Budgeting practices in manufacturing firms in Kenya

Abstract

The manufacturing sector in Kenya contributes approximately 13% of the GDP and is thus a significant player in the economy. The objective of this study was to establish the budgeting practices in the manufacturing industry in Kenya. The study was aimed at establishing whether budgets exist in the sector and if so, the methods used for budgeting, uses to which the budgets are put and the factors considered important while budgeting. To achieve this, a questionnaire was issued to 75 companies of which 45 (60%) responded. The responses were analysed using percentages, measures of central tendency (the median and mean) and for dispersion, standard deviation was used. The findings of the study indicated that majority of the firms in the sector prepare budgets. Incremental (prior year) budgeting is the most widely applied method of budgeting. The most significant use of budgets according to the research is maximisation of shareholders' value. Firms were asked to rate their agreement or disagreement with the budget criticisms that were proposed as the basis for "beyond budgeting". All the firms disagreed with the criticisms except one where they indicated that budgets stifle innovation to some extent. The conclusion is that budgeting is a widely applied tool in the manufacturing industry in Kenya and budgeting in its current form is widely accepted. The more traditional method of incremental budgeting is widely applied. Management in the industry should aim to adopt more advanced methods like zero based and activity based budgeting. Incremental budgets have the very significant shortcoming of carrying forward inefficiencies from prior years. Criticisms should be used as basis for developing a more flexible planning model that focuses on the entire performance management process.