The relationship between budgetary controls and financial performance of insurance companies in Kenya

Abstract

The purpose of the study was to investigate the relationship between budgetary controls and the financial performance of insurance companies in Kenya. Descriptive survey design was used so as to achieve the objective of the study. The study carried out a census of 44 insurance companies in Kenya. Secondary data constituted the key data for the study and was derived from financial statements for the last five years up to 31st December 2009 for all the insurance companies. Information on budgeted amounts and actual costs realized was also obtained from the financial statements. Primary data was obtained using a structured questionnaire and was administered to Chief Finance Officers in all insurance companies. Data analysis was carried out using both inferential (regression analysis) and descriptive statistics. Statistical analysis was carried out with the help of statistical package for social sciences. Frequency tables and charts were used in presentation of the study results. The findings revealed that all the insurance companies in Kenya prepare budgets for financial planning. The study also found that the budgets applicable in the respondent organizations were incremental budgeting, hybrid method, and zero based budgeting and the budgeting process was inclusive. From the findings it was concluded that the budget control in the respondent organizations was carried out through monthly monitoring of the budget and analysis of the variances and where applicable undertaking remedial action. On a monthly basis, variance analyses were carried out on revenues and expenses and where they were unfavourable, remedial measures were instituted. Employees at lower levels are not involved in the budget control within their organizations. The study revealed that budget variances were addressed depending on their causes. The findings revealed that budgetary control was an effective tool in the insurance industry. Budgetary control was rated very effective by all the respondents. However, statistically, it was found that there was negative moderate relationship between profitability (Return on Assets and Return on Equity) with budget variance (49%) and a positive moderate relationship between profitability ((Return on Assets and Return on Equity) with size of the company (21%). The study revealed that challenges such as having poorly trained financial professionals, lack of integration, absence of connection between compensation and financial measures and lack of dynamic structure should be well addressed since they affect budgeting in the insurance industry. The study revealed that similar research should be carried out in other industries apart from the insurance industry so as to give more conclusive findings. Further research studies should focus on relationship between other factors such as current assets and expenditures on financial performance.