Impact of Budgeting on performance: An analysis of Bangladesh’s

manufacturing sector
 CHAPTER 1

INTRODUCTION

1. Overview

Budgeting is a financial plan of a firm which anticipate the expenditures and revenue during a
certain period. The concept of budgeting process has a long history of about 100 years since
1920. After its inception, every company which was serious about its process and had a greater
concern of budget use it. It is an ability to coordinate the allocation of resources through the
internal communication process, and at the same time, it a mean of evaluation and authorization
of expenditure, which made the budgeting a necessary tool which is at the disposal of managers
when they run the company. It is exactly this importance that has contributed to budgets’
longevity and caused them to remain relatively unchanged in their use since the first days of
their existence. All these explanations do not say that the budget is the only tool for the manager
in this course. The entrance of budgeting techniques in the business world has provided many
benefits, and there are different complains about the dysfunctional behavior of the budgeting
process. These conflicts in budgeting motivate a number of academicians to discover suitable
solutions for items like budget bias, budget slack, budget gaming and other issues that managers
need to deal with. In this regard some theories are also developed, and contingency theory and
RAPM are the most prominent, which explains the direct and indirect relationship among budget
and employee participation, motivation and investigates the overall environment. Resultantly, in
management accounting, budget is the most researched topic, and studies provide different
suggestions for developing budget and manage budgeting problems. These accounting issues
become part of each accounting and finance book. Empirical findings of the studies make
contribution in the prior research, but they are slower in speed, but some budgeting methods are
converted to the models which are more suitable in fulfilling the rapid change in environment,
global competition among manufacturing as well as other industries is increasing the demand of
the customer also improving the quality at lower prices. Therefore, companies at one point have
to decide either go with the traditional budgeting process of there is need to do modification. The
modifications in the process help to overcome the weaknesses in their process so that better
budgeting technique is adopted to carry out the overhauling in the budgeting system as
suggested by the Beyond Budgeting model. A well-developed budgeting system of the firm
helps them to have better performance.

The purpose of this study is to provide a deeper understanding of budgeting and its impact on the
performance of manufacturing firms in Bangladesh. The aim of manufacturing companies is to
provide the necessary goods and products which can satisfy their needs. The financial
performance of the firm is improved due to the goals they set for. The selected country is
Bangladesh as it has a strong manufacturing sector and the products of Bangladesh are exported
to almost all the countries. Moreover, Bangladesh has strong GDP growth, even in the current
financial turmoil. During the last decade, Bangladesh has made significant progress in its
manufacturing sector, which made him distinct from the other Asian neighbors. This study used
a number of control measures which were proposed by Barbara (1984). At the macro level,
budgeting is one of the important instruments used to control the mobilization of national
resources and manage the fiscal and economic policies. But this study aims to analyze the budget
and its impact at a micro-level that is at firm level. A primary data collection method is used to
empirically investigate the link between budgeting and performance.

1.1 Budgeting practices

Budgeting is an economic instrument that is used for realizing and facilitating the vision of the
firms at all levels throughout the fiscal year. It is a framework that helps define the future
directions of the firm. Conmick et al. (1988) explained that empirical research had analyzed the
budgeting system of the firm from different perspectives. The budgeting process is one of the
crucial factors which improves the exchange and sharing of information at all the management
and subordinates’ level, but most of the studies applied this model on large and private firm, and
their results are diverse. There are very few studies that include only the manufacturing firms for
analyzing the impact of budgeting on performance (Jensen, 2003). A number of prior studies put
significant emphasis on the budgeting process as it helps to control the management of the firm
and provide the direction for improving the firm performance. In 2002 Little et al. explained that
budgeting is one of the basic instruments which is helpful in the budgeting process in each
organization. A good number of studies attempted to develop a link between the budgeting
process of the firm and its impact on the firm’s performance. Most of the prior studies focus only
on private firms or used all the sectors of the country. Some recent amendments in the
preparation of the budget and newly developed multi-year budgetary system grab significant
attention from financial economics researchers for planning, policymaking, and budgeting in an
organized way as compare to what was done in this respect in the past. Moreover, the budgeting
process has rarely part of the studies of manufacturing firms, especially for Bangladesh.

If a manufacturing firm needs to find performance information in a setting of budgeting, then

they have to find a way of integrated performance after the process of budgeting, not just the
paperwork for the budget. Prior studies found that the extent of the budgeting process range from
the narrowest, no use of budget to the broadest comparison with details between the budgeting
performance and firm’s actual performance by making corrective actions frequently, which
impact the firm’s performance. When a budgeting process is used more frequently, then it is
expecting that the firm gets a higher rating of performance in an organization. Yet, in a formal
budgeting process, the dimension is only restricted in terms of budgetary control and budgeting
planning. Theoretically, the activities of qualifying and predicting future requirements for
financial planning so-called budgeting triggers a series of activities that aim to achieve various
objectives in a firm such as planning, evaluating, communicating, coordinating, and performing.
The advanced elements achieved through advanced budgeting processes adopted by large firms
include planning, evaluation, control, performance and coordination (Yang, 2010). Thus, this
study includes existing model of the formal budgeting process in firms, which will add more
dimensions that will affect the firm’s performance.

The effect of the budgeting process is different for a different group of people or operating unit
or department. When BP is part of the discussion in the traditional way, then it only has
relationship with the firm’s financial performance. Individual participation leads usually lead to
the greater interaction of people in a group, which will be a good thing if the individuals value
their membership of the group and see the goals of the group as being collective targets that they
are regarded as desirable. Where the budget aims to analyze the performance, the budgets are
usually set by the managers may be tempted to build in some element of spare resources, which
allows a lapse from actual higher levels of performance without deviating from the target budget.
A major significance of the matter discussed in the study is important because of determining the
dimension of the effect of BP on the performance of subordinates in the current competitive
conditions for firms (Melek, 2009).

Prior studies in this respect attempted to analyze several questions to understand more about the
effect of budgeting process on the financial performance of developed countries, but here our
focus is to include Bangladesh, which is one of the developing countries and making rapid
progress in the manufacturing sector.

1.1.1 Traditional budgeting

Traditionally, the budgeting process explained as a technical process that promotes and reflects
rationally in making decisions or used as a technical device to cope with an objective world and
to rationally foster stability, order, and efficiency (Covaleski, Dirsmith, & Jablonsky, 1985).
Merchant (1981), on the other hand, explains that sophisticated budgeting techniques are applied
through technical staff, computer, and financial modeling, which improves the accuracy of the
budget plan and the information accuracy and the connection of the budget plan, which results in
improved performance of the firm. Yet, there is a need to have more empirical investigation to
prove a positive relationship between budgeting and firm performance.

The budget is explained as a plan based on quantitative economics, which developed over time.
Therefore, the budgeting process consists of the quantities obtained from the economic
resources, and these are expressed in the monitory terms. It is a plan – not a forecast or hope but
is an authoritative intention, and these assumptions are made during a certain time period (Drury,
2006). Such type of plans is said to be budget. However, in the wider context of the budget, it is
explained a tool used by management which exerts control on the executives of the firms for
enhancing the financial health of the firm. It is one of the basic measures for analyzing the
financial structure of the firms, and tools aim to force the management of the firm that they are
accountable for the firm performance. The budget as a control tool for management is neither
bad nor good. Major value creation through budget depends on how management administers it.
When a budget is administered wisely, it provides a proper allocation of resources and helps in
planning, enumerates, dissects, and examines all the services and products that are offered by the
company (Gitelle, 2000). Most commonly, a budget is said to a mathematical exercise, while in
real terms, it is much more than the available numbers on a spreadsheet.

The main purpose of the budgeting process is to provide ideas to the management that how well
the firm is meeting their goals of generating income; either the expenses are according to the
prediction and how the controls put on the different departments are working. If a firm is
properly using a budget, then it has a significant impact on increasing the profit reduces
unnecessary expenses, and how the firm can take immediate steps to expand markets (Thomsett,
1988).

1.1.2 Type of budgets

The development of budget is not a unitary concept, but its applications differ from firm to firm.
A fundamental budgeting concept includes the estimation of future performance, compare the
actual results with the estimated ones, and analyze the difference among them. Factors that are
relative for determining the style and type of firm’s budget and its impact include the leadership
style, the type of firm, ownership structure of the firm, the method of preparing a budget, and the
results aimed to obtained from the budgeting process (HEHRINGTON, 1973).

Generally, the budgets are classified into two major types.

i. Operating budgets.

This budget type includes all those activities of the firm, which make the complete operation of
the firm. In general, the operating budget of the firm includes production, material, labor,
inventory, sales, marketing, R& D expenses, etc.

ii. Financial budget.

This budget is used for controlling the financial aspects of the firm. In essence, the influence of
operation budged on the on-going financial position of the firm is revealed through this method.
The financial budget includes a budget of capital expenditure, cash budget, and proforma income
statement and balance sheet of the firm.

The figure below explains all the major methods of budgets that could be used in a typical
organization and how there are interconnected in a larger system in a master budget plan. This
confirms the things about the budget, which are already explained in the process – that
individual budgets are dependent on one another, which requires that they are prepared in a
hierarchical manner (Lucey & Lucey, 2003).

Besides the general division of firms into the operational and financial budget, there are some
other bases as well, which differentiate based on expenditure authority. Through this method
there further two groups of budget (Kemp, 2002)
 a. Line-item budgets

In this budget, the name of each line is set according to the amount of investment that could be
spent on each item. If one works within a line-item budget, one does not overspend a specific
line item and then compensate this with savings on another line (or vice versa). Higher
management needs to be involved if it is required to move the required amount to be spent from
one-line items to another.

b. Block budgets

On the other hand, the block budget is the contrast of the line-item budget. In this category, the
block of the amount is provided. The budget details are presented but, later on, if there is require
spending more amount on one item and less on another, there is no issue in doing so. The
allocated amount is for the whole block, and the block should need spend no more than the
allocated amount in a calendar year; the budget remains under control.
 1.2 Financial Performance of Manufacturing Firms

In each sector, the performance of the firm is important for the shareholders, management as
well as outsiders. The current performance of the firm impacts its future earnings, and its
budgeting process has significant importance for defining the performance. Investors and lenders
have significant concerns in the ability of the firm to repay its loans and have significant
improvement in its performance. Purchasing agents of the manufacturing firm look to the
viability of its suppliers of raw material so that they can serve the customers with quality
products at a cheaper rate. Financial strength, which is an element of assessing the firm’s value,
is one of the vital concerns for potential investors. Moreover, the manufacturing sector of the
country has significant importance for the economy of the country, and if it is performing well,
then it can contribute significantly to its growth. A good financial performance of the
manufacturing firm in Bangladesh is one of the major factors in its growth.

1.2.1 Budgeting practices and firm financial Performance

The decision making of the firm is effective when it has strong financial management and
budgeting system. An improved mechanism of the firm helps them to provide accurate, timely,
and comprehensive information for all facets of management. To be effective, performance
measurement must be thoroughly integrated into an organization's budgetary process. Studies
explain that performance is linked with the budgeting process of the firm as it helps to improve
the firm's control over expenditures and its efficiency & performance. Therefore, performance
and budgeting are combined through as it enables the firm on how to improve productivity and
minimize the expenses. These mechanisms help the management to put more emphasis while
developing a budget of the firm. This, in return, imposes more accountability of the firm’s
managers of each department. Performance Information can be used by the court for planning
purposes or accountability purposes. But when there is more monitoring and management is on
more stress due to high accountability leads to the decline in the performance of the firm.

In this way, the budgeting process has both negative as well as positive impacts on the financial
performance of the manufacturing firms in Bangladesh. But the most important element here is
how the firm is managing its operations to achieve the targets. The financial objectives,
investment ventures, and funds allocation are based on the budgeting process. On one side, the
budgeting process can put more challenges on the management, which diminishes the
performance of the firm.

The effect of budgeting on the financial performance of manufacturing firms provides direction
to analyze the different aspects of the firm, which is the main motivation for analyzing this
phenomenon.

1.2.2 Manufacturing Sector of Bangladesh

Bangladesh is a developing country that is making progress by leaps and bounds. It is one of the
biggest cloth exporting hub. Bangladesh stands at second after China in Asia’s manufacturing
centers. During the last year, the country has earned about 24 billion USD from garments
manufacturing alone. It is not only the clothing industry, but there are many other manufacturing
sectors that are the major source of Bangladesh’s progress. The first and foremost reason for
which make Bangladesh distinct from other countries in the low wage rate.

In 2013, Bangladesh developed almost 5,000 factories, which is about double the amount of
Indonesia. The exporting items of Bangladesh have greater access to a number of countries, and
even the European Union has given duty-free access to the country. The cost of labor is lowest in
Bangladesh as compared to the other countries in the regions. The minimum wage rate of the
country is 68USD or 5,300 takas. After a protest from different manufacturing and labor unions
increase in wages was implemented on December 1, 2013. Although these changes about 95% of
the manufacturing units in Chittagong pay less than the minimum wages, this is in contrast to
Dhaka, Capital of Bangladesh, where more than 60% of the factories are maintaining to pay new
minimum wage.

Though the country is experiencing good growth in the manufacturing sector, there were many
financial and industry issues which are encountered by each manufacturing company. The
lacking in cash on hand forces them to sell their products immediately before buying the new
fabric to continue their manufacturing process. This process put long delays in the shipping
process. But as time goes on, the small exporters and manufacturers maintaining their cash in
hand and can enhance their manufacturing capabilities. These continuous improvements provide
significant growth in the overall manufacturing sector of the country.

1.2.3 Manufacturing Industries of Bangladesh

A government-operated statistical agency of Bangladesh, BBS is one of the agencies which does
a survey on the Manufacturing firms under the industrial statistics Act 1942 regularly since
1973-74. A recent survey of the manufacturing industry has included all those manufacturing
firms which have ten or more workers in their setup. However, the latest publication of SMI
focused on including all the small and large-sized firms in the manufacturing sector. The
published manual explains that the manufacturing sector mainly has two categories, namely
Large manufacturing industries, which have 100 or more employees in its enterprise second is
the small manufacturing industry, which has less than 100 employees. The large manufacturing
sector is further divided into two categories based on the value addition, which are i)handloom,
bricks and textiles, and non-clay products and ii) all others. A figure below explains that in
Bangladesh, almost ¾ of the SMI sample is from the small industries. Covering 35% of large
establishments and 16% of the small establishments, overall SMI covers 18.5% of the
manufacturing industries of Bangladesh. Figure 1.1 show’s the distribution of the two main
categories of manufacturing firms in Bangladesh.

25.09%

74.91%

Small Manufacturing IndustriesLarge Manufacturing Industries

Figure 1.1. Distribution industries in the SMI sample

The process of data collection used by SMI was done mainly through the postal mail method.
Therefore, most of the data and the methods used for the analysis are mainly depending on the
self-reporting methods, and the BBS authority does not have enough power to do verification of
each figure and number.

1.3 Problem Statement

This research starts with an extensive review of prior studies related to both budgeting and the
firm’s financial performance. This section is divided into the theoretical analysis of budgeting
and impact on the firm performance and specifically analyzing the impact of budgeting on the
performance of the manufacturing sector of Bangladesh. The exploration of the prior studies at
initially developed the framework for budgeting-performance relationships for the manufacturing
sector of Bangladesh will be established.

In this process, the review of prior studies identifies the problems, gaps, or deficiencies in those
studies. This will then help to provide a gap for the current research, and they work to those gaps
and limitations. In the second process, this study aims to conduct a sample study by doing
empirical research work. This process includes monitoring of questionnaires, crafting of
instruments, analyze quantitative data collected through the survey, report the findings, make
modifications in the hypothesis if required, and compare the findings with the results of prior
studies and finally reaching a conclusion.

1.4 Significance & contribution of the study

There is a suitable time now for this study, given that all resources are diminishing. The
economic budget of the firms showing a decline from the last few years and this increases the
responsibilities of the government. A number of stakeholders will get benefits from this
budgeting study. Moreover, guidance will be provided to the manufacturing sector of Bangladesh
as well as the government to amend their policies as the performance of the manufacturing sector
is very important to the growth of the economy, especially for developing countries like
Bangladesh.

Budgeting has an enormous impact on the manufacturing and commercial firms, and their
performance is important for policymakers. Reviewers and researchers are much bias with this
industry and are more critical to these organizations as the development of budget and its impact
differ from firm to firm. The suggested policies of the study will be beneficial for devising
policies to enhance the performance and efficiency of this sector. Moreover, the strong
accountability of the manager under the strict budgeting method will also improve the
performance of this sector.

The information of the manufacturing sector, focusing the financial performance, will provide
satisfaction to the general public and stakeholders of the firm to show and understand that these
firms provide good value for the money. It will also enlighten them and hence will appreciate the
existence of firms and provide a benchmark for evaluating their performance inefficient service
delivery. For the researchers, this study will provide more elaboration in the manufacturing
sector and explains how the financial performance of the firm will be improved by using
advanced budgeting techniques.

1.5 The objective of The Study

In relation to the prior studies focusing on budgeting are limited, which tests the phenomenon of
the manufacturing firm. The purpose of this research is to explore and describe the relationship
between budget and performance. This exploratory study first identifies and discovers the
variables which have a significant impact on the relationship by analyzing the scholarly
literature. After that, the study will attempt to analyze whether the developed relationship
between budget and performance is confirmed via actual budgeting practice of the manufacturing
sector. The exploratory purpose of this research is firstly explaining and developing a theoretical
link between budgeting and performance from the prior studies and secondly, explaining how
budgeting practices are helpful for the manufacturing firms in Bangladesh.

The following are the main objectives that will be achieved through this empirical research.

 This research study determines the effects of budgeting on the firm's financial
performance of manufacturing firms in Bangladesh.

 Analyze the effect of budgeting on performance in the manufacturing sector from the
theoretical perspective.

 To analyze and explore the determinants of the performance of manufacturing firms.

1.6 Research questions

After explaining the objective of the study here, we add the research question, which will be
analyzed through various processes and techniques in the later chapter. The budgeting process of
a company is very important as it helps in determining the future financial strength and way of
planning the budget for different departments. Each large firm has a number of departments,
namely sales, marketing, operations, finance HR, etc. for which a firm needs to allocate a
specific budget so that the operations of the department should run smoothly. From the research
objective, which we explained earlier, our first research question is.

 How does the budgeting process impact the performance of manufacturing firms in
Bangladesh?

This study will do extensive research and analyze a number of factors for determining the
budgeting as well as the firm’s financial performance. These factors will be explored from the
prior researches, which analyzed the impact of budgeting on the firm’s financial performance.
Some mediating factors would also be explored during this analysis of previous literature. The
aim of this research question is to analyze whether the impact of budgeting on the performance is
suggested by the theories and then empirically supported by the studies. Thus the second
question is.

 What are the effects of budgeting on performance in manufacturing firms from the
theoretical perspective?

The explanation of the budgeting method & firm performance is different in various studies. It is
important to include a most broader explanation of the formal budgeting process because other
dimensions and aspects related to the budgeting method and firm performance may not provide a
better explanation, which in the analysis for manufacturing firms. Therefore, this study includes
the existing model of the budgeting process and firm performance for manufacturing firms by
adding more dimensions, which will affect the performance of manufacturing firms.

 What are the determinants of firm performance for manufacturing firms in

Bangladesh?

The most important element for which the budgeting method is explored is to analyze the
performance of the firm. Most of the prior studies analyze the budgeting method tend to focus on
managerial performance. It seems there are very few studies that analyze the relationship
between budgeting and its impact on the financial performance of the firm. Thus, this study uses
to analyze the impact of budgeting on the financial performance of the firm from the
manufacturing sector.

1.7 Scope of the study

Similar to other studies, this research also has several limitations due to time and budget
constraints. The main limitation is based on the manufacturing sector as this study only used data
of manufacturing firms of Bangladesh, which is different from the other countries, and the results
will not be applicable to other industries and developed economies. Secondly, there will be both
small and large organizations in the sample, but the sampling techniques used for the survey
would be convenience sampling, which may provide different results than the other methods of
sampling. Due to limited time and the difficulty of gaining access to data, this study uses a
modest survey to test all hypotheses. The third limitation of the study is linked with the nature of
self-reporting questionnaire data. Fourth, the limitation of the study is the use of performance
measures, which are profit and sales revenue of the firm. However, the return on equity and
return on assets may provide some different results for the measurement of performance.

1.8 Conceptual framework

This study goes through two procedures for developing the research design of the questionnaire.
The procedure of this research study starts from an extensive review of prior studies, which
include the budgeting as well as the performance of the firm. The phases are then subdivided into
the theoretical analysis of budgeting and its impact on the performance of the firm in general and
manufacturing firms in particular. Through this logical exploration of the. prior research studies,
and initial conceptual framework for budgeting performance relationships for manufacturing
firms will be established. Based on the research implication, the conceptual framework, tentative
propositions will also be generated as assumptions, which will be analyzed through empirical
investigations in the later chapter. The analysis of prior studies will identify the research gaps
and deficiencies in those researches. It will then provide a place for current research to make the
corresponding development towards those limitations and gaps. The second phase of the study
will conduct a sample study that will do an empirical investigation of the research questions
defined for this study. In this process, the subdivided phases are grouped, which include
monitoring questionnaires, crafting of instruments, analyzing data which is retrieved from the
survey report the results, modify the hypothesis (if required) or do more analysis of the prior
studies, and at the final stage reach to the conclusion.

1.9 Operational definition

The effect of the budgeting process is different for a different group of people or operating unit
or department. When BP is part of the discussion in the traditional way, then it only has
relationship with the firm’s financial performance. Individual participation leads usually lead to
the greater interaction of people in a group, which will be a good thing if the individuals value
their membership of the group and see the goals of the group as being collective targets that they
are regarded as desirable. Where the budget aims to analyze the performance, the budgets are
usually set by the managers may be tempted to build in some element of spare resources, which
allows a lapse from actual higher levels of performance without deviating from the target budget.
A major significance of the matter discussed in the study is important because of determining the
dimension of the effect of BP on the performance of subordinates in the current competitive
conditions for firms (Melek, 2009).

Budgeting is an economic instrument that is used for realizing and facilitating the vision of the
firms at all levels throughout the fiscal year. It is a framework that helps define the future
directions of the firm. Conmick et al. (1988) explained that empirical research had analyzed the
budgeting system of the firm from different perspectives. The budgeting process is one of the
crucial factors which improves the exchange and sharing of information at all the management
and subordinates’ level, but most of the studies applied this model on large and private firm, and
their results are diverse. There are very few studies that include only the manufacturing firms for
analyzing the impact of budgeting on performance (Jensen, 2003).

1.10 Organization of the study

This study consists of five main chapters. The first chapter already discusses the overview of the
study and provides some research foundation, inquire about the target and some major findings
and theories which elaborate the relationship between budgeting process and its impact on the
performance of the firm. The following chapters will be elaborated as follows.

Chapter 2 will discuss and elaborate on the process of budgeting, budgeting control,
precipitation, the goals of the firms with the business opportunity and provide the foundation for
the study through the development of a hypothesis. This chapter will also provide linkages
between different factors. Hypothesis will be linked with the reasonable system of prior
discoveries and relationships among the variables. Chapter 3 will elaborate on the sampling
method, collection of data and the estimation procedure for each variable and dependability
which will be completed according to the provided outline information and research plan linked
with variables. Chapter 4 will analyze the results of the study which include the discussion of
link among the dependent and independent variables. Discussion of the examination and
ramifications of Budgeting impact on the performance of manufacturing firms in Bangladesh.
Chapter 5 will provide the Conclusion of the study, and it will also include recommendations and
suggestions for future research.
Figure1.2 Organization of the study

Chapter 1 Introduction

Literature
Chapter 2
Review

Research

Chapter 3 Methodology

DATA

Chapter 4 ANALYSIS,FINDINGS
AND DISCUSSIONS

CONCLUSIONS,
Chapter 5 RECOMMENDATIONS
AND SUGGESTIONS
 1.11 Chapter Summary

Though this study aims to analyze a new investigation of manufacturing firms by considering
the data of Bangladesh, there is a number of limitations provided by the prior studies for
which those studies unable to use data beyond their research, and this study is including data
beyond their limitation. This study mainly focuses on the impact of budgeting on the
performance of the firm in the manufacturing sector of Bangladesh. Bangladesh has a very
developed manufacturing sector. In 2013, Bangladesh developed almost 5,000 factories,
which is about double the amount of Indonesia. The exporting items of Bangladesh have
greater access to a number of countries, and even the European Union has given duty-free
access to the country. The cost of labor is lowest in Bangladesh as compared to the other
countries in the regions. The minimum wage rate of the country is 68USD or 5,300 takas.
After a protest from different manufacturing and labor unions increase in wages was
implemented on December 1, 2013. Although these changes about 95% of the manufacturing
units in Chittagong pay less than the minimum wages, this is in contrast to Dhaka, Capital of
Bangladesh, where more than 60% of the factories are maintaining to pay new minimum
wage. This study aims to analyze the relationship between budgeting and firm performance
for Bangladesh’s manufacturing firms. These firms have significant contribution to the
economy of the country. This study will make significant contribution to the general
understanding of the impact of budgeting on the firm’s performance for manufacturing sector
in developing countries like Bangladesh.
 Chapter 2

Literature Review

2. Chapter Overview

This chapter discusses the historical developments made in the field of the budgeting process
and then also explains its relationship with the performance of the firm. Some basic elements,
such as the budgeting process and firm performance, are discussed in relation to the empirical
studies done in the field of budgeting and firm performance. Most of the recent research
studies included in this chapter which focuses on the budgeting of the firm and its impact on
the firm’s performance from the different perspectives.

2.1 Budgeting research: Historical Development

Traditionally budget is a process that follows a system of rules helpful in decision making,
which leads to the formation and formulation of the budget through its approval to the
execution (Shown in fig 1). The process of budgeting consumes six months of management
time in planning, negotiations, and target setting. The process starts with the development of
the mission statement and strategic plans of the firm. One there are developed, then corporate
center sends out budget packs to the division of operations and complete process of
negotiations and meetings. Once the board members agreed upon the budget, corporate center
require regular reports to enable senior executives to control process. But in the recent time
number of developments has been made after the flaws discovered by the research in the
traditional budgeting process.
 2.1.1 Development in the budgeting process
As explained in the first chapter, a budget is a complete quantitative plan made for the firm. It
provides the information of the firm’s financial resources and its utilization for a specific time
period, which could be both for long-term as well as short-term period. Budget demands from
the management to define their expected sales, cash inflow & outflows as well as the costs
which will incur in the specified period. A tangible and rational data which facilitates & helps
in the decision making of the organization is provided in the budget. Budgeting is one of the
cornerstones for management control and is extensively used in a number of management
accounting research. There are multiple users of the budgeting information in an
organization, such as evaluation and performance management, strategy formation and
implementation of strategy, etc. The traditional way of developing a budget has been under
severe criticism by recent studies. A greater concern by the practitioners is actually on the
overall budgeting process and argue that budgets hinder in the allocation of organizational
resources and encourage myopic decision making. Among the firm’s pensions are present
regarding the reason and importance of a budget. For instance, competition in the firm due to
budget is important for goals and strategy formation, but at the same time fierce competition
has a negative impact on the performance evaluation. In a business organization there are
following objectives of the firm.

i. To help in the planning of yearly operations.

ii. To coordinate the activities of different parts of the firm.
 iii. To deliver plans to the managers of different responsibility centers.
iv. To motivate the managers of each department to achieve their specific as well as
the firm’s overall objectives.
v. To evaluate the manager's performance.

Though a number of functions have been discussed in the prior researches, that studies
focused on budgeting its applications to a number of listed firms in developed and developing
countries. This study mainly focusses on Bangladeshi firms, which are a developing country
and has a fast-growing manufacturing sector. Thus, our study includes Bangladeshi
manufacturing sector for our sample. the following part sheds light on the studies which have
focused on the budgeting process. Figure 2 below elaborate the different types of Budgets
interrelationship.

Figure 2.1 explains the different items of master budget based on the manufacturing
companies and explains how they are linked. Typically, the short-term planning process helps
in the preparation of a master budget. The key indicators of planning a master budget are cash
budget, sales budget and overall budget of the firm.

2.2 Previous studies about Budgeting

Arnold & Artz, (2019), in their study, explains that budgeting has various functions in an
organization that is not essentially congruent with one another. In a number of organizations,
the use of budget is for both performance evaluation and operative planning. Although prior
studies provide recommendation to use different levels of budget for different purposes for
resolving conflicts between different functions of the organizations. Empirical studies found
that single budget level is used by most of the firms for performance evaluation and planning.
This study examines the questions why, and whether firms do the budgeting, they analyze
expected costs emerge from the conflicts in budgeting. The study also explains that the firms
usually trade-off the budgeting costs against the behavioral costs of reduced credibility when
the budget of performance evaluation has greater deviation from the planning budget. The
hypothesis of the stud is tested through survey data collected from management accounting
executives and found that as predicted there is trade-off. Furthermore, it is found that use of
single budget for both the purposes doesn’t imply at the beginning and end of the year as
adjustment of budget is made by the firms differently for performance and planning
evaluation. The study makes contribution to the literature by the reconciliation of
discrepancies among recommendations from prior literature and descriptive empirical
practices from the prior studies regarding the use of separate vs single budgets for different
purposes.

Siziba & Hall, (2019), in their research, investigate the applications of capital budgeting
techniques. Most of the prior studies applied a method of cross-sectional inquiry for
understanding the practices of capital budgeting in a firm. Very few studies applied
longitudinal studies for generalizing the results to the larger population, and emerging trends
are identified in the use of capital budgeting techniques (CBTs). The current study includes
78 survey studies that focus on the capital budgeting practices in the firms of United
Kingdom (UK), South Africa, the US and India during the period 1966 to 2016. Findings of
the study show’s that six major techniques of capital budgeting namely net present value
(NPV), Payback period (PBP), internal rate of return (IRR), return on investment (ROI),
accounting rate of return (ARR) and real option valuation (ROV) are some of the important
methods used to evaluate the capital investment. From these methods, ROV is a method used
very least. A major reason for this least use is the lack of familiarity with this method, and
most of the studies considered it one of the complex method. ROI is another method that is
used less for capital budgeting. However, in the UK followed by India, the USA and South
Africa this method is getting significant attention. IRR method has got significant attention in
the UK and USA as a primary method of evaluating capital projects and has retained PBP as
an ancillary technique to strengthen the information available when evaluating capital
projects. South African and Indian firm is excluding both ARR and PBP methods and using
NPV projects for evaluating capital investments. Though such developments are in
accordance with the theory, it limits the information scope while making evaluation of capital
projects.

A study by Mauro, Cinquini, & Pianezzi (2019) draws from the theoretical insights of
pragmatic constructivism. This study aims to define the problems and complexities faced by
the organizations while translating the performance-based budgeting (PBB) into practice. The
center of pragmatic constructivism, while explaining the dichotomy of reality and illusion,
sheds light on the shortcomings and limitations that symbolize the business practices
implementation introduced as a reform movement called a New Public Management (NPM).
An interview and policy document analysis method is used for investigating the case of
Italian Ministry. The analysis explains that a failed integration of values, communication, and
aims among different players and an illusionary analysis of factual possibilities constrain the
construction of causalities, hence jeopardizing the successful implementation of the
performance-based budgeting reform. Instead of engaging in the process of co-authoring, an
illusionary construct is left by the actors, while compliant organizations are unable to produce
the required changes.

(Sampaio Filho, Vellasco, & Tanscheit, 2018) their research study analyzed the capital
budgeting process in a unified solution way in a modified crisp method. From the mid of
1980s both practitioners and academicians have discussed and proposed different solutions in
a fuzzy capital budgeting. Due to deterministic methods used in the traditional capital
budgeting number of problems arise, which are; the implicit assumption based on the re-
investment rates, the anomalous behavior possibility of net present value method, and the
probability of multiple rates of return. This paper explains a single solution for fuzzy capital
budgeting based on modified deterministic method suggested by number of financial studies.
The problems of fuzzy budgeting are removed by the unified approach and make matching
decisions on rejection and or acceptance of investment projects with same scales and same
horizon of life which therefore maximizes the shareholder’s wealth. Due to complex
calculations of the methods, financial functions in new MS-Excel are developed by using
applications of Visual Basic. The paper contributed to the existing literature by the
development of a unifying approach in the process of capital budgeting under the uncertainty
which emphasizes the strengths of the modified methods, while bypassing the individual
drawbacks and conflicts in the traditional methods of capital budgeting. The results of the
study confirm that the suggested solution has number of advantages over the prior methods of
capital budgeting.

(Schmidbauer, 2019) in his study explains that a budget K is selected by the firm and defines
how the funds are utilized for many projects in the organization and then needs to consult N
agents, each of them has information regarding the value of their own project. After getting
reports of cheap talks from the agents, the manager has the power to decide which projects
need to be implemented based on the budget and agents report on new i.i.d projects each
period until the exhaustion of budget. When there is small budget in comparison to the
number of agents, each one of them is concerned about their own projects. The quality of
information is degraded because of the competition among agents, which thus lowers the
principal’s payoff. On the other hand, there is less competition when the budget is large and
thus may be selected for information extraction from the agents; even this leads to the
selection of unprofitable projects. It is also found that payoffs are increased with the increase
in funding compared to when the re-seek of funding is made by the agent.

(Warren & Jack, 2018) in their investigation, analyze the role of capital budgeting in the
‘energy trilemma.’ A major focus of the study is on the knowledgeable agency role in the
strategic conduct. The study also put emphasis on how the accounting tools are helpful for the
managers who are the dominant players of their organization in the European and United
Kingdom level. The strategic conduct of the players is analyzed in a setting of theorized,
narrative case study which spans in an 11-year period that is 2006-2017. A major
contribution of the study in the body of knowledge is the contribution of the strategic
investment accounting in the changing of role in regulatory and government bodies.
Regulators and government are forced to play their role because the capital expenditures are
restricted by the generators rather than mobilizing their resources. It is highlighted by the
generators that it is not only a price for consumers and environmental sustainability problems
but also a long-term supply issue. It is argued that government should focus on all the
trilemma aspects while developing a policy.

(Eliadis & Verkuyl, 2019) in their research discuss that the budget of simulation center and
needs of balanced education requires innovation. The simulation center keeps on working
when revenue-generating and cost-saving ideas are applied. During recent years the demand
for simulation is increased significantly in the programs of health care, especially nursing.
Simulation centers face number of challenges for responding the educational programs' needs
while focusing the constraints of budget. The results of the study explain that innovations are
playing important role in the simulation center for decreasing the costs of operations in the
supply of equipment, and revenues are increased related to the utilization of space.

(Zaporozhets, García-Valiñas, & Kurz, 2016) their study focuses on the needs of political
powers, which explains the allocation of budget for the EU. Thus, two alternation
explanations that impact the budget are “needs view” vs political power discussed in this
study. This study extended the data from 1976 to 2012 and used different econometric
specifications. The nucleolus is used as an alternative measure of power. The results of the
study explain that both needs and power are the essential components for explaining the
allocation of EU budget. Though political power matters but its impact is not that strong as
explained in the prior studies. It is also concluded that a good alternative to the Shapley –
Shubik index is nucleolus, which is used in prior studies. Power is more balanced with needs
under the specifications based on the nucleolus.

(Batra & Verma, 2017) analyzed that examination of corporate capital budgeting is getting
more attention from the academicians because of the changing business practices, volatile
global economy, and development in academics. Rapid economic growth in India is one of
the major reason which got the attention of the researchers to study this phenomenon on
Indian firm. This study used a sample of 77 Indian firms that are listed at the Bombay Stock
Exchange. This study used a relatively important and superior method of net present value
(NPV), which is adjusted with the real options analysis, earning multiplier (EMA)
sophisticated method of risks such as Monte Carlo simulation analysis, decision tree analysis,
and theory of probability. Researchers explain that theory is the major concern for the
corporate practitioners for using capital budgeting practices. Methods of discounted cash flow
of internal rate of return and net present value and risk-adjusted sensitivity analysis are most
popular. For cost of capital weighted average cost of capital is prominently used and is
considered most favored. The gap between theory and practice remained a specialized
method of real options, simulation and modified internal rate of return (MIRR). In the
selection of project criteria of non-financial also have due importance. The study has
significant implication for the academicians as it provides better understanding of the capital
budgeting practices followed by Indian companies in reality and redefine the theory
accordingly. The results are also useful for the practitioners so that the capital budgeting
practices of the firm are re-assessed according to the advanced investment methods which are
adopted by the more innovative and efficient firms in India.

A study by (Libby & Lindsay, 2010) focuses on budgeting or budgeting reconsideration by

focusing on the budgeting practices of North-American organizations. Historically budgets
played an important role in controlling the management; yet, recently it becomes a matter of
significant debate and criticism. It is argued in prior studies that main problem with
budgeting is the way it is used while other studies explain that there is number of flaws in the
budgeting process. There is need for systematic analysis of these elements against the
empirical evidence. The results of the study are based on two surveys done on the medium
and large-sized organizations of North America. This study 1) updated the knowledge of
prior studies that used data of budgeting practices in North-America 2) to assess the
criticisms this study uses empirical investigation and 3) identify major and strong tendencies
in the practicing of budgeting for providing information for the future research. Overall it is
found that for most of the firms budget is a tool used to control the firm’s management and is
considered as value-added. Some problems still present with budgeting techniques, and
organizations are adopting their own ways to handles those problems rather than not using
budgeting altogether.

(Meng & Xue, 2015) in their study discuss the indeterminacy problem under the consumption
of a balanced budget in the small & open economy. It also explains that a small & open
economy that has perfect work capital market does not have indeterminacy. This study also
discusses that a balanced-budget fiscal policy is followed by the government on the local tax
rate consumption, then saddle-path stability is stated, and therefore instability is ruled out.
The results of the study are opposite to what is obtained from the closed economy model, and
it is suggested that world capital mobility of unrestricted model is helpful in stabilizing the
economy in the balanced-budget fiscal policy based on the taxation consumption.

(Uyar & Bilgin, 2011) their research study investigates practices of budgeting adopted by the
Turkish hotel industry in the region of Antalya, which is one of the prominent places for the
visitors in the country. The results of the study explain that having a budget manual and
budget committee are usual for the hostels in Turkey. Secondly, in the same industry
participative budget is also common. Moreover, the period of budget is dynamic because it is
stated by the hotel's service that they revise their budgets and do the reporting on periodic
basis within the period of budget. Cost control and profitability are the most important reason
for preparing budget in the Turkish industry. Lastly, budgeting is the primary indicator of
performance, which is helpful in monitoring the management and brining improvement in
their performance.

(de Souza & Lunkes, 2016) analyzed the practices of capital budgeting, which are addressed
in the prior studies, and the most prominent factors discussed are the discount rate setting,
investment analysis, and risk analysis. The more sophisticated budgeting practices used for
the investment analysis are Present Net Value (NPV), discounted cash flows, Modified
internal rate of return (MIRR) & Internal rate of return (IRR) and Profitability Index (PI).
While traditionally studies used the Accounting rate of return (ARR) and Payback Period
(PP). The discount rate definition explains that the most suitable practice used in the study for
budgeting is Debt Cost (DC) and Weighted Average Cost of Capital (WACC). In relation to
the risk analysis, one of the simple practice used is the discount rates. But for the
sophisticated practice studies used scenario analysis, sensitivity analysis, Monte Carlo
simulation and decision tree. This study includes large Brazilian firms for the analysis of
capital budgeting practices. Data is collected through survey method for 51 firms that are
listed in the stock exchange. The basics of the discussion are improved through descriptive
statistics. The theoretical assumptions of the research are assessed through correlation
method. The results of the study explain that the method of Internal Rate of Return, Payback
Period and Net Present Value are used for assessing the capital budgeting in the investment
risk. Theoretical assumptions assessment explains that there is no relationship between cause
and effect of the variables for explaining the use of classy budgeting practices. One the
comparison of similar studies it is concluded that sophistication is on the rise in the different
stages of investment budget in most of the large Brazilian firms.

Asatryan, Castellón, & Stratmann, (2018) in their research study, investigate the
constitutional balanced budget rules (BBRs) in its reduced form in the fiscal year outcomes.
A historical data is used in the study for a number of countries from the 19 th century, and a
relatively new statistical technique difference-in-difference is used. It is found that
constitutional BBR helps in reducing the sovereign debt crisis. Results show’s that debt to
GDP ratio of the country is decreased by about 11% points on average, and it is majorly
because of decreasing expenditures instead of increasing tax revenues. A methodology is
applied to the other sample; there is no evidence that non-constitutional BBRs incorporated in
national legislation affected these measures. Some other estimates applied from the method
of synthetic control on the other 9 countries from the regions of Latin America, Africa, and
Europe selected for the study are in line with the main findings, but results also explain that
the country-specific factor creates major differences while evaluating the success of BBRs.

(Amans, Mazars-Chapelon, & Villesèque-Dubus, 2015) in their study, discuss the different
uses of the budget in different firms which has institutional complexity. This study mainly
focusses on those organizations which have prominent institutional complexity, French not
for profit theaters. The neo-institutional theory is the major part of the discussion which has
widely discussed in management accounting literature for institutional complexity. Different
institutional factors may work as filters, which can develop the ways the logics shape the
budget sued in the firm. This study focuses on one single factor that is funding situation,
considered related to the funding uncertainty and relative weights of public funders. Two
representative theatres of French origin are selected for the study, which explains the funding
differences. Results explain that firms use multiple logics to shape the institutional
complexity of the firm. The budget is used as hybrid practice. A variety of practices are
highlighted in the study which has close relation with the budgeting conditions of the firm. It
is concluded that heterogeneous budget used in different firms from the multiple logics which
are filtered through situational factors.

(Andor, Mohanty, & Toth, 2015) in their research survey used 400 executives from 10
different countries of Central and Eastern Europe (CEE) and reported the results of their
firms in the practices of capital budgeting. It is found that practices of capital budgeting in
CEE countries are mostly influenced by firm size, presence of ethical codes, multinational
cultures, firm goals, and to some lesser extent by the target level, executive owners, and a
number of projects to be analyzed. The comparison of the results with the prior studies
explains that there is significant variation in the capital budgeting of the firms from the 35
countries, which are based on the lower middle, upper-middle- and high-income countries
and across 7 geographical regions.

(Wnuk-Pel, 2014) in his paper attempt to explore the methods used for capital budgeting and
also factors that influence their selection for 100 firms that are working in Poland. A
questionnaire survey is used in the study. The empirical investigation of the study explains
that firms use capital budgeting methods usually explained in textbooks, after the scenario &
sensitivity analysis and investment appraisal formalization. The results of the study are also
helpful to verify that the capital budgeting method is also helpful in determining other factors
such as it is used in large-sized firms. Thus, firm size and foreign ownership are also factors
that determine the firm's budget. It is also believed by the author that a gap will be bridged in
the MA literature, and further research could result in questioning the current ideas and
develop new theories based on those results. Results are also helpful for practitioners in
identifying areas where recommended methods are not implemented, and there is a need to
apply those activities which create value.

(Sato & Hirao, 2013) in their paper, analyze the problem of trade-off among critical risks and
project budgets. Balancing between risks and cash flow is an issue for the project managers
when an additional cost is required for the plans of preventive risk. This study used a
mathematical modeling method with a metric called risk-based project value (RPV). RPV is a
project’s evaluation, which is calculated through probabilities of risk and cash flow activities,
which constituted the project network diagram. For the allocation of budget, there is always
an optimal solution, and if not utilized properly then it increases the expected project value.
Thus, there are some conditions where the project value is improved through additional
budgets. The results of the study explain that there is an integrated process of optimizing risk
management plan with the budget plan. Different activity networks are helpful in optimal
budget allocation for projects. Marginal cost sensitivity on the RPV supports the decision of
project manager on the budget’s reallocation.

2.2.1 Financial performance (Empirical Studies)

Cucculelli & Bettinelli, (2016) explains that in economic entities major element is the
performance. From this perspective, there is a need to analyze those indicators which help in
performance. Thus, budgeting is the major element that contributes to the performance of the
firm. This study analyzed the relationship between budgeting and performance on the data of
Romanian firms using the questionnaire and simple econometric model. The results of the
study explain that using the budget is an element to enhance the performance in Romanian
firms. This is seemingly true from the Romanian firm’s perspective, though study didn’t find
any significant direct link between budgets and performance.

King, Clarkson, & Wallace (2010), in their empirical research study, the link between
characteristics of the primary healthcare business, business performance and budgeting
practices. This study used a survey method by collecting a sample of 144 respondents who
were members of the Australian Association of Practice Managers (AAPM). The results of
the study explain that business budgeting practices are linked with the contingency-based
factors of the firm. On the specific node it is found that adoption of written budgets related to
structure and size of the firm and the business which uses written budgets on the extent of
structure, perceived environmental uncertainty, and business structure has considerable
impact on its performance. Finally, it is found that there is significant positive relationship
between budgeting practices and firm performance, and written budget has a very positive
impact on the performance of the firm. More refined tests for the analysis of fit among extent
of operating budget and contingency factor used to provide evidence of a positive association
between the extent of “fit” and performance.

Derfuss (2016), in his study, attempt to find the relationship between the participative budget
and its impact on the performance, which is widely debated but still not resolved in the
research of management accounting. This study used a method of meta-analysis for exploring
the methodological concerns for analyzing the budget and its impact on the firm’s
performance. The selection of sample, the performance measurement, differences in industry
is the major reasons for inconsistency in the results of prior studies. In accordance with
theoretical predictions, the relationship between participative budgeting and its impact on
performance is significantly positive. Furthermore, in relation to the managerial performance,
there is moderate influence of subjective versus objective and absolute versus relative self-
rated performance measures as well as public versus private sector samples emerge, which
therefore are important boundary conditions development of future theory. Contrary to
theoretical predictions, there is heterogeneous relationship between participative budget and
its impact on organizational performance and cannot be generalized to all the settings.

Vlaicu, Verhoeven, Grigoli, & Mills, (2014) in their research study, investigate the multiyear
budgets (MTFs) by using a new dataset. It is observed that more than 120 countries are using
a multiyear budget method (MTF or Medium-term framework), which enables the central
government to set the targets for multiyear. Newly collected global data of MTF is used in
the study from the year 1990 to 2008. For estimating the MTF’s a dynamic panel framework
is adopted for analyzing the variation within a country. It is found that multiyear budgeting
process improves budget balance by about 2% points during the phase of MTF which has a
larger impact on the performance. MTFs higher-phase also has capacity to reduce spending
on health volatility, while there is measurable impact of top-phase MTF on the efficiency of
health sector technology.

Arnold & Artz, (2019) while evaluating the use of budgeting explains that it has various
functions in an organization that is not congruent with each other but has conflict. In a
number of firms, the use of budget is both for performance evaluation as well as operative
planning. Prior studies suggest different levels of budgets can be used for different purposes
for resolving the conflicts among these functions. Empirical investigations indicate that most
of the firms use a level of single budget for performance and planning evaluation. This study
analyzes the question why and whether firms do evaluate the impact of budget on the
performance and also analyze the costs incurred due to conflicts in the adopted methods of
budget. It is suggested that firms trade off these costs against when the budget of performance
evaluation deviates from the budget of planning. A survey data is used in the study collected
from the executives of management accounting and find issues in the predicted trade-offs.
Furthermore, it is found that the use of single budge level for both purposes from the
beginning of the year does not explain that single budget is beneficial for the firm, which
adjusts their budgets differently for performance and planning evaluation. This study
contributes to the literature by comparing the discrepancies among recommendations from
prior studies and descriptive empirical practices regarding the use of separate vs single
budgets for different purposes.

2.3 Theoretical perspectives of budgetin

Virtually every aspect of management accounting is implicated in budgeting. Budgeting is

one of the elements of cost accounting, performance measurement, responsibility accounting,
and compensation. There is a number of purposes for which budgeting is used, including
coordination and planning in organizational activities. Not surprisingly, budgeting is one of
the topics used extensively in management accounting research. There are three major
perspectives and theories on which budgeting works and explained as follows.

2.3.1 Institutional Perspectives on Budgets

The institutional isomorphism explained by DiMaggio & Powell (1983) says that budgeting
is defused through three mechanisms. Organizations adopted the budget, mimetic diffusion,
because they observe that other groups of such kind are more confident and successful
financially through a process of systematic budgeting. By the sophistication in budget the
firms have more pressure to adopt budget practices. Stockholders who want to have sound
financial management in their firm demand for yearly budget for major activities.
Philanthropy firms develop their budget for charities to ensure that their contributions are
wisely spent. Employees in an organization expect from the firm’s budget that at the start of
month amount is available for their salaries and other important projects.

Finally, Financial managers and accounts who are hired by the firm bring normative pressure
to apply practices of standardized nature. Budgeting is a logical extension of debit-credit
accounting principles and is part of course in every business school. The budget is also a
rational myth in modern organizations, and studies say that the adoption of these myths is
ceremonial in nature. Legitimacy is a major concern of budgets and can be de-coupled from
daily operations. Sometimes money is transferred from one category of budget to another for
covering over-spending. Most of the time there is small pressure for maintaining budgeted
spending after its development.

2.3.2 Resource Dependency Perspective on Budgets

In an organization, Budget is prevalent because it helps in clarifying internal resource

dependencies. Organizational priorities are most set by the hierarchy of the organization,
which is better than formal organizational charts. A budget when approved also represent
rationalized statement of purpose for the next fiscal year which is important for employees as
well as outsiders.

More importantly, the budget is a tool of power (Pfeffer, 1992). As the departments are more
dependent on budgets for their normal operations, the controlling of budgeting means
controlling of resources. The planners and approvers of the budget can exploit those
asymmetric dependencies for power accumulation. The external group also puts more
influence on internal through reviewing and or approving the annual budget. At the given
level, the process of budget planning is usually zero-sum game where influence and politics
are more evident. The budget is also a control mechanism because these are more flexible
than the contracts. Contrary to contracts budgets can be changed to affect the sub-group
activity.

2.3.3 Transaction-Cost Perspective on Budgets

From the perspective of a transaction-cost (Williamson, 1987), budgets are ubiquitous as they
are helpful in regulating the internal market. Internal transactions are lowered due to the good
budgets by minimizing the hindering opportunities, minimizing uncertainties, and mediating
internal disputes. The involvement of the organization in the preparation of budget help to
clarify future transactions among sub-groups. For instance, defining advertising budgets for
each product line helps the department of marketing in planning activities in more efficient
way. Carefully defining limits and scrutinizing budget would reduce the potential of
opportunism. Budgets are also helpful in mediating disputes among organizational members
by explaining the boundaries and priorities for the organization's activities.
It is also stated that from the perspective of resource dependency, budgets are not contracts.
They provide normative advantages for external contracts with the possibility of future
modification.

2.4 Budgeting practices in Developing countries

During the last decade, a good number of firms from countries of the Organization for
Economic Cooperation and Development (OECD) have made substantial reforms in their
budgeting process. Three major trends are seen in these reforms. Firstly, in number of
developed countries, budget responsibilities developed significantly from their central
budgeting authority to departments of individual spending, thus provide these departments
the freedom of funds allocation in spending limits of centrally determined departments.
Secondly, a good number of countries introduced budgeting techniques that are result
oriented through their budgeting process which is based on departmental performance. These
reforms are helpful in enhancing the efficiency by which public resources are allocated.
These two types of reforms are basically made for improving the efficiency by which
allocation of public resources is made. The third trend in this line is made in recent years that
many developed countries already moved in framing their annual budget process in multi-
year framework. Although a multi-year budget could be defined narrowly which determines
the revenue of government and appropriate expenditures for a multi-year period.

The rationale for developing a budget is based on several potential benefits. Firstly, in the
process of the budget, it is required to make consistent statements of priorities and policy
goals. Secondly, budget of medium-term makes single projections that provide future
implications at odds with the fiscal strategy. Thirdly, dimensions of multi-year provide
continuation to the budget process by placing the annual budget in the medium term-fiscal
strategy of firm and government. Fourthly, efficiency is enhanced by multi-year budgeting in
the allocation of public resources to enhance accountability and transparency in the process
of budgeting and to provide mechanism of systematic review for expenditures. Fifthly,
cooperation is enhanced through multi-year budgeting.

2.5 Summary & Conclusion.

Budgeting is a financial plan of a firm which anticipate the expenditures and revenue during a
certain period. The concept of budgeting process has a long history of about 100 years since
1920. After its inception, every company which was serious about its process and had a
greater concern of budget use it. It is an ability to coordinate the allocation of resources
through the internal communication process, and at the same time, it is a mean of evaluation
and authorization of expenditure, which made the budgeting a necessary tool which is at the
disposal of managers when they run the company. This chapter provides understanding of the
budgeting process by highlight the different studies from the budgeting perspectives of
economies as well on the firm’s basis. The discussion of the budgeting explains that it is
important for the performance and monitoring of the firm, and in developing countries, the
process of budgeting is still not well developed.
 CHAPTER 3

RESEARCH METHODOLOGY

3.1 Introduction

The purpose of this chapter is to explain the research method which will be adopted for
this research. Moreover, this chapter also describes the research design, the population
& sample size, techniques, and procedures used to select the sample.

This is empirical survey research; thus, questionnaires will be filled from the
respondents. The purpose of the study is to find the relationship between the budgeting
process and its impact on firm performance. The population of the study is
manufacturing firms in Malaysia, and this questionnaire will be filled from the
managers and accountants of the firms so that their opinion will be evaluated by
applying suitable statistical techniques. Thus, this study used a primary data collection
method to fulfill the objective of the study. This chapter also discusses the methodology
for developing the questionnaire and then analyzing the data of filled questionnaires. At
first, the research questions developed in the first part of the study will be addressed,
and then the sampling frame and method of data collection will be discussed later in
this chapter.

Data collection techniques and the survey and research instruments are also part of this
chapter. Finally, this chapter discusses the method of analysis and presentation.

3.2 Research Design

This study aims to analyze the impact of the Budgeting process on the performance of
Bangladesh’s manufacturing firms. Pimpong & Laryea, (2016) explains that descriptive
research investigation involves the collection of data for testing hypothesis or
answering the research questions related to the ongoing position of the study. Thus, this
methodological approach is adopted to explain the situation as this study is in relation
to the Budgeting Process and its impact on firm performance.

At the start of the research, there is a need to select a specific design to be used. There
is number of research designs available, but there is no simple system of classification
which defines all the different issues that should be considered (Schindler & Cooper,
2003). The classification of the research is based on its purpose. Accordingly, it is
explained that studies are classified into descriptive, exploratory and causal (Saunders,
Lewis, & Thornhill, 2003). The research of exploratory nature is helpful when the
research questions are unclear or when there is little theoretical evidence available to
support the predictions. Similarly, it could be very difficult to formulate the basic
statement of research problem. Hoffman & Bateson, (2010) in this study explains that
exploratory study is a valuable means to find the question like what is happening for
new insight, to assess phenomenon in new light. The methods are helpful if researchers
want to clarify the understanding of a problem.

A major difference between causal and descriptive studies basically resides in their
objectives. If the research has major concern is to find out what who, where, how much,
when, then the study is said to be descriptive. The relationship between the variables is
explained in the causal study for analyzing the cause and effect relationship. The
research design for the descriptive study is described by explaining the characteristics
of the research questions. The theory is helpful in defining the hypothesis, which serves
to guide the process and explains what needs to be measured. Studies that develop a
causal relationship among variables may be explained as explanatory. The major focus
here is to study a problem for explaining the relationship between the variables
(Saunders et al., 2003). Cause and effect relationships are described in the explanatory
study (Hoffman & Bateson, 2010).

Therefore, this study used a descriptive method, and the collection f data is made
through a questionnaire that aimed to analyze the important factors of budgeting and
then analyze its impact on the firm’s performance of manufacturing firms in
Bangladesh.

3.1 Population and Sample

The target population for this study is the manufacturing firms of Bangladesh, which
mainly focus the firms doing their work around the capital city of Dhaka. This study
includes a total sample of 200 manages. This study used a purposive sampling method
that is selected because of their schedules and that they should be the best people to
answer the questions of this research and get true responses.

Basic knowledge of the sampling is to select some fundamentals from the population,
then the research draw conclusion for the entire population. There are a number of
fascinating reasons for lowering cost, collecting data with greater speed, and
availability of selecting population (Schindler & Cooper, 2003).
Selecting a sampling method based on the related practical and theoretical issues which
need to be tested. These include the study nature, the study objective, and the available
time budget. There are two main categories of traditional sampling methods, which are
non-probability and probability sampling methods. One of the most common methods
used in a number of researches is a method f probability which is linked with survey-
based research where inferences are made by the researchers from the sample regarding
the population for answering the research questions or to fulfill the objectives of the
research (Saunders et al., 2003). In a probability sampling method, elements of
sampling are randomly selected, and the probability of being selected is determined by
the time by the researcher

In probability sampling, sampling elements are selected randomly, and the probability
of being selected is determined ahead of time by the researcher (Hair, Celsi, Money,
Samouel, & Page, 2015). A number of different methods are used in the non-probability
sampling method. The selection of the sample is not necessarily representing the
population in a non-probability sampling.

3.2 Data Collection

This study used two types of data. Later in this research, it will show how
questionnaires are designed and then given to respondents. The interview guide is used
for developing semi-structured interviews. This study focusses on the manager and
accounts manager of the manufacturing firms on getting their views for Bangladesh’s
manufacturing firms. A gap in the Budgeting process is the major reason which
provides direction to the researchers to study the Budgeting and specifically its impact
on the performance of the firm. One of the major elements of budgeting is the
satisfaction of clients and other stakeholders of the firm.

In this respect, this study use manager as well as accounts officer/manager of the
manufacturing firms as they have major concern regarding the budget of the
manufacturing firm and how it is being implemented, their role in its implementation,
and the challenges they encounter.

3.3 Research Approach

This used both quantitative as well as a qualitative method as a research approach

which will contribute to the knowledge body as explained by (Tashakkori & Creswell,
2007).
A method in which the research mainly use postpositive entitlements to enhance
knowledge (that is causal relationship, hypothesis testing, reduction in specific
variables, use of surveys and instruments and testing theories) apply strategic inquiries
such as surveys and experiments and collection of data on predetermined instruments
which obtain a statistical data (Creswel, 2013).

The hypothesis is tested, and the research questions are solved through Quantitative
data. Typically, the study design begins from the theory statements from which
hypotheses are derived. After that, the design for the experiment is established by
which the dependent variables are determined while controlling the effects of selected
independent variables. This study included the subjects randomly so that bias and
errors are reduced. The sample of the study is drawn randomly so that the results are
generalized to the whole population (Newman, Benz, & Ridenour, 1998).

3.3.1Qualitative Approach

Research in which multi-method is used to focus on a naturalistic, interpretive approach

related to the subject matter is said to be a qualitative method. It means that in the
natural setting the qualitative researches are done to make sense or explain the
phenomenon in terms of the meanings people bring to them (Newman et al., 1998).

A qualitative approach is one in which the inquiries often makes knowledge claims
based primarily on constructivists perspectives (that are individuals with single
experiences has multiple meanings historically and socially constructed with an intent
to develop pattern or theory) or perspectives of participatory/ advocacy which include
issue-oriented, politics, change or collaborative orientation or both. A strategic inquiry
such as phenomenology, narratives, ethnography, case studies, or studies of grounded
theory. In some parts, the open-ended question is asked from the respondents, emerging
data with the basic intent of themes development from the data (Creswel, 2013).

As the aim of this research study is to understand the important dimension of the
Budgeting process from the perspective of managers; thus, quantitative research is an
important thing that is more suitable for this study.

3.4 Research Strategy

Generally, the research strategy of the study is to analyze how the questions of the
research are answered by the researchers. It needs to contain clear objectives extracted
from the research questions, mainly the focus is which researcher intends to focus on
ethical issues, location, time, data, or money (Saunders et al., 2003). Based on the
provided conditions, there are the following steps that need to be followed.

1. Research question form.

2. Need to have control on the behavior events and

3. Contemporary events are focused, and social science identified five research
strategies

These are surveys, histories, experiments, archival analysis, and case studies.

Table 3.1: Research Strategy

Strategy Type of research Requires control over Contemporary events

are focused
Question behavioral events

Survey Where, What, Who, No Yes

How, How much.

Experiment How, why Yes Yes

Archival Analysis Who, where, what, No Yes/No

how much, how
many/

History Why, How No No

Case study How, why No No

An important condition to select a research strategy is to recognize the research questions

type to be asked Where What, Why, Who, How, and what questions are asked to investigate
two possibilities. Firstly, some types of questions are justifiable to conduct an exploratory
study, and the aim is to develop a specific hypothesis and make proposition for more inquiry.
From the given five strategies any single strategy could be used in such situation – like
exploratory experiment, exploratory survey, and an exploratory case study. The other type of
question is mainly how much or how many inquiries and a situation provide specific
outcomes.

Sine the major question in the current study is based on the question of “what” and this
question is mainly brought from a how many, and there is no control by the investigator over
the actual behavioral events, it is also found that survey is a better approach for getting better
understanding of the research area.

The survey is more appropriate for a quantitative study.

3.5 Data Validity and Reliability

Saunders et al. (2003) explain that it is important to analyze the reliability and validity
of the collected data, as well as the rate of response, which is achieved and is dependent
on the structure and design of the questionnaire and methodology. Instrument’s validity
is measured by using the Content Validity Index (CVI). The relevancy of the
questionnaire is analyzed by sending it to at least three experts. This study uses a four-
point scale of not relevant, somewhat relevant, quite relevant and relevancy.
Additionally, the design of the questionnaire is developed through two ways that are
developing their own questionnaire and adopting questions making methods adopted in
previous studies. In this study questions aim to measure variables such as participation
of budget, managerial performances, which are directly adopted from the other
researches. It is important for the question that their consistency should be checked if
study aims to replicate or compare the findings with prior studies. It is also time-saving
and efficient than developing own questions, provided that one can still make data
collection for answering the research question to meet the objectives of the research.
For some questions, both negative and positive statements are used. The respondents
can answer and checked once again by comparing and analyzing both the questions.
Yet, some questions, such as budgeting process and firm’s performance are developed
by the researcher. For determining the confidence and internal consistency the most
reliable measure is the Cronbach’s Alpha test to measure the reliability of the data.

3.6 Research Instruments

Before the administration of the instruments, thorough instruments are development. A

complete set of questionnaires was administered and designed for more than a hundred
clients selected from the population of the subject were administered carefully and
meticulously edited for research questions and objectives. The questionnaire was split
into different groups of variables, and under each group there are some questions that
sought some backgrounds related to the respondents.

Under the dependent variables, the available dimensions are five, which are Assurance,
Tangibility, Empathy, Reliability, and Responsiveness, and each of them explained
related to the clients — perceptions and expectations of the process of Budgeting in
manufacturing firms. On the basis of customer’ behavior decisions, the decision is
made according to the satisfaction of the consumers.

Under each set of variables, some questions are raised by the researchers, which are
knowledge gap, technology, interpretation, perception, bossiness communication can be
used to cover all the expected outcomes. It is argued that the knowledge of customers
means their consciousness about the municipality’s delivery system, which is based on
the marketing research, management layers, upward communication, and service
dimensions decision making. Additionally, two separate interview guides were
formulated and designed by isolated interviews with the selected respondents.

The other guides for interview select the respondents for finding them whether they
have information on any service quality, client satisfaction, and clients care, their roles
in its implementation, challenges, and success, Budgeting process standards.

Other guidelines for an interview for selected respondents aim to find out that either
they are aware of the quality of service, clients satisfaction and clients care, their roles
in implementation, challenges and success, Budgeting process standards in a
manufacturing organization and their recommendations for enhancing the Budgeting
process and satisfaction of clients.

3.7 Research Methodology

The research methodology is generally a guiding principle to solve the problem, with
some specific elements such as techniques, phases, methods, tools, and tasks (Ishak &
Alias, 2005). There are different factors that determine the research methodology of the
firm. For instance, a preconception by the researchers is whether there is a single
authenticity that discovers the truth or multiple perceptions that need to be discovered.
That is based on the researcher’s tendency to positive other researchers’ context.

Though, it is of utmost importance to focus on the theory which needs to be utilized in

terms of inductive or deductive approach (Creswell, 2009). Research methodology
explains the steps that the researcher considers in defining the objective and address the
research questions. The decision on methodology of research selection is very
important as it develops the ways by which it will be conducted and affects the research
quality and its outcome.

This is an empirical study, and it needs to get the questionnaire filled from the
respondents. The purpose of this study is to explore the relationship between Firm
Performance and Budgeting impact the manufacturing firms. A method used for this
survey study is a questionnaire. The collection of data is method includes literary
observations and questionnaire sources. This part of the study discusses the
methodology for this research for developing the conclusion for the research question.
At first the research question is discussed, and then hypothesis is developed. In the next
phase the framework for sampling is made, and then data collection procedure will be
defined.

3.8 Research Objectives

Prior research on the problem of budgeting and performance, include all type of
organizations. The purpose of this research is to explain and explore the relationship between
budgeting and performance for the manufacturing firms of Bangladesh. The exploratory
study attempts to identify and discover potential variables related to the budgeting and
performance relationship for manufacturing firms from a review of prior studies. The study
then attempts to examine whether the established relationship among Budgeting and
performance is confirmed by the actual practices of budgeting for Bangladesh’s
manufacturing sector. The following is a list of the objectives of this study:

1. Determine the impact of Budgeting on the firm's financial performance in

Bangladesh’s manufacturing sector.

2. To analyze the impact of budgeting on performance from the theoretical

perspective for the manufacturing sector and

3. To determine and define how to measure the performance of Manufacturing firms.

3.9 Research Hypothesis

The hypothesis is developed as follows;

H1: There is a positive or negative relationship between Budgeting and the firm’s
performance of manufacturing firms.

H3: There is a positive or negative relationship between Budgetary Participation

and manufacturing firms.

H4: There is a positive or negative relationship between Budget Goals and manufacturing
firm’s performance
 3.10 Conceptual Framework

This study aims to find the relationship between the manufacturing firm’s service
quality, performance, and loyalty program with the customer satisfaction level. Prior
studies explained in the second chapter proposed a conceptual framework that is based
on deductive approach through the quantitative methodology. The five dependent
variables which are part of the analysis in this study include budgeting control,
budgetary participation, budgeting goal, and budgeting process and firm owernship is a
moderating variable.

Figure 3.1: Theoretical Framework of the study.

3.11Variables

The concept of the conceptual framework is based on the psychological phenomena,

where there is not a single element that is accepted at university for each construct.
Resultantly, this section attempts to explain the major constructs of the researcher’s
model. These are important to determine the scope of the current study and are to avoid
the misunderstanding in the construct of the research model. All the operations were
developed by the author has based on the different perspectives that are presented in
prior studies regarding these constructs.
 3.12 Administering Questionnaires

The data collection is made by using the questions provided in the appendix. The
questionnaire was distributed to the manager and accounts managers and distribute
among 200 people who are working in manufacturing firms in Bangladesh. An exit
interview strategy is used to collect the response.

As explained earlier, the interview and questionnaires were used to collect the related
primary data. This study aims to find the effectiveness of the delivery system to the
management and their performance for the manufacturing firms in Bangladesh. These
administered questionnaires are then collected, organized and then edited by the
research for accuracy, consistency completeness and homogeneity. About 170
questionnaires were completed and collected by the respondents. The uniformity of the
answers was analyzed through the respondents and other management.

The effective penetration of the issue is ensured by the examiner. The research
instruments are administered over eight weeks’ time. In the surrounding environment,
the researcher’s interacted, and it leads to the various methods by which the research
was conducted. Yet, there are some common principles; research’s perception is
influenced due to the epistemology of researcher. To realize how and why the
researcher selects the perspective of methodology for this study and most proper
appropriate methods are discussed in this study.

3.13 Data Analysis Procedures

This study aims to analyze the relationship between budgeting and firm performance of
Bangladesh’s manufacturing firms from the Literature Review chapter. The discussion
then leads to the bivariate correlations procedure, which is non-desirable. As the
identified variables are scale variables that develop a Hierarchical Cluster, which is
non-desirable. This study will then use Factor analysis procedure to identify the
underlying variable which will then explain the correlation pattern in the set of
observed variables. This procedure is helpful too.

a. Reduce the redundant variables from the data set, which would replace the
complete data set with small set of uncorrelated variables.

b. Explore the variables latent structure in the collected data, and this way, the
extracted data would answer.
 1) How many components are required to represent the variables?

2) What do these do components represent?

The selection of the statistical package used in the student is dependent on the
registered analysis. In this setting SPSS is very helpful to hand complex data, and it
provides a complete system for data analysis. SPSS is also a friendly software in use.

Fitting the covariance could be analyzed through Amos, which is based on the
structural equation model. It is suitable if the objective of the research is for testing
theory and confirmation.

From the aforesaid discussion of software, this study will use SPSS for the Factor
Analysis. There are following steps will be followed in this research.

1) Running the analysis

2) Total Variance Explained

3) Scree Plot

4) Rotated Component Matrix

5) Component Score Coefficient Matrix

6) Scatter plot Matrix of Component Scores.

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