BUDGETING AND BUDGETARY CONTROL AS MANAGEMENT TOOLS FOR IMPROVING FINANCIAL PERFORMANCE IN LOCAL AUTHORITIES, MPIKA DISTRICT COUNCIL AS A CASE STUDY.
CMDCs as development partners to the central government need to mobilize enough revenue locally to support the central government development agenda. Inadequate financial resources can undermine the effective implementation of developmental projects in CMDCs. Budgets are important as they prudently manage scarce financial resources and at the same time serve as a means of expenditure authorization, control and evaluation base. CMDCs in Zambia prepare budgets but deal with it in lesser extent unlike the profit-making organizations which consider budget and budgetary controls important element in their policies. It is against this background that this study was carried out to find ways by which CMDCS especially MDC can use budgeting and budgetary controls as management tools to prudently improve their financial performance to accelerate local development. The case study approach was used in the study. Interviews and questionnaires were used to solicit data for the study. The research found out among other things that CMDCs prepare budgets and control the budgets. The research data evidently prove that in the case of Mpika District Council this is true. However, poor budget formulation and implementation and low revenue generation base make it difficult for CMDCs to live up to their responsibility as partners to the central government in national development. Recommendations and suggestions have accordingly been made to improve upon budgeting and budgetary controls as a way of improving financial performance in CMDCs and the nation as a whole.
Table of Contents
Accronyms and Abbreviations ix
CHAPTER ONE 1
Introduction and background 1
Background to the study1
Statement of the problem4
purpose of the study5
objectives of the study6
The specific objectives6
Significance of the study7
Scope of the study7
CHAPTER TWO 8
2 Literature Review 8
Concept of Management Control8
Characteristics of a Budget11
Types of Budgets11
The Medium-Term Expenditure Framework (MTEF)12
2.2.3 Budget Formulation and Implementation 15
Preparation of Budget and Budgetary Controls16
The Budget Cycle16
The Budget Period17
Purposes of Budget Preparation17
The Budget as a Tool for Measuring Financial Performance23
Reasons for measuring financial performance24
Benefits of a Budget25
Challenges of a Budget25
Criteria for Measuring Budget Performance27
Research Variables arising from Literature Review28
CHAPTER THREE 29
3 Methodology and Design 29
Research Philosophy and Approach29
Quantitative Research Methodology29
Qualitative Research Methodology29
3.2.2. Research Choice 30
3.2.3 Time Horizon 30
Sources of Data30
Data collection techniques31
Data Analysis Techniques32
Reliability and Validity (triangulation)32
Triangulation to minimize bias32
Limitations of the study33
CHAPTER FOUR 34
4 Data Presentation and Analysis 34
Responses from employees and other stakeholders34
Administration of the Budget 35
Budget Preparation Process 36
CHAPTER FIVE 41
Discussion and interpretation of data 41
Responses from employees and other stakeholders41
Gender of Respondents41
Educational Background of Respondents41
Administration of the Budget 41
Budget committee inclusion of all relevant stakeholders41
Budget Preparation Process 42
Communication of details of budget policy and budget guidelines42
Factor that restricts output determined? (Revenue Determined)42
Preparation of Revenue Budget42
Forecast of Revenue Budget42
Factors taken into account before making the budget42
Methods used to forecast revenue42
Initial Preparation of the Budget (Purchase budget, Overhead budget, Administration expenses)42
Negotiation of Budget with Superiors43
Coordination of budgets43
CHAPTER SIX 44
Covering Letter to Questionnaire 49
Research Questionnaire 50
Work Schedule and Resource Requirement 54
1 Introduction and background
This chapter looks at the background to the study, problem statement, objectives of the study, research questions, significance of the study, scope and limitations of the study and the organization of the study.
Background to the study
Central governments over the world have made human and environmental development their primary objective and have therefore used decentralization as a method of sharing development responsibilities with para-state agencies such as the local authorities. Rondinelli (1981) defines decentralization as the transfer of authority to plan, make decisions and manage public functions from a higher level of government to individual, organization or agency at lower level. Aryee (1999) identifies four forms of decentralization. These are administrative, economic, political and fiscal.
Local government in Zambia, especially City, Municipal and District Councils (CMDCs) were established with the sole aim of providing services, generating good contacts with the citizens and to bring decision making to the level where development generally takes place. CMDCs were also created to help strengthen the democratic process and lay the basis for the upsurge of autonomous institutions of governance within the structure of the nation-state.
To ensure development, the government of Zambia promulgated a local government law to establish one hundred and sixteen (116) local authorities. Section 281 of the 1991 constitution and local Government Act 1991 Cap 281(Amended Local Government Act No. 2 of 2019) have been the basis for the adoption of the current decentralization programme (Decentralization Implementation plan (DIP 2009 –2013)) in Zambia.
There are massive responsibilities, spelt out in Cap 281 specifying the functions, and responsibilities of the District Councils or rather councils generally in Zambia. The Local Government Act 281(Amendment) (2019) Section 61 states that the districts Councils shall be responsible for the overall development of their district and preparation and submission of development plans.
CMDCs are charged by the local government law with physical development responsibilities such as to:
1. Ensure legal arbitration;
2. Register birth, death, marriage and divorce;
3. Give building permits to ensure proper spatial development;
4. Build schools, provide books and furniture;
5. Maintain law and order;
6. Establish and maintain parks and gardens;
7. Provide street lights;
8. Provide health, sanitation and waste management service;
9. Provide social services;
10. Provide firefighting services;
11. Provide markets;
(Local Government Act No. 2 of 2019, Cap 281)
CMDCs are charged by various enactments including the 2016 Amendment national constitution to ensure physical transformation of the various local areas and stimulate socio- economic activities and development so as to change civic inertia, poverty and illiteracy to enhance equity, efficiency, effectiveness and economy in their entrepreneurship. These functions of the CMDCs cannot be achieved without adequate financial resources to support them. Inadequate financial resources can undermine the effective implementation of developmental projects in the districts. It is against this background that the new local government system has made provision for the financing of the district.
Fiscal decentralization is the transfer of responsibilities, power and resources to lower level public authority to mobilize funds for development that is autonomous and fully independent from the devolving authority when narrowed down to devolution. Local authorities are given responsibilities and financial means within the national level determining the scope and quality of services to be provided and amount of funds needed to deliver these services.
Vigorous revenue mobilization drive is required if the CMDCs are to perform better. The effectiveness of revenue mobilization depends on factors such as fiscal policy, revenue administration monitoring operations and performance assessments. Unfortunately, many CMDCs do not generate enough revenue. The reasons for their inability to mobilize enough revenue are numerous. Some of these are; corrupt practices, poor mobilization strategies, poor budget control and poor financial performance as the major reasons hence affecting their performance financially.
Financial performance refers to the act of performing financial activity. In broader sense, financial performance refers to the degree to which financial objectives being or has been accomplished. It is the process of measuring the results of a firm's policies and operations in monetary terms. The financial performance identifies how well a company generates revenues and manages its assets, liabilities, and the financial interests of its stakeholders. Performance & financial management involves the deployment of various tools, techniques, and systems to help an organization implement its strategies and plans, and support the achievement of organizational objectives. Successfully executing strategy involves various disciplines, areas of capability, including planning and forecasting, funding and resource allocation, revenue and cost management, managing performance against objectives, and improving operational management and utilization of assets.
Prudent financial performance refers to how wisely resources are mobilized and managed effectively and efficiently. Financial performance is therefore important aspect of public administration of every nation and it is one of the elements that make government effective. It involves financial forecasting, financial planning and budgeting, financial reporting and auditing. Sound performance management is one of the important complements of effective management practices which seek to enhance the socio-economic development of local authorities in Zambia.
Performance & financial management also covers the management of an organization’s finances, such as cash flow and working capital management, and forecasting and budgeting, as well as ensuring resources are allocated to the most important projects and investments by using analytical approaches to project and investment appraisal.
Effective performance & financial management requires:
i) Engaging people to determine their information needs;
ii) Implementing processes and systems to collect the right data;
iii) Turning the data into information and insights; and
iv) Presenting it in the best way.
In order to ensure sound financial performance there should be good planning, accounting and budgetary systems. Jackson (1958) states that without financial independence local authorities must lead a very subdued life. Therefore, funds should be mobilized from taxes levied on citizens and residents within the territories of the local authorities. Officials must spend funds in a manner governed by rules and regulations.
Statement of the problem
CMDCs as development partners to the central government need to generate sufficient revenue locally to support the central government development agenda. Budgets are necessary to prudently manage scarce financial resources and at the same time serve as means of expenditure authorization, control and evaluation base. Profit making organizations consider budgets and budgetary controls important elements in their policy making. The success of their organizations depend largely on good budget preparation and effective budgetary controls.
In Zambia, CMDCs prepare budgets but the degree and extent to which budgets are prepared and formulated into performance budgets vary from each other. Even where formal budgets are prepared their nature and purposes may vary. Failure of many businesses nowadays erupt from the fact that budgets and budgetary control which are the bedrock of any successful business organizations is weak or absent as reported by The Auditor General’s report, (2016) Such organizations or businesses are characterized by financial, administrative, production, managerial etc., constraints.
Budgets should be prepared based on availability of resources. CMDCs should ensure that they generate enough resources to compliment central government grants which are always inadequate. They can also look elsewhere for resources to support their budgets. It means some activities captured in the budget could not be undertaken or part touched. Mpika District Council prepares budget but most times the expenditure always exceeds the revenue resulting in budget deficits. It does not mean that budgets are ideal manager’s tool. This observation encourages numerous academicians to try to discover appropriate solutions for budget slacking, budget gamming, budget bias and other problems that managers had to deal with, Harper (1995). In line with this argument, the study looks at whether, CMDCs in Zambia can achieve their objectives with or without effective budget and budgetary control systems. It is to find out reasons for budget failure and deficits at Mpika District Council where budgetary control is cited as a cause for poor performance in development process.
The problem is that most CMDCs do not have effective financial control system due to poor budget formulation and implementation. They experience budget deficits. The budget deficits occur because:
a.) there is poor data base for planning and budgeting;
b.) there is poor budgetary control resulting in embezzlements, misappropriations and misapplication of funds culminating in over expenditures;
c.) there is lack of ownership and responsibility when it comes to budgetary control.
d.) most of the CMDCs have no proper budget tracking systems. The have track the budget manually
Poor data base for planning and budgeting also have other consequences. The consequences are that:
i) Revenues may be over-estimated to the extent that the estimated revenue is higher than the actual revenue;
ii) Expenditures may be under-estimated to the extent that the actual expenditure is higher than the estimated expenditure.
Some other rate and property rate payers may fail to fulfill their legitimate obligations in rate payment and not having an updated valuation roll in place. This may also result in situations where actual revenue may be lower than the estimated revenue. Revenue deficits may also occur as a result of dishonesty of revenue collectors. While useful revenue cannot be collected, expenditures go on without adequate controls resulting in excess expenditures over-revenue.
When these happen CMDCs cannot live up to their responsibility of being partners to the central government in the development effort. The citizens are also denied facilities and economic services for their business take-offs.
purpose of the study
The persistent challenges of poor budgeting and budgetary controls needs to be investigated so as to draw out lessons that could be useful for addressing the financial challenges faced by local authorities particularly MDC.
objectives of the study
The general objective of the study is to find ways by which CMDCs can achieve prudent financial performance/ management to enhance development.
The specific objectives
a) To find out if poor financial performance at Mpika District Council can legitimately be traced to poor budgeting and budgetary control;
b) To identify some of the limitations faced by Mpika District Council in relation to budgeting and budgetary control;
c) To identify the consequences of poor budgeting and budgetary controls on the financial performance in the Council in its match to development;
d) To find out what can be done to improve budgeting and budgetary controls at Mpika District Council so as to achieve prudent financial performance as well as development goals.
Under this study the questions which are posed to achieve the research objectives are:
i) Why is it that most CMDCs especially Mpika District Council experience budget deficits year- in and year-out?
ii) To what extent can effective budgets and budgetary controls enhance financial performance at Mpika District Council?
iii) What can be done to improve budget formulation and implementation in all CMDCs and for that matter Mpika District Council, so as to ensure prudent financial performance for development?
i) Effective budgeting and budgetary controls can improve financial performance of the council.
ii) Ineffective budgeting and budgetary controls machinery can adversely affect the council’s performance financially thereby experiencing budget deficits
Significance of the study
This study is important because it will guide management of MDC in future financial decision making. It will also serve as a reference for ensuring effective financial performance in CMDCs. Also it will be an added value to the knowledge base on budget and budgetary controls and serve as an impetus for future policy making. Lastly, it will also serve as a guide to policy makers, development workers and stakeholders in Zambia and the world as a whole.
This involves methods used to collect and analyse data. The methods are discussed in chapter 3.
Scope of the study
The study was focused on reviewing the characteristic features of budgeting that enhances financial performance, the extent to which budgetary control principles are employed to enhance financial performance and critically review the impact of budgeting and budgetary controls on financial performance, Mpika district council as a case study.