ,--=@. !arron ?,--&@ highlighted theformidable budgeting challenges that faces

the country as how should they should account for long7term obligations3 how they should

budget for them and how they should communicate them.

2.= T" / 3'


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decision situations involving unclear goals3 unclear technology3 and fluid /artici/ants. In this

model3 active decision7makers and /roblems track one another through a series of choices

without great /rogress in solving /roblems. The most im/ortant feature of the garbage can theory

entails four inde/endent streams of decision7makingD /roblems3 solutions3 /artici/ants3 and

choice o//ortunities. This kind of organiCation is a collection of choices looking for /roblems.

$ecision7makers have already devised strategies to solve /roblems3 but are waiting for the

a//ro/riate time and /lace to im/lement them. Issues in the organiCation are available to be

solved and the decision7maker must be 2uick to note any window of o//ortunity. The garbage

can theory is clearly not a rational7com/rehensive decision making a//roach such as /rogram

budgeting. In this former a//roach3 /eo/le do not set out to solve /roblems. >y contrast3

solutions usually search for /roblems. Peo/le work on /roblems only when a /articular

combination of /roblems3 solutions3 and /artici/ants in a choice situation make it /ossible.

2.=.2 B'


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Incrementalism suggests that /olicy makers use JJrules of thumb:: in order to deal with the

technical and /olitical com/le0ity of e0/enditure decisions. Incremental budgeting occurs when

actors in the /rocess have many interests to fulfill and roles to /lay. To accom/lish these tasks in

a timely fashion3 they rely on regular changes from the e0isting base of resources. This aid for

calculation of incremental theory reduces the com/le0ity of s/ending decisions. It is very

unlikely that decisionmakers weigh all the costs of benefits of decision in the short7run when

they determine ne0t year:s budget. This would be too time consuming and take u/ too may

resources3 es/ecially in a /olitical setting. Begular changes3 which incrementalism /redicates3 are

much easier to make.

2.=.; L$#-'$ '""3"'? & / 3'


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fashion. "n the contrary3 >> has been em/loyed as a form of Cero7base review for which there

is no /rivate sector model. >B should be more /ro/erly viewed as the systematic but /eriodic

assessment of agency activities rather than as an annual budgeting techni2ue. This em/loyment

arises from the misunderstanding of >> as beginning from a Cero7level funding of all activities

rather than3 more /ro/erly3 as an evaluation of alternative s/ending levels for discretionary or

controllable activities. >> is theoretically transferable from the /rivate to the /ublic sector for

such activities. 4ust as in the /rivate sector3 new ca/ital e0/enditures can be handled through a

>> /rocedure by definition3 because use of a cost7benefit criterion for /roject evaluation itself

involves develo/ment of a decision /ackage ?indsor '


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2.=. B'


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should also reach those from the local government since they are also e0/ected to carry out

budgetary im/rovements ?oingco and Guevara '


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measurement /ractices and identify both the advancements and backsliding made by the states

between the two years. Their survey findings dramatically em/hasiCed the diversity among the

states in their use of /erformance measurements. The results also made it clear that in any given

time /eriod some states maybe advancing in the use of /erformance measurement while others

maybe backsliding3 and that any single state may be e0/anding its use of /erformance

measurement in one regard while backsliding in the other ?1ee and >urns ,---@.

Beddick ?,--*@ e0amined the im/act of three rival decision making theories on disaggregated

% state budgetary out/ut data. His study tested the im/act of the different theoretical

e0/lanations on e0/enditure levels. The three budget models tested are the garbage can theory3

incrementalism3 and Bational a//roaches. The garbage can theory of budgeting argues that

decisions are determined by the random mi0 of /roblems3 solutions3 /artici/ants3 and choice

o//ortunities in the decision7making /rocess. Incrementalism focuses on e0/enditure decisions

based on marginality and regularity from /revious s/ending out/uts. 6inally3 rational a//roaches

to budgeting advocate that decision7makers think /ros/ectively by systematically weighing

/olicy o/tions. The rational a//roaches he focused on here are /rogram budgeting3 ero >ased

>udgeting3 and biennial budgeting ?re/resenting more strategic long7term decision7making in

com/arison to annual budgeting@. The results of the study demonstrated the uneven s/read of

rational techni2ues throughout the different areas of state finance. Incrementalism had relatively

low e0/lanatory /ower below the aggregates ?e0ce/t for education s/ending@. It seems that larger

categories such as total and education s/ending are more susce/tible to incrementalism than

smaller dissagregated categories. Therefore3 at the aggregate level the budget may a//ear

incremental3 but when one e0amines further3 there is more going on in the /rocess. Garbage can

budgeting is more /revalent at functional areas than for government as a whole. There was

su//ort for the garbage can theory of budgeting below the aggregates in five of the ten categories

of state finance. Interestingly3 there was no su//ort for this model on total e0/enditures. It seems

that the garbage can model is more /revalent at the disaggregated level3 /robably due to theability of decision7makers to mani/ulate functional areas of the budget rather than the entire

budget. This may be due to the difficulty of establishing government7wide agendas ?Beddick

,--*@.

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"soro ?,--'@ studied the budgetary control /rocess in 8enya #on Governmental "rganiCations

with s/ecific reference to orld ision 8enya. The study establishes how accurately budget

antici/ates the level and direction of actual results. The analysis found out that budgetary

/ractices in relief organiCations are clearly different from develo/ment organiCations due to

differences in donor funding and re/orting re2uirements. It established that more stringent

controls e0ists in relief /rograms than in develo/ment ones. It is established that more com/le0

control techni2ues are re2uired in develo/mental /rograms than in relief /rograms3 due to close

donor su/ervision and need for monthly accountability in the later as o//osed to the former

whose funding is not followed with strict re/orting re2uirements ?"soro ,--'@.

!uleri ?,--=@ set out to determine how budgeting /ractice is actually done3 to what e0tent the

budgets are used as management and control tools and the mechanism international #on

Governmental organiCations ado/t to control financial mismanagement. The study revealed that

budgets are normally /re/ared using such modern /ractices as ero based budgeting or /riority

based budgeting. The budget forms an integral /art of the /lanning /rocess and have become a

standard /ractice. The study also revealed an over7em/hasis on conformity to budgets and

/arameters ?funds that can be mobiliCed@ which tends to relegate /ro/er financial management to

the /eri/hery. His findings reveal that many organiCations strive to s/end without due regard to

value for money and im/act3 and that once budgets are a//roved little effort is made to use the

budgets to control the budget holders. 6inancial mismanagement in the sector is never taken too

seriously. The /ush by funding organiCations to s/end ?which in fact is a measure of success@ has

just worsened the matter. The findings led to call for stringent budget management /ractices in

the sector ?!uleri ,--=@.

There is need to utiliCe different e0/ertise ?finance and monitoring e0/erts@ in /re/aration and

motoring of budgets. !baru ?,--9@ sought to com/are the budgets and the e0/ost results for

>amburi /ecial Products 1imited for a /eriod of four years from '


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e0/enditure was e2ually below the budget. Em/irical evidence suggests that most budgets are

set to be )-; to


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strategy. >usiness unit managers /artici/ate in setting targets of the business units. In most cases3

the standards are develo/ed by lower7level management and are reviewed and a//roved by

higher levels of management. The budget targets are attainable with some e0tra effort. Targets

are used in the budgeting /rocess. These targets are develo/ed through /artici/ation of

subordinate levels of management. These standards are tight but attainable. >udgets have several

uses. They are used most fre2uently to motivate and reward managers3 for /lanning /ur/oses3 to

evaluate activities3 and for communication /ur/oses. >udgets are related to long7term /lans. The

/rofit7conscious style is used to evaluate the /erformance of managers. Any overs/ending of

budgets is evaluated in relation to the long7term goals of the firm S8aren . and tout $. E.

,--)@.

2. E?8""+% S&'amburi /ecial Products 1imited for

a /eriod of four years from '


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financial mismanagement in the sector is never taken too seriously. The /ush by funding

organiCations to s/end ?which in fact is a measure of success@ has just worsened the matter. His

findings led to a call for stringent budget management /ractices in the sector ?!uleri ,--=@. 1ack

of budgeting knowledge or e0/ertise is a major budgeting challenge in Public secondary schools

in 8enya. A study by "bulemire ?,--&@ on the budgeting /ractices in /ublic secondary schools

in 8enya revealed that a majority of schools in #airobi did not educate staff about budgeting

/rocess and that budget targets were initiated mainly by the /rinci/al3 the bursar and Head of

$e/artments. Another challenge highlighted in this study is the inability of /ublic secondary

schools in #airobi to make budgets that cover both short term and long term activities. The cash

budget and long7term asset ac2uisition budgets were least /re/ared in /ublic secondary schools

in #airobi ?"bulemire ,--&@. E0istence of many /itfalls with loose controls which ensure that

cash budget does not ca/ture the total cash movement in Telkom ?8@ limited /osed a serious

budgeting challenge to the use of cash budget as a management tool for im/roving the

management of cash. Poor co7ordination between the various o/erational related de/artments

vested with management of cash is another challenge. This caused a cash /lanning mismatch in

Telkom ?8@ 1imited ?#diritu ,--+@.

C$+'"$ /? "&%&' 1"

#diritu ?,--+@ evaluated how Telkom 8enya 1imited has em/loyed a cash budget as amanagement tool and the effectiveness of cash budgeting in im/roving the management of cash

while !baru ?,--9@ investigated the ga/ between budgets and e0/enditure in >amburi /ecial

Products 1imited. #diritu ?,--+@ and !baru ?,--9@ confirm e0istence of budgetary /rocesses in

the sector. However3 their studies revealed that there were many /itfalls with loose controls that

make it im/ossible to use budgetary /rocess to guide and control o/erations. The two studies

reveal /oor coordination between the various o/erational related de/artments vested with

management of cash. Their findings led to call for stringent budget management /ractices in the

organiCations studied.

8aren . and tout $. E. ?,--)@ studied the budgetary /ractices in $utch7listed 5om/anies while

"soro ?,--'@ and !uleri ?,--=@ studied budgetary control and budgetary /ractices res/ectively3

in #G"s in 8enya. "bulemire ?,--&@ established the budgetary /ractices in /ublic secondary

28


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schools in #airobi. Their findings converge on the fact that budget forms an integral /art of the

/lanning /rocess and have become a standard /ractice in the sectors under study. However3 the

/ractices ado/ted are different. "soro ?,--'@ stressed that budgetary /ractices in relief

organiCations are clearly different from develo/ment organiCations due to differences in donor

funding and re/orting re2uirements. His study revealed that more stringent controls e0ists in

relief /rograms than in develo/ment ones. !uleri ?,--=@ concluded that financial

mismanagement in the develo/ment /rograms ?#on Governmental organiCations@ is never taken

too seriously which is contrary to 8aren . and tout $.E. ?,--)@which noted that variations

from the budget in $utch listed com/anies are taken so serious that regularly revised forecasts

are /re/ared ne0t to the original budget.

"bulemire ?,--&@ found out that3 /ublic schools in #airobi use budgets mostly to im/lement

short7term o/erational /lans with majority of the long7term /lans being im/lemented without

/rior budgets. This /osition is contrary to !baru P.. ?,--9@ findings that confirms e0istence of

ca/ital budgets in >amburi /ecial Products 1imited3 but /ointed out that the highest level of

achievement was about +; of 5a/ital budget. hile "bulemire ?,--&@ revealed that a majority

of schools in #airobi did not educate staff about budgeting /rocess and budget targets were

initiated mainly by the /rinci/al3 the bursar and Head of $e/artments and that the cash budget

and long7term asset ac2uisition budgets were least /re/ared3 #diritu ?,--+@confirmed that cash

budgeting was an integral /art of cash management /rocess in Telkom 8enya 1imited3 but noted

that there were many /itfalls with loose controls which ensured that cash budget does not ca/ture

the total cash movement in the organiCation.

The reviewed studies converge at a conclusion that budgeting is an integral /art of organiCations

management /rocess all over the world and that there are many challenges of budgeting that

limit effective use of budgeting as a management and control tool. However3 evidence e0ist that

show that there is no standard budgetary /ractice that is generally acce/ted or em/loyed by

organiCations and that different organiCations are faced with different challenges of budgeting.

There is no study ?that we know@ that has been carried out in the dairy sector of the economy.

This study aims at establishing the budgetary /ractices in the dairy co7o/erative societies in

8enya.

29


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30


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CHAPTER THREE

RESEARCH METHODOLOGY

9.0 I$&


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2uestionnaire which was develo/ed in line with the objectives of the study ?a//endi0 '@. This

ensured consistency in the inter/retation of 2uestions and hence results to answers that are

consistent with the real situation on the ground. The uestionnaire consisted of /art I and /art II.

Part I contained 2uestions on the general information about the $airy 5o7o/erative society and

its /erformance. Part II contained 2uestions on the society:s budgetary /ractices. A five /oint

1ikert cale was used to determine the /ractices mostly used in budgeting among the societies.

The 1ikert cale was used to determine the im/ortant budgeting /ractices mostly used in dairy

co7o/erative societies. According to !ugenda et al ?'


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CHAPTER FOUR

DATA FINDINGS, ANALYSIS AND INTERPRETATION

;.6 I$&


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many farmers in the area. This could be as a result of the many dairy farmers in the area. Table

=., shows the membershi/ of the dairy co7o/erative societies.

Table =.,D !embershi/ of dairy co7o/erative societies

M?3"8 "$ $'?3 F'$+ P+$&%#

' 7


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=- and above , &.


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members of staff in su/ervisory level ?table =.9b@. &+.+*; of co7o/erative societies em/loyed

over thirty em/loyees in lower level while &.9 ; of them em/loyed less than ten em/loyees in

the lower level ?table =.9c@

T%3 ;.:%! M%$%#"% S&%// ?8< 3 +-8%&"1 +"&"

N'?3 / M%$%#"% &%// F'$+ P+$&%#

- & '


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co7o/erative societies did not ?table =.+b@. "n the other hand =&; of dairy co7o/erative societies

/re/are Income and e0/enditure budget while 9=; did not /re/are any income and e0/enditure

budget ?table =.+c@.

T%3 ;.=%! P8%%&"$ / C% 3'


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The study also sought to establish the level of /artici/ation by the General manager3 the 6inance

manager(Accountant3 the /roduction manager(2uality controller and the sales manager in budget

/re/aration. The findings are as /er table =.) below.

Table =.)D Partici/ation in budget /re/aration

L)%0&"$1-1) ?'


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1ee B.$. and >urns B.5.?,---@D Performance measurement in state budgetingD advancement andbacksliding from 'ritish Governmentagencies in 8enya.

#diritu !.G. ?,--+@D Effectiveness of cash budgeting in /ublic institutions3 a case study ofTelkom 8enya 1imited.

"bulemire T.A.?,--&@ A survey of budgeting /ractices in secondary schools ?A case study ofPublic econdary chools in #airobi@.

"soro P.!. ?,--'@D >udgetary control in #G"s in 8enyaD a case study for orld ision.

Porter 4. . ?,--)@K !anaging the >ottom 1ine3 available on websitehtt/D((archive.techlearning.com(techlearning(/df(events(techforum(ny-*(vault(>ottom1ineVHandout,./df

Bedick 5.G. ?,--*@D Testing rival theories of budgetary decision7making in the % states36inancial accountability and management3 #ovember ,--*.

antos 4.B.A ?'


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APPENDI 6! QUESTIONAIRE FOR DAIRY FARMERS CO-OPERATIVES

High level of confidentially will be accorded the information in this 2uestionnaire and will beused for academic /ur/oses only. Any difficulties e0/erienced will be discussed with you duringthe interviews.

$ate uestionnaire number

PABT I

General information about the 5o7o/erative society

1. $o you use long term ?strategic@ /lan as a guide to management actions for the 5o7o/erative

es ? @ #o ? @

2. hat is the current membershi/ ?in numbers@ of your co7o/erative society..............

3. .hat is the total Asset alue of the 5o7o/erative

?a@ 1and 7 #umber of acres .. alue 8shs.

?b@ >uildingsD Total value of building .?c@ 5ooling ystemD Total alue..?d@ any other Asset D 7 Total alue ..

=. hat is the average delivery 2uantity ?litres@ /er member ..

9. How many of the following staff categories are em/loyed by the 5o7o/erative

!anagerial taff .

u/ervisory staff.

1ower level staff .

P%& II

C-8%&"1 B'


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#ot im/ortant 1imited im/ortant im/ortant ery im/ortantEssential ? @ ? @ ? @ ? @

7. $o you undertake some initial /re/arations before undertaking the budget /rocess

es ? @ #o ? @

). hat kind of >udgets does your 5o7o/erative /re/are ?Tick as a//ro/riate@

5ash >udget for ac2uisition of Income and>udget fi0ed assets e0/enditure budget? @ ? @ ? @

udget committee ? @ ? @ ? @ ? @ ? @7interde/artmental discussion grou/s ? @ ? @ ? @ ? @ ? @7uggestion system ? @ ? @ ? @ ? @ ? @7budget manual ? @ ? @ ? @ ? @ ? @7>rainstorming grou/s ? @ ? @ ? @ ? @ ? @7 Any other ?s/ecify@ ? @ ? @ ? @ ? @ ? @

Have em/loyees been educated about your budgeting /rocess es ? @ #o ?@

''. Are the following budget a//roaches used in your co7o/erative society

74ustification of all costs as if /rograms es ? @ #o ? @

7addition of some /ercentage on the /revious years budget es ? @ #o ? @

7 5onsidering the cost of activities necessary to achievedesired level of o/eration es ? @ #o ? @

7 Any other ?s/ecify@ es ? @ #o ? @

58


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12.$o you use standard total cost /er liter as a measure of actual total cost /er literes ? @ #o ? @

'*. Are your budgets negotiated between higher level managers R de/artmental heads

es ? @ #o ? @

'=. hat information do you communicate to em/loyees during budgeting /rocess

7Targets to be achieved es? @ #o ? @7 Environmental e0/ectations es? @ #o ? @7 strategic /lan details to be im/lemented es? @ #o ? @7 ariance between actual R budgeted es? @ #o ? @7 >udgeting guidelines es? @ #o ? @

'9. hat 5hallenges do you face during budgeting /rocess for your ociety

1east !ost

' , * = 9

71ack of to/ management su//ort and involvement ? @ ? @ ? @ ? @ ? @

71ack of education for all involved ? @ ? @ ? @ ? @ ? @

7Partici/ation of all individuals ? @ ? @ ? @ ? @ ? @71ack of understanding of the business environment ? @ ? @

? @ ? @ ? @ 7etting of unrealistic targets by managers for/ersonal gains

? @ ? @ ? @ ? @ ? @ 7>udget com/le0ity ? @ ? @ ? @ ? @ ? @75onflicts among managers ? @ ? @ ? @ ? @ ? @

7 #on communication to em/loyees duringbudgeting /rocess ? @ ? @ ? @

? @ ? @ 7escalating cots beyond antici/ation ? @ ? @? @ ? @ ? @ 7>udget im/lementation ? @ ? @ ?@ ? @ ? @

Documents

Budgeting Practices and Challenges in Dairy Co-operative