Effect of Budgetary Control On Financial Performance of Savings and Credit Cooperative Organizations in Nairobi County

EFFECT OF BUDGETARY CONTROL ON FINANCIAL PERFORMANCE OF SAVINGS AND CREDIT COOPERATIVE
ORGANIZATIONS IN NAIROBI COUNTY
KAREN JEBIWOT RUTTO, DR. OLUOCH OLUOCH

Vol. 4, Iss. 2 (45), pp 797 - 816, May 25, 2017, www.strategicjournals.com, ©strategic Journals
EFFECT OF BUDGETARY CONTROL ON FINANCIAL PERFORMANCE OF SAVINGS AND CREDIT COOPERATIVE

ORGANIZATIONS IN NAIROBI COUNTY
Karen Jebiwot Rutto1, Dr. Oluoch Oluoch2
1
Jomo Kenyatta University of Agriculture (JKUAT), Kenya
2
Jomo Kenyatta University of Agriculture (JKUAT), Kenya
Accepted: May 24, 2017
ABSTRACT
Savings and credit cooperative societies have in the past experienced harsh economic conditions due to poor
management caused by incompetent employees who misappropriated approved loans leading to members
receiving less. In most organizations, budgetary process is important in financial performance of firm. However,
it is not clear as to how performance of Savings and Credit Cooperative Organizations (SACCOs) is affected by
budgetary control. The main purpose of this study was to determine effect of budgetary control on financial
performance of savings and credit cooperative organization in Nairobi County. The specific objectives of the
study were; to determine the effect of human capital budgetary control on financial performance of savings and
credit cooperative organizations and to establish effect of cash flow budgetary control on financial performance
of savings and credit cooperative organizations. Theory of budgeting and budgetary control model informed the
study. This study employed explanatory research design. The target group of the study was 40 Savings and Credit
Cooperative Organizations (SACCOs) in Nairobi County registered under Sacco Societies Regulatory Authority
(SASRA). The study used questionnaire to collect data. Findings showed that human capital budgetary control
and Cash flow budgetary control had significant effect on financial performance of savings and credit
cooperative organization. The research recommended the need for communication of details of human capital
budget policy and guidelines to the individuals tasked with the preparation of the budget. It also recommended
the need for SACCOs to have a database of the daily cash flow to enable tracking against departments’ profiles
and major divergences. There is need for the SACCOs to have network of contacts, voice and electronic with the
main spending and revenue departments tasked with developing forecasts of current and prospective cash flows.
In addition, further research need to be done on other geographical dimensions as well as similar research using
different methodology.
Key Words: Human Capital, Cash Flow, Budgetary Control, SACCOs
- 797 - | The Strategic Journal of Business & Change Management. ISSN 2312-9492(Online) 2414-8970(Print).www.strategicjournals.com
INTRODUCTION deviation from the norms which are the result of
the economy and make the necessary correction in
Globally, SACCOs are increasingly becoming a major order to forestall recurrence.
source of the productive resources that are
invested by members to create employment Budgetary control is a complex function which is
opportunities and increase income to the related to production planning and control, cost
household. This is possible due to the growing control and sales planning and control. If optimum
ability of the cooperatives to mobilize substantial balance is not achieved in planning and controlling
savings from their members which they can later be this triangle of operations, financial planning and
borrowed by other member’s investors (Kobia, control will be adversely affected. It is worthy to
2011). Danovi (2010) reported that SACCO note that budgeting aims at providing a benchmark
movement in United State is quickly spreading from for controlling performance of managers and their
its traditional urban and wage employment sectors subordinates. Control is sought to be achieved by
to the rural and informal sectors, thereby widening comparing actual performance with budgeted
the scope of financial service provision (Danovi, performance and taking action to correct the
2010). Therefore, high performance of SACCOs budget variance. The principle of management by
promotes development of vibrant economic exception should be applied while enforcing control
businesses all over the country by creating through budgets. No action or intervention is
entrepreneurial morale to small businesses. The required so long as the actual performance
rapid growth of microfinance has brought approximately conforms to the budget (plan).
increasing calls for regulation, but complying with Management attention should be focused only on
prudential regulations and the associated exceptional or significant deviations. To determine
supervision can be especially costly for microfinance significant deviations, control limits that represent
institutions. In Germany, Chortareas, Girardone and the range of normal deviations from budget (plan)
Ventouri (2012) found that regulation reforms were should be developed.
positively associated to the performance and the
stability of financial institutions. Alternatively, Budgetary control looks at the future and lays down
powerful supervisors may exert a negative influence what has to be achieved. Controls check whether
on financial institutions performance. the plans are being realized and put into effect
corrective measures and determines where
Budgetary control is the establishment of deviation or short-fall is occurring (Egan, 2010).
departmental budgets relating the responsibilities Egan emphasized that without effective controls, an
of executives to the requirements of a policy, and enterprise will be at the mercy of internal and
the continuous comparison of actual with budgeted external forces that can disrupt its efficiency. When
results, to ensure that individual actions of the a budgeting and control system is in use, budgets
objectives of that policy provide a firm’s basis for its are established which set out in financial terms, the
revision (Enya, 2012). Budgetary control is one of responsibility of managers in relation to the
the approaches to the control of firm’s financial requirement of the overall policy of the company.
activities. Enya (2012) argued that to ensure that Continuous comparison is made between the actual
the firm’s actual performance coincides with and budgeted results, which are intended to either
expected performance, it is necessary to initiate a secure, thorough action of managers, the objectives
system of controls. This method is used to ascertain of policy or provide a basis for policy revision.
Wijewardena and DeZoysa (2011) showed a positive growth globally. The WOCCU statistical report also
and significant relationship between budgetary indicated that Kenya is leading in membership,
control and sales growth. However, no significant number of credit co-operatives and savings
difference was found between budgetary control mobilization in the African continent. The statistics
and return on investment. To explain the further show that Kenya ranks number seven (7)
insignificant relationship between budgetary globally in savings mobilization
control and ROI, they state that, although firms with
a greater extent of budget control report higher In Kenya, the growth in the co-operative movement
rates of growth in sales, these revenues are not has been witnessed in the areas of number of new
bringing about higher profits because of internal co-operatives registration, savings, turnover,
inefficiencies. Following Wijewardena and surplus; share capital and membership, and
DeZoysa’s research, Fonseka and Perera (2014) also computerization as will be highlighted in this
studied the relationship between the budgeting research. According to the Co-operative Digest
process and performance in Sri Lankas’s SMEs. The (MOCD & M, 2008), co-operatives in Kenya remain
findings are consistent with the previous findings, friendlier in offering credit and products to the
which show that those firms engaged in more small scale firms and traders and if they coalesced
control processes have achieved higher growth rate into bigger unions, they would become profitable
in sales, but no significant relationship are found financial institutions that would be able to face stiff
between budgetary control and ROI. competition in the sector. For this to be realized,
co-operative leaders must accept to give up
Yang (2010) observed that more formalized positions held in their respective small co-
budgetary control tends to lead to a higher growth operatives in order to accommodate mergers for
of profit of a firm. The underlying reason can be the interest of their members. The journal further
that due to management control; the total expense adds that the ministry of co-operative development
of a firm will be at most minimized, which thus and marketing has put up measures in place to
results into the growth of profit of the firm. It is also develop co-operatives which will provide young
interesting to find that the formal budgeting people – across all sectors of the economy – with
planning and the formal budgetary control show opportunities to grow and be self-reliant. On the
different patterns in terms of their effect on growth of the co-operative movement, the co-
financial performance. Akintoye (2014) in his work operative Digest adds that the Sacco sector is
on budgetary control and its effect on firms’ growing very rapidly – 20% per annum – and has
performance tested the association using turnover the potential for further growth to be able to serve
as one of the variables with the assumption of the un-banked segment of the population. It says
turnover as the budgetary control indicator on growth will further be accelerated with enactment
dividend per share. of the Sacco Legislation. The legislation aims at
ensuring that members‟ savings are safe and sound,
The global statistics indicate that in the year 2011, and in effect result in requisite confidence vital for
100 countries had credit co-operatives that any financial intermediary.
numbered 51,013 with a membership of
196,498,738 (WOCCU, 2012). In the year 2009,
globally there were 49,330 credit co-operatives with
a membership of 183,916,050 which indicated
Statement of the Problem LITERATURE REVIEW
Savings and credit cooperative societies have in the Theoretical Framework

past experienced harsh economic conditions due to
poor management caused by incompetent The Theory of Budgeting
employees who misappropriated approved loans
leading to members receiving less (Okwee, 2011). The proponent of the theory was Hirst (1987). Hirst
These financial institutions struggle to pay their (1987) explains that an effective budgetary control
debts to reduce the cost of holding the debts but on solves an organization’s need to plan and consider
the other hand there is laxity in collection of money how to confront future potential risks and
lent out to their customers and this increases opportunities by establishing an efficient system of
number of days that business cash stays in the control. Shields and Young (1993) define the theory
hands of these customers which negatively affects of budgeting as a detector of variances between
profitability. Since the introduction of SASRA in organizational objectives and performance. Budgets
2008, a number of SACCOs have had their licenses are considered to be the core element of an
canceled due to inadequate compliance to efficient control process and consequently vital part
minimum liquidity requirements. In 2014 poor to the umbrella concept of an effective budgetary
financial performance recorded by most SACCOs in control. Theory in budgeting, like much of public
Kenya led to cancellation of 44% of SACCOs administration, has been of two kinds, descriptive
operating licenses (Osoro & Muturi, 2015). and normative. Descriptive theory is based on close
observation or participation in public sector
Research Objectives activities. Theorists describe trends, sequences of
events, and infer causes, paying attention to local
The main purpose of the study was to determine variations as well as uniformities across cases.
the effect of budgetary control on financial Normative theory advice may be based on a much
performance of savings and credit cooperative narrower range of observations than descriptive
organizations in Nairobi County. The specific theory and its proposed solutions may be based on
objectives were:- values rather than observations. If the explanatory
power of the descriptive theory is too weak, or if
 To determine the effect of human capital the advice of normative theory is not adopted by
budgetary control on financial performance of public officials or is adopted and abandoned
savings and credit cooperative organizations because it does not work, the gap between theory
 To establish effect of cash flow budgetary and practice may become unacceptably wide.
control on financial performance of savings and
credit cooperative organizations Accounting Theory
The theory of accounting was founded by Kaplan

and Norton (1996) .Kaplan and Norton (1996) assert
that the accounting theory is aimed towards
provision of a coherent set of logical principles that
form the general frame of reference for the
evaluation and development of sound accounting
practices and policy development. Otley and summaries of all accounting-based measurements
Pollanen (2000) exemplifies that the purpose in tested by researcher.
developing a theory of accounting is to establish
Standard for judging the acceptability of accounting Conceptual Framework
methods. Procedures that meet the Standard Human capital
should be employed in practice of accounting. budgetary control
Theory has assisted in making predictions of the  Human
likely outcome of budget action in a given set of Resource Plan
 Employee Financial
circumstance and effect of any change in
expenditure Performance of
circumstances. Accounting theory has developed
SACCOS
models in which Standard can be set. Management  Return on
accounting theory also provides several yardsticks Cash flow
budgetary control Assets
to be used for control. That is variance analysis.
 Cash Flow  Surplus
Since budget is an instrument of plan. It provides a from
framework of given feed back to the management Operations
on the implementation of budget. The cost  Non-
accounting theory developed by Wedgwood in the Operating
early 20th century which stresses on cost Cash Flows
identification, allocation and revenue maximization
has provide a basic insight and blue print in budget Independent variable Dependent variable
and control in organization. According to Hopwood
(1976), the matching concept in accounting also Figure 1: Conceptual Framework
plays a role as reference issue in budget analysis.
Human Capital Budgetary Control
According to Hutchinson and Gul (2014) and
Mashayekhi and Bazazb (2012), accounting-based Several articles have been debated the importance
performance measures present the management of human capital budget control in the
actions outcome and are hence preferred over organizational financial performance but still
market-based measures when the relationship research are not conclusive that HR assets are
between corporate governance and firm important in creating value of organizations.
performance is investigated. As a result, a company Training is one of the main functions that directly
showing a positive performance through ROA, it contribute to the development of employees.
indicates its achievement of prior planned high Research also suggests that the organizations
performance (Nuryanah & Islam, 2011). investing considerably in training justify their
Contrastingly, a negative person indicates failure of investment by the contribution training makes to
the planned high performance which requires improve individual and firm performance (Khan,
revision of plans to enhance short-term 2010; Batool & Batool, 2012). Training and
performance. The negative performance results in development cost being employed by organizations
investors’ (local and foreign) loss. The company helps them to enhance employee skills and firm
therefore has to update its objectives from time to performance (Solkhe & Chaudhary, 2011).
time if it is desirous of competing in the market
place. The rest of the section provides extensive
Cash Flow Budgetary Control dimensions analyzed: financial performance, market
performance and shareholder value performance.
Cash control is concerned with the management of
cash flow that is to say inflow and out flow of cash, The countless number of ways has been brought
this seeks to achieve control of cash by paying forward to measure financial performance and
obligations like meeting organizational needs among them are: measurement of performance as
(Kakuru, 2011). The indicators of Cash control the level of Return on Assets (ROA), Return on
include cash planning which is a technique use to Equity (ROE) (Heenetigala & Armstrong, 2011),
plan and control the use of cash, safety that is to
Empirical Review
say there should be one to authorize use of cash,
cash control, cash allocation and cash budget.
A number of empirical studies have been conducted
According to Ross (2010) major business expenses on the issue of human resource accounting in
are incurred in the production of goods or the corporate organizations. A number of these studies
have highlighted the need to capitalize human
provision of services. In most cases, a business
incurs such expenses before the corresponding capital asset in the balance sheet of companies as
payment is received from customers. In addition, against being written off as expenses in the profit
employee salaries and other expenses drain and loss accounts (Enofe, Sunday & Ovie, 2013).
considerable funds from most business. These make Hermannson (1964), in his pioneer work concerning
the valuation of human assets attempts to place
effective Cash control an essential part of the
business financial planning. According to Bort money value on human capital in the balance sheet
(2014) cash is the lifeblood of the business.
Syed (2013) employed a meta-analytic approach
SACCO Performance using data from 26 previously published examined
the relationship between corporate characteristics
The concept of performance forms the core of and human resource accounting disclosure and
strategic management and empirically, most concluded that companies with higher profitability
strategy studies make use of the construct of intended to disclose more human resource
business performance in their attempt to examine accounting information. There have been also been
various strategy content and process issues (Al- some empirical researches on the issues of human
Matari, 2014). Richard et al., (2009) defined resource accounting in Nigeria. Okpala and Chidi
organizational performance as comprising the (2010) in their work, examined the relevance of
actual output or results of an organization as human capital accounting to stock investment
measured against its intended outputs (or goals and decisions in Nigeria and opine that corporate
objectives). He mentioned that it is the ability of an success now rests on the ability and knowledge of
organization to fulfill its mission through sound people who can easily adapt to technological
management, strong governance and a persistent changes and drive organization to attain its goals
rededication to achieving results. Don Hee (2011) and objectives. They explain that the function of
on the other hand defined organization human capital accounting is to provide information
performance as the analysis of a company’s success which affords investors opportunity to truly
compared to its profitability. He added that within evaluate and understand the complete picture of an
corporate organizations, there are three primary organization.
Kirfi and Abdullahi (2012), view the practice of basic function. They are beginning to realize,
human resources accounting in Nigerian companies however, that improving the process can lead to
as more of a mirage than reality as human resource significant financial gain for the company. Fewer
is not reported in financial statements. Kirfi and outstanding account balances mean fewer bad-debt
Abdullahi (2012), argue that the existing accounting write-offs and enhanced profitability. In
practice lack regard to human resource as an asset communication companies, the observed emphasis
and have significantly discouraged the use of any or on turnover by concentrating on recruitment of
a combination of measurement technique(s) in customers has resulted on less emphasis on credit
quantifying human resource let alone reporting it in and debt management. Ironically, this has put the
Nigeria. Bassey and Tarpang (2012), examined the profit of these organizations at risk. Brown (2013)
influence of expensed human resources cost (HRC) notes that with revenue leakage occurring
on corporate productivity and found that expensed throughout the industry and cost spiraling as
human resources (remuneration, protection and demand for even more sophisticated services
dismissal / compensation) costs are important increases, some companies may be facing a crisis if
determinants of expensed human resources cost they fail to address the credit management
and does significantly influence corporate problem.
productivity.
According to McLaney (2016), negotiating a
Cash flow control involves managing the monies of reduction in cash outflows may be done in order to
the firm in order to maximize cash availability. It postpone or reduce payments. This was done by
includes policies and procedures adopted by the taking longer credit from suppliers. However, if the
management of an entity to assist in achieving the credit period allowed is already generous, creditors
management policies, laws and regulations of cash, might be very reluctant to extent credit even
the prevention and detection of fraud and error, further and any such extension of credit would have
promoting orderly, efficient operations (Van Horme, to be negotiated carefully. There would be a serious
2010). According to Pandey (2010) cash is the risk of having further supplies refused. The rationale
money that a firm can disburse without any for such a move is to have complete control of the
restriction. The term cash includes coins, currency cash and to provide greater investment
and cheques held by the firm and balances on its opportunities with larger sums of money available
bank accounts. Sometimes near cash items such as as surplus, (Bort, 2014). Given the context of a
marketable securities or bank time deposits are also company, cash disbursements are controlled
included in cash. Pandey (2010) noted that Cash through a policy of delaying payments to suppliers.
control is concerned with management of cash However, failure to meet financial obligations by
flows into and out of the firm, cash flow within the the company on time, owing to cash shortages
firm and cash balances lent by the firm at a time of mean loss of further supplies from injured suppliers.
financing deficit. This is extremely damaging since some products
would be vital to continuing business operations.
In a study done on Kenyan Parastatals, Anderson
(2010) argues that a properly managed accounts As Nyabwanga (2011) asserts, cash management is
receivable portfolio can expedite cash flow and the process of planning and controlling cash flows
support corporate cash requirements. Companies into and out of the business, cash flows within the
have traditionally viewed accounts receivable as a business, and cash balances held by a business at a
point in time (Pandey, 2014). Efficient cash the range of normal deviations from budget (plan)
management involves the determination of the should be developed.
optimal cash to hold by considering the trade-off
between the opportunity cost of holding too much Budgetary control looks at the future and lays down
cash and the trading cost of holding too little (Ross what has to be achieved. Controls check whether
et al., 2010) and as stressed by Atrill (2016), there is the plans are being realized and put into effect
need for careful planning and monitoring of cash corrective measures and determines where
flows over time so as to determine the optimal cash deviation or short-fall is occurring (Egan, 2010).
to hold. As Nyabwanga (2011) asserts, setting up of Egan emphasized that without effective controls, an
cash balance policy ensures prudent cash budgeting enterprise will be at the mercy of internal and
and investment of surplus cash (Kwame, 2011). external forces that can disrupt its efficiency. When
These findings agree with the findings by (Kotut, a budgeting and control system is in use, budgets
2013) who established that cash budgeting is useful are established which set out in financial terms, the
in planning for shortage and surplus of cash and has responsibility of managers in relation to the
an effect on the financial performance of the firms. requirement of the overall policy of the company.
The assertion by (Ross et al., 2010) that reducing Continuous comparison is made between the actual
the time cash is tied up in the operating cycle and budgeted results, which are intended to either
improves a business’s profitability and market value secure, thorough action of managers, the objectives
furthers the significance of efficient cash of policy or provide a basis for policy revision.
management practices in improving business
performance. Wijewardena and DeZoysa (2011) showed a positive
and significant relationship between budgetary
Budgetary control is a complex function which is control and sales growth. However, no significant
related to production planning and control, cost difference was found between budgetary control
control and sales planning and control. If optimum and return on investment. To explain the
balance is not achieved in planning and controlling insignificant relationship between budgetary
this triangle of operations, financial planning and control and ROI, they state that, although firms with
control will be adversely affected. It is worthy to a greater extent of budget control report higher
note that budgeting aims at providing a benchmark rates of growth in sales, these revenues are not
for controlling performance of managers and their bringing about higher profits because of internal
subordinates. Control is sought to be achieved by inefficiencies. Following Wijewardena and
comparing actual performance with budgeted DeZoysa’s (2011) research, Fonseka and Perera
performance and taking action to correct the (2014) also studied the relationship between the
budget variance. The principle of management by budgeting process and performance in Sri Lankas’s
exception should be applied while enforcing control SMEs. The findings are consistent with the previous
through budgets. No action or intervention is findings, which show that those firms engaged in
required so long as the actual performance more control processes have achieved higher
approximately conforms to the budget (plan). growth rate in sales, but no significant relationship
Management attention should be focused only on are found between budgetary control and ROI.
exceptional or significant deviations. To determine
significant deviations, control limits that represent Yang, (2010) observed that more formalized
budgetary control tends to lead to a higher growth
of profit of a firm. The underlying reason can be literature that banks should be less inclined to share
that due to management control; the total expense lending (loan syndication) in the presence of well-
of a firm will be at most minimized, which thus developed equity markets and after a process
results into the growth of profit of the firm. It is also consolidation. Both outside equity and mergers and
interesting to find that the formal budgeting acquisitions increase banks’ lending capacities, thus
planning and the formal budgetary control show reducing their need of greater diversification and
different patterns in terms of their effect on monitoring through share lending (Degryse et al.,
financial performance. Akintoye (2014) in his work 2014). This theory has a great implication for banks
on budgetary control and its effect on firms’ in Nigeria in the light of the recent 2005
performance tested the association using turnover consolidation exercise in the industry. As for the
as one of the variables with the assumption of soft-budget-constraint problem, multiple-bank
turnover as the budgetary control indicator on lending enables banks not to extend further
dividend per share. inefficient credit, thus reducing firms’ strategic
defaults. Both of these theories consider multiple-
Chodechai (2004) further stressed that “banks’ bank lending as a way for banks to commit towards
lending decisions are also influenced by the past entrepreneurs and improve their incentives
relationship with the borrowers”. Past relationship
according to him can help banks to obtain more Effective management of the loan portfolio and the
private information, leading to a more accurate credit function is fundamental to a bank’s safety
understanding of the borrower’s business and and soundness. Loan portfolio management (LPM)
financial situation. Carletti et al. (2006) however, is the process by which risks that are inherent in the
discussing on multiple-lending is of the opinion that credit process are managed and controlled. Because
banks choose to share lending whenever the review of the LPM process is so important, it is a
benefit of greater diversification, in terms of higher primary supervisory activity. Assessing LPM involves
cost per project monitoring dominates the cost of evaluating the steps bank management takes to
free-riding and duplication of efforts. If banks set identify and control risk throughout the credit
interest rates too high, they may induce adverse process. The assessment focuses on what
selection problems because high-risk borrowers are management does to identify issues before they
willing to accept these high rates. Once these become problems. This booklet, written for the
borrowers receive the loans, they may develop benefit of both examiners and bankers, discusses
moral hazard behavior or so called borrower moral the elements of an effective LPM process. It
hazard since they are likely to take on highly risky emphasizes that the identification and management
projects or investments (Chodechai, 2004). of risk among groups of loans may be at least as
important as the risk inherent in individual loans
From the reasoning of Stieglitz and Weiss, it is usual (Chodechai, 2004).
that in some cases we may not find that the interest
rate set by banks is commensurate with the risk of For decades, good loan portfolio managers have
the borrowers .These theories predict that the concentrated most of their effort on prudently
number of borrowing relationships will be approving loans and carefully monitoring loan
decreasing for small, high-quality, informational performance. Although these activities continue to
opaque and constraint firms, all other things been be mainstays of loan portfolio management,
equal. (Godlewski & Ziane, 2014) It is found in analysis of past credit problems, such as those
associated with oil and gas lending, agricultural structure and firm performance of Tehran Stock
lending, and commercial real estate lending in the Exchange Companies is investigated between the
1980s, has made it clear that portfolio managers years 2006 to 2011. The study uses three
should do more. Traditional practices rely too much performance measures including Gross Profit
on trailing indicators of credit quality such as Margin, Return on Assets as dependent variable and
delinquency, non-accrual, and risk rating trends. three capital structures including long term debt
Banks have found that these indicators do not short term debt and total debt ratios as
provide sufficient lead time for corrective action independent variable. The study reported a
when there is a systemic increase in risk (Sanchez, significant relationship between dependent and
2010). independent variable, except long term debts with
gross profit margin. According to Ebaid (2009)
Effective loan portfolio management begins with research, capital structure choice decision, in
oversight of the risk in individual loans. Prudent risk general terms, has weak-to-no influence on the
selection is vital to maintaining favorable loan financial performance of listed firms from 1997 to
quality. Therefore, the historical emphasis on 2005 in Egypt as one of emerging or transition
controlling the quality of individual loan approvals economies. By using three accounting-based
and managing the performance of loans continues measurements of financial performance which are
to be essential. But better technology and return on assets, return on equity, and Gross
information systems have opened the door to Margin, the empirical tests come with the result
better management methods. A portfolio manager that capital structure particularly Short term debts
can now obtain early indications of increasing risk and Total debts have a negative impact on an
by taking a more comprehensive view of the loan organization’s performance which is measured by
portfolio (Hirtle, 2010). ROA. Apart from that, capital structure including
short-term debt, long-term debt and total debt has
To manage their portfolios, bankers must no significant impact on an organization’s
understand not only the risk posed by each credit performance which is measured by ROE and Gross
but also how the risks of individual loans and margin. Valeriu and Nimalathasan (2010)
portfolios are interrelated. These interrelationships researched on capital structure and its impact on
can multiply risk many times beyond what it would profitability: a study of listed manufacturing
be if the risks were not related. Until recently, few companies in Sri Lanka. The result shows that debt
banks used modern portfolio management is positively and strongly associated to all
concepts to control credit risk. Now, many banks profitability ratios (gross profit ratio; operating
view the loan portfolio in its segments and as a profit ratio; and net profit ratio) except return on
whole and consider the relationships among capital employed and ROA.
portfolio segments as well as among loans. These
practices provide management with a more According to Iorpev and Kwanum (2012) they
complete picture of the bank’s credit risk profile examined the impact of capital structure on the
and with more tools to analyze and control the risk performance of manufacturing companies in
(Gonzalez, 2010). Nigeria. The annual financial statements of 15
manufacturing companies listed on the Nigerian
Nima, Mohammad, Saeed, and Zeinab (2012) Stock Exchange were used for this study which
examined the relationship between capital covers a period of five years from 2005-2009.
Multiple regression analysis was applied on DATA ANALYSIS, DISCUSSION AND FINDINGS
performance indicators such as Return on Asset and
Profit Margin as well as Short- term debt to Total These findings from pilot test obtained Cronbach’s
assets, Long term debt to Total assets and Total Alpha value of 0,84 which were in line with the
debt to Equity as capital structure variables. The benchmark suggested by Hair, et al. (2010) where
results show that there is a negative and coefficient of 0.60 is regarded to have an average
insignificant relationship between Short term debt reliability while coefficient of 0.70 and above
to total assets and Long term debt to total assets, indicates that the instrument has a high reliability
and ROA and profit margin; while Total debt to standard. The study deemed it important to
equity is positively related with ROA and negatively establish if the educational level of the respondents
related with profit margin. Short term debt to total had a bearing on the financial performance of
assets is significant using ROA while Total Long term savings and credit cooperative organizations. From
debt to total assets is significant using profit margin. the results, 7.9% (3) of the respondents have
The work concludes that statistically, capital primary level of education as their highest academic
structure is not a major determinant of firm level, 65.8% (25) secondary level and 23.7% (9)
performance. university level of education. It is evident that the
respondents possess the requisite skills to perform
RESEARCH METHODOLOGY their duties effectively. As such, the respondents’
educational attainment is part of the organizations’
This study employed explanatory research design. human capital. Job tenure was chosen as one of the
The study targeted 40 SACCOs in Nairobi County respondents’ characteristics to ascertain the
registered under SASRA. The sampling frame of this respondents’ experience with the SACCO’s
study was derived from the database of the operations. From the study, most of the
Ministry of Co-operative Development and respondents had worked with the SACCO for over
Marketing which regulates and licenses SACCOs in two years (50%); 15.8% for over a year but less than
Kenya. The list contained SACCOs licensed by the two years; while 34.2% had worked with the SACCO
Ministry as at 1st January 2017 registered under for over 5 years. Overall, most of the respondents
SASRA. A census of 40 SACCOs registered under had worked with the SACCO for more than a year
SASRA in Nairobi County was used. The study and this provided responses based on a wider
collected both primary and secondary data for the knowledge base of the SACCO operations.
purpose of this study. The study used questionnaire
and data collection sheet to collect data. The Human Capital Budgetary Control
questions were formulated according to the study
objectives with similar order and content for all the. This seeks to analyze descriptive statistics for
The researcher used both closed and open ended Human capital budgetary Control as shown in table
questions. Data collected was edited first to identify 1 below.
the items that would have been wrongly responded
to and any blank spaces left unfilled, the
information was categorized into topics.
Table 1: Human capital budgetary Control
Std.
SD D N A SA Mean Deviation
We set ceiling for human resources
cost Freq. 6 6 10 9 7 3.13 1.339
% 15.8 15.8 26.3 23.7 18.4
Explanations above are provided on
human capital budgetary control when
budget is revised. Freq. 9 9 13 1 6 2.63 1.324
% 23.7 23.7 34.2 2.6 15.8
Free discussions between staff
members on budget are encouraged Freq. 5 23 4 6 2.55 1.309
% 13.2 60.5 10.5 15.8
Staffs have a significant influence on
the final human capital budget. Freq. 10 13 3 7 5 2.58 1.407
% 26.3 34.2 7.9 18.4 13.2
Contribution from staff to the human
capital budget is viewed important. Freq. 10 14 5 4 5 2.47 1.35
% 26.3 36.8 13.2 10.5 13.2
Opinions and / or proposals relating to
human capital budget are challenged
before publication of budget Freq. 0 14 20 4 0 2.74 0.644
% 0 36.8 52.6 10.5 0
Communication of details of human
capital budget policy and guidelines to
people responsible for preparation of
budgets are always made. Freq. 0 11 22 5 0 2.11 1.226
% 0 28.9 57.9 13.2 0
Firstly, the research tested existence of Human Secondly, the study sought to establish if there is
Capital Budgetary control existed in a SACCO. Syed employee involvement in preparing human capital
(2013) elucidated that companies with higher budget. From the results, majority (87%) of the
profitability disclosed more human capital respondents denied employee involvement in
budgetary control. Therefore, the study sought to preparing human capital budget. The implication is
establish if the SACCO has human capital budgetary that employees’ ability and skills are not utilized in
control. Basing on the results, 55% (21) of the the preparation of human capital budget.
respondents noted that there is existence of human
capital budgetary control. However, 45% (17) of the In addition, the findings on human capital budget
respondents denied that the human capital control are presented on a 5-point likert scale
budgetary control exists in their SACCO. (Based on the 1-strongly disagree to 5- strong agree
scale rate).The respondents were asked whether
the SACCO sets ceiling for human resources cost. total respondents, 13.2% (5) strongly agreed that
The results from the study revealed that, of the the staff have a significant influence on the final
total respondents, 18.4% (7) strongly agreed that a human capital budget, 18.4% (7) agreed, 34.2%
ceiling for human resources is set, 23.7% (9) (13) disagreed, 26.3% (10) strongly disagreed while
agreed,15.8% (6) strongly disagreed while 7.9% (3) of the respondents were neutral. The
26.3%(10) were neutral. The findings were supported results revealed a mean of 2.58 and standard
by a mean of 3.13 and a standard deviation of 1.339. deviation of 1.407. The mean value suggests that
there is less focus on contribution from staff to the
In determining whether explanations were human capital budget.
provided on human capital budgetary control
when budget was revised, the study revealed that; A related item on whether opinions relating to
15.8% (6) of the respondents strongly agreed human capital budget were challenged before
that explanations were provided on human publication of budget. Of the total respondents,
capital budgetary control when budget is revised, 10.5% (4) agreed that opinions relating to human
2.6% (1) agreed, 23.7% (9) disagreed while 34.2% capital budget are challenged before publication of
(13) of them were neutral. The results also showed budget, 36.8% (14) disagreed and 52.6% (20) of
a mean of 2.63and standard deviation of 1.324. them were neutral. This position was further
confirmed by the 2.74 question mean and standard
The study sought to establish whether there were deviation of 0.644 that showed the non-variation
free discussions between staff members on in the responses.
budget were encouraged, results from the study
revealed that, the question had a mean of 2.55 and The study further sought to find out if
standard deviation of 1.309.This was because of communication of details of human capital budget
15.8% (6) of the respondents strongly agreeing, policy and guidelines to people responsible for
10.5% (4) agreeing, 13.2% strongly disagreeing preparation of budgets are always made. The
and 60.5% (23) disagreeing. results revealed that 13.2% (5) of the respondents
agreed, 28.9% (11) disagreed while 57.9% (22) of
To find out whether, the staff had a significant them were neutral. The item mean was 2.11 and
influence on the final human capital budget. Of the the standard deviation of 1.226.
Cash Flow Budgetary Control
Table 2: Cash Flow Budgetary Control
Std.
SD D N A SA Mean Deviation
The SACCO has database of actual
daily cash flows, as a means of
identifying patterns and for
monitoring. Freq. 30 0 0 0 8 2.63 1.239
% 78.9 0 0 0 21.1
The SACCO actual cash flows are Freq. 8 22 0 0 8 2.42 1.407
closely tracked against departments’
profiles and major divergences
investigated.
% 21.1 57.9 0 0 21.1
Departments are best placed to
supply information when actual flows
are diverging from budget. Freq. 8 14 8 0 8 2.63 1.403
% 21.1 36.8 21.1 0 21.1
The SACCO has network of contacts,
voice and electronic, with the main
spending and revenue departments
which are used to develop forecasts
and current and prospective flows. Freq. 0 12 16 10 0 2.95 0.769
% 0 31.6 42.1 26.3 0
This section of the analysis highlights results on the diverging from budget; respondents were asked to
cash flow budgetary control. Table 2 illustrates the state the degree to which they concurred with the
results. The respondents were asked whether the above. Of the total respondents, 21.1% (8) of the
SACCO has database of actual daily cash flows, as a respondents strongly agreed, 21.1% (8) strongly
means of identifying patterns and for monitoring. disagreed, 36.8% (14) disagreed while 21.1% (8) of
The results from the study revealed that, of the them were neutral. The item realized a mean of
total respondents, 21.1% (8) strongly agreed that 2.63 and standard deviation of 1.403.
the SACCO has database of actual daily cash flows,
as a means of identifying patterns and for Finally, in a bid to establish if the SACCO has
monitoring while 78.9% (30) of them strongly network of contacts, voice and electronic, with the
disagreed. main spending and revenue departments which are
used to develop forecasts and current and
In determining whether the SACCOs’ actual cash prospective flows, the respondents were asked to
flows are closely tracked against departments’ respond accordingly. 26.3% (10) of the respondents
profiles and major divergences investigated, the agreed, 31.6% (12) disagreed and 42.1% (16) of the
respondents were asked to respond accordingly. respondents were neutral. The results were
The study revealed that; 21.1% (8) of the supported by a mean of 2.95 and standard
respondents agreed, 57.9% (22) disagreed while deviation of 0.769.
21.1% (8) strongly disagreed. Generally, most of the
respondents denied that the SACCOs actual cash The study sought to establish the frequency in
flows are closely tracked against departments’ which cash budgets are prepared and revised. Table
profile and major divergences investigated. The 3 illustrates the results. Basing on the results, 42.1%
results were supported by a mean of 2.42 and (16) of the respondents noted that the budgets are
standard deviation of 1.407. revised weekly, 42.1% (16) monthly and 10.5% (4)
quarterly.
To find out whether, departments are best placed
to supply information when actual flows are
Table 3: Preparation and revision of cash budgets
Frequency Percent
Weekly 16 42.1
Monthly 16 42.1
quarterly 4 10.5
any other 2 5.3
Total 38 100
The study deemed it important to establish the cash from investing cash flow and 31.6% (12)
source of cash flow. Basing on the results in table operation cash flow.
4.7, 68.4% (26) of the respondents generate their
Table 4: Source of cash flow
Frequency Percent
operation cash flow OCF 12 31.6
investing cash flow ICF 26 68.4
Total 38 100
Firm Performance sought. From the findings, there had been a
significant decline in the sales volume from a high
The study sought to establish the performance of of 3,924,001.00 in the year 2012 with a slight
the commercial banks. The results are as presented decline to 3,779,265.00 in 2013 and the least being
in table 4.10.The performance of the firms was 1,591,245.00 in 2015.The net profit is also high.
Table 5: Firm Performance
Mean SD
Return on asset (ROA) 0.501 0.119
Sale volume 1,591,245.00 238,445.00
Surplus 1,500,000 204,480

SUMMARY OF FINDINGS, CONCLUSION AND are encouraged. Furthermore, there was less
RECOMMENDATIONS focus on contribution from staff to the human
capital budget. Likewise, there was less focus on
Basing on the findings, there was doubt whether the opinions relating to human capital budget are
SACCOs’ set ceiling for human resources cost. As well, challenged before publication of budget. However,
it was undefined if explanations were provided on there was no communication of details of human
human capital budgetary control when the budget is capital budget policy and guidelines to people
revised. There was also doubt if there were free responsible for preparation of budgets.
discussions between staff members on budget
Furthermore, findings on cash flow budgetary Recommendations
control indicated that most of the SACCOs lack
database of the actual daily cash flow. Similarly, the The study has established that human capital
SACCOs actual cash flows are not closely tracked budgetary control had a positive and significant effect
against departments’ profiles and major on firm performance. As such, it was important for
divergences. Besides, it is undefined if departments explanation to be provided on human capital
are best placed to supply information when actual budgetary control whenever the budget is revised.
flows are diverging from budget. It is also unclear if Free discussions between staff members on the
the SACCO has network of contacts, voice and budget needs to be encouraged. As well, contribution
electronic, with the main spending and revenue from staff relating to human capital budget needs to
departments which are used to develop forecasts be viewed as important. To sum, there was need for
and current and prospective flows. communication of details of human capital budget
policy and guidelines to the individuals tasked with
Conclusion the preparation of the budget.
In conclusion, human capital budgetary control was Finally, since cash flow budgetary control has a
key in creating value of organizations. With human significant effect on firm performance, it was crucial
capital budgetary control, it is easier for investors to for SACCOs to have a database of the daily cash
evaluate and understand an organization fully. The flow. Most importantly, the cash flows needed to
challenge however was that there was no ceiling for be tracked against departments’ profiles and major
human resources and concerned stakeholders such divergences. As well, there was need for the
as staff members are partially involved in the SACCOs to have network of contacts, voice and
revision of budgets. The implication was that staff electronic with the main spending and revenue
members are unaware of budget policy and departments tasked with developing forecasts of
guidelines that relate to the human capital. There is current and prospective cash flows. With this in
thus less contribution from their side which was place, firm performance will be improved.
disadvantageous to the organization mainly because
the firms’ success is dependent on the ability and Areas for Further Research
knowledge of the staff.
This study expands our knowledge on the effect of
In addition, cash flow budgetary control has a budgetary control on financial performance of
positive and significant influence on firm savings and credit cooperative organizations in
performance. With cash flow budgetary control, Nairobi County. Though this study had fulfilled its
SACCOs can plan for shortages and surpluses in cash aim and objectives, there existed an area for
and thereby maximize cash availability. SACCOs additional studies and empirical research, given the
therefore have control over their cash hence better limitations of the research.
investment opportunities. The resulting outcome is
improved financial performance. Despite the in-depth coverage of this study and its
findings, there still exists a gap that future research
could explore. The results of the study showed that
revenue budgetary control and investing budgetary
control had no significant effect on firm
performance, there is therefore need for further The methodology that was chosen to achieve the
studies on the same to validate the results. research objectives was limited to questionnaires.
As such, future research could build on this study by
On a geographical dimension, this study was examining the effect of budgetary control on
primarily limited to SACCOs in Nairobi County. financial performance of savings and credit
Therefore, it may not be appropriate to generalize cooperative organizations in both a qualitative and
to the whole population of SACCOs countrywide. quantitative way.
For this reason, further empirical investigations in
different regions and countries are needed.
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EFFECT OF BUDGETARY CONTROL ON FINANCIAL PERFORMANCE OF SAVINGS AND CREDIT COOPERATIVE

ORGANIZATIONS IN NAIROBI COUNTY

KAREN JEBIWOT RUTTO, DR. OLUOCH OLUOCH

EFFECT OF BUDGETARY CONTROL ON FINANCIAL PERFORMANCE OF SAVINGS AND CREDIT COOPERATIVE

Karen Jebiwot Rutto1, Dr. Oluoch Oluoch2

Accepted: May 24, 2017

Key Words: Human Capital, Cash Flow, Budgetary Control, SACCOs

Savings and credit cooperative societies have in the Theoretical Framework

The theory of accounting was founded by Kaplan

Table 2: Cash Flow Budgetary Control

Return on asset (ROA) 0.501 0.119

Sale volume 1,591,245.00 238,445.00

Surplus 1,500,000 204,480

Cooper, D.R., Schindler, P.S. (2006) Business Research Methods, McGraw-Hill

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