JEAN MOULIN LYON 3 UNIVERSITY VIETNAM UNIVERSITY OF COMMERCE MASTER FINANCE AND CONTROL THESIS September 2013 THE RELATIONSHIP BETWEEN BUDGETARY CONTROL AND PERFORMANCE IN GTEL MOBILE JOINT STOCK COMPANY Prepared by: Nguyen Thi Phuong Supervised by: Professional Ng uyen Van Thanh The relationship between budgetary controls and performance in Gtel Mobile 2 Acknowledgements The author would like to warmly thank to everyone who provided their assistants to finish this dissertation. First of all, the author would like to send grateful to Mr. Nguyen Van Du, General Director of Gtel Mobile Joint Stock Company for expressed enthusiasm to this thesis and provide his full support during study and research. The author also acknowledged and thank for the times devoted by the interviewees and their feedback toward this study. Further, the author would like to thank the supervisor PHD, Professional Nguyen Van Thanh for his advice and feedback. The dearest appreciation and thankful are sent to my family for giving me great support of time and encouragement. Hanoi, August 10, 2013 _________________ _________________ Nguyen Thi Phuong Nguyen Van Thanh The relationship between budgetary controls and performance in Gtel Mobile 3 Abstract Master Thesis in Finance and Control, Jean Moulin of De Lyon III University and Hanoi Commercial University Author: Nguyen Thi Phuong Supervisor: PHD, Professional Nguyen Van Thanh Title: The relationship between budgetary controls and performance in Gtel Mobile Joint Stock Company Key words: budgetary controls, budgetary procedure, budgetary participation, budgetary motivation, budgetary evaluation. Background and discussion of the problem: Budgetary control is a management tool to help managers to plan and control the use of resources in systematic and logical manner to ensure that they achieve their financial objective. In Gtel Mobile JSC case, it was acknowledged that budgetary control influents company performance. However, the problem is the significant variances between budget and actual. In Gte Mobile, budgetary control established and presented through budgetary procedure, budgetary participation, budgetary motivation and budgetary evaluation. Therefore, the study the level of relationship between budgetary control and performance in Gtel Mobile JSC is the case study in this thesis. Questions: The thesis will answer the following questions. - What are the levels of budget controls in Gtel Mobile JSC? - What are the levels of performance in Gtel Mobile JSC? - What is the relationship between budget controls and performance in Gtel Mobile JSC? Purpose: This study will analyze and evaluate the situation of budgetary control in Gtel Mobile JSC, finding out the limitations of budgetary control in Gtel Mobile JSC. Then the author will recommend solutions for effective budgetary control and improve performance in Gtel Mobile. Limitation: This research is study in one company and in a limited period of time only so the result is not generalization and the result of this period may be different from other periods. Moreover, the feedback of questionnaires could be bias as the senilities of the questionnaires and the cultures of Vietnamese companies as well as people. Further, the limitation of knowledge and information of the respondents may results in unrealistic feedback. Methodology: Both qualitative and quantitative are used to analyze and evaluate to provide the results. The relationship between budgetary controls and performance in Gtel Mobile 4 Results: The relationship between budgetary control and performance is strong positively. However, budgetary procedure, budgetary participation, budgetary motivation and budgetary evaluation have no relationship each other and there is no effect between each of them alone on performance. The study also found that there are critical limitations of budgetary control such as lack of knowledge of budgetary control of participants, complication of budgetary procedures, lack of application to support budgetary control. Recommendation: The author suggests Gtel Mobile to review and improve budgetary motivation scheme, budgetary participation and budgetary procedure to enhance the performance. Training budgetary control system and procedure is essential and priority to improve participation and responsibility on implementation of budgetary control. An investment of budgetary application to support and improve budgetary control then improve performance should be considered and evaluated to improve performance and enhance benefits to the company. The relationship between budgetary controls and performance in Gtel Mobile 5 Table of Contents CHAPTER 1 - INTRODUCTION 7 1. The essential of research 7 2. The purpose of research 8 3. Research objectives 8 4. Scope of research 9 5. Summary of chapter one 9 CHAPTER 2 - LITERAL REVIEW AND HYPOTHESIS 10 1. Review the concept and definition 10 1.1. Budgetary Planning and Control 10 1.2 Budgeting 12 1.3 Types of budgeting 12 2. Budgetary controls 13 3. Objective of budgetary control 15 4. The need of budgetary control 15 5. Limitation of budgetary control 16 6. Measurement of Organizational performance 17 7. Essentials of an effective budgetary control system 19 8. The relationship between budgetary controls and performance 21 9. Research Model and hypothesis 23 10. Summary of chapter two 25 CHAPTER 3 - RESEARCH METHODOLOGY 26 1. Research design 26 2. Study population 26 3. Sampling 26 4. Sources of data 27 5. Data collection instruments 27 6. Measurement of variable 28 7. Limitation of study 28 The relationship between budgetary controls and performance in Gtel Mobile 6 8. Summary of chapter 3 29 CHAPTER 4 - ANALYZING, INTERPRETATION, PRESENTATION AND DISCUSSION OF FINDINGS 30 1. Introduction of Gtel Mobile 30 2. Respondents’ data analysis 30 3. Level of budgetary controls analysis 33 4. Levels of performance in Gtel Mobile 37 5. Performance measurement in budgetary control 41 6. Relationship between budgetary controls and performance 42 7. Factors effecting budgetary controls in Gtel Mobile. 51 CHAPTER 5 - SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION 53 1. Summary of findings 53 2. Conclusion 55 3. Recommendations of the study 55 4. Suggestions for further research 56 References………………………………….……………………… …………………………57 The relationship between budgetary controls and performance in Gtel Mobile 7 CHAPTER 1 - INTRODUCTION 1. The essential of research Global economic downturn recent years effect almost countries over the world and directly impact the business and operation of many companies. The US housing bubble burned in 2006- 2007, the government bad debt in EU after that caused the value of securities tied and damaged financial market globally. It is major recession of financial market leaded to financial crisis in 2007-2008 and impact seriously economic and European sovereign debt crisis. The consequences of this recession caused a lot of companies and banks became bankruptcy, unemployment, obstacles of economic recovery. Vietnam is not out of the list and recent years from 2011 to now, a lot of companies could not survive, increase of inventory balance, banking system is on crisis of bad dept, unemployment, a lot of companies cease operation or bankruptcy. All of these required all companies to focus on predicting, planning, forecasting, budgeting and control income and revenue more strictly for survival. In which budgetary control is essential to maintain and improve performance of the company on daily, weekly, monthly, quarterly and yearly. A budgetary planning and control system is essentially a system for ensuring communication, coordination and control within an organization. Communication, coordination and control are general objectives for more information is provided by an inspection of the specific objective of a budget planning and control system. Planning and control appear at all level of performance hierarchy to different degrees. Although, the plan implies a “top-down” approach to management, it could describe a cascade of goals, objectives and plans down through the layers of the organization. The plan made at the higher levels if the performance hierarchy provides a framework within which the lower levels must be achieved. The plans at lower levels are the means by which the plans at the higher levels are achieve. Plan set the targets, while control involves measure actual result against plan called performance, take corrective action to adjust actual performance to achieve plan or to change plan altogether. As per John (1996), stated that during the 1960s, companies began to use budgets to dictate what people needed to do. In the 1970s, performance improvement was based on meeting financial targets rather than effectiveness. The companies faced problems in 1980s and 1990s when they were not willing to spend money on innovations in order to stay with rigid budgets, they did not concerned about know customers were being treated, only meeting sales targets became essential. It is policy of Gtel Mobile JSC that the budget of each departments and company master budget should be consolidated and prepared and the monthly financial statement and operational key performance indicators can be compared with the budgets. However, the effective budgetary control has been a problem, where the monthly budgeted/forecasted targets are not actually met, and the gap is rather high. Accounting is the process of identifying, measuring, accumulating, analyzing, preparation, interpreting, and communicating information that help managers to fulfill organizational The relationship between budgetary controls and performance in Gtel Mobile 8 objectives (Horngren, Sundem and Stratton, 2001). Management accounting system is an important component of accounting system, which help to provide information to managers for decision making. An important part of management accounting is budgeting system. Budgets are known to have an important role to transmit the expectation of top management to lower levels. As per Lucey (1993), budget is quantitative expectation of plan of action prepared in advance of the period to which it relates, expressed in money terms approved prior to the period. Lucey also argued that performance is influenced by many factors including planning and coordination, classification of authority and responsibility, effective communication both internal and external, control of resources available both human and non-human and motivation of lower and middle management. It is demonstrate that management understands the company’s business and has been successfully driving it in the direction they had planned if the actual deliveries through the financial year turn to be close to the budget. In vice versa, if the actual results diverge wide from the budget, this indicates out of control signal. For this reason, budget based control means manager’s evaluation according to budget goals. In this context, budget control can motivate but also can negative effect managers’ attitudes. The behaviors of managers on performance are still the subjects of strategic management control system that are being research recently by various researchers stating that all large business reforecast their forecasted activities, as month pass, the actual income and expenses incurred will be compared to the budget and forecast. As such, many organizations recognize the need to have developed and comprehensive budget control system in order to minimize budget variances, control cost and maximize efficiency. Budgetary control is crucial as cash itself and any overestimation of revenue, excessive of cost, stock, waste could result to poor performance. Gtel Mobile JSC acknowledged that its performance is influenced by budgetary control systems. However, a deficit in revenue 10% and expenses is lower than budgets by 21%, and EBITDA favorable by 37%. That is the reason the author is interesting in analyzing the effect of budgetary controls on business performance in Gtel Mobile JSC. 2. The purpose of research The purpose of the study will be to establish the effectiveness of budgetary controls on performance of Gtel Mobile JSC particularly in term of revenue and operating cost through activity planning, coordination and communication between departments, allocation of resources, motivation to objectives, assessment and control of results and performance evaluation of managers. 3. Research objectives 3.1 Research objectives - Analyzing and evaluating the situation of budgetary control in Gtel Mobile JSC. - Finding out the limitations of budgetary control in Gtel Mobile JSC. - Recommendation for Gtel Mobile JSC for effective budgetary control and improve performance in Gtel Mobile. 3.2 Research questions: - What are the levels of budget controls in Gtel Mobile JSC? The relationship between budgetary controls and performance in Gtel Mobile 9 - What are the levels of performance in Gtel Mobile JSC? - What is the relationship between budget controls and performance in Gtel Mobile JSC? 4. Scope of research 4.1 Study scope The study will be limited to the performance as a dependent variable and budgetary controls as an independent variable. The study will consider the ways used in budgetary controls and the way they are manipulated to influence performance of the organization. 4.2 Geographical scope The study will carried out in Gtel Mobile JSC located in 280B, Lac Long Quans st., Tay Ho District, Hanoi, Vietnam. This is one of 5 mobile operators in Vietnam. 4.3 Time scope The study will cover the period between January, 2012 to March, 2013. 5. Summary of chapter one In summary, the study will be analyzing the role of budgetary controls on the performance of the company business. The study will establish to correlation between budgetary controls with business performance and provide recommendation to support managers improve their operational efficiency. Even though the author have been holding key position in Finance department, she understand that the budgetary system is good in place however problem is still there when evaluating the variance, so from this research will help the author having opportunities to find out the root cause and the weaknesses of the system to improve the system and situation as part of the author’s responsibilities. Moreover from the research, this also gives opportunities to measure the attitude options of respondents towards budgetary controls for education and addressing later on for improvement. The study will also fulfill the requirement for the award of Master Degree of Finance and Control of Jean Moulin University De Lyon III. The relationship between budgetary controls and performance in Gtel Mobile 10 CHAPTER 2 - LITERAL REVIEW AND HYPOTHESIS In this chapter, a number of issues will be discussed in relation to budgetary controls and organization performance. The discussion will be based on the work done by various institutions, previous researchers, writers about budgetary and performance management. 1. Review the concept and definition Budget is a short term financial planning tool of management for operations and resources of an organization for a given period of time. Budget highlights potential problems and advantages earlier, allowing management to take steps to avoid these problems or use advantages wisely, a budget is a tool that helps managers in both their planning and control (Silva and Ariyarathna Jayamaha, 2012). Lucey (2003) defined a budget as a “quantitative expression of a plan of action prepared for the business as a whole for departments, for functions such as sales and production or for financial resources items such as cash, capital expenditure, manpower purchase, and others”. A budget is a plan of action expressed in quantitative terms. It is financial and or quantitative statement prepared and approved prior to a defined period of time for attaining a given organizational objectives (Kamukara, 1992). 1.1. Budgetary Planning and Control A budgetary planning and control system is an essential system for ensuring communication, coordination and control within an organization (BPP Learning media). Mike Tayles (1998) define Budgets are central of the process of planning and control. As framework, planning and control cycle including 7 steps. [...]... But in case where budgetary control is high, there is a meaning positive relation between performance and budgetary participation According to Cheng-Tsung Lu (2011), argued that when budgetary motivation and budgetary attitude were high, the budgetary performance would also be high He also suggested that when budgetary motivation is high the budgetary performance is increased, and when budgetary evaluation... appropriate decisions Target set in budget should be reasonable and achievable Effective communication to managers on budget control and performance The relationship between budgetary controls and performance in Gtel Mobile 20 A common Budgetary process and budgetary control Step 1 Step 2 Step 3 Step 4 Communicating details of budget policy and budget guidelines Determine the factors that restrict output... for Gtel Mobile on the performance 7 Essentials of an effective budgetary control system Various studies and framework found that a budgetary control is effective, the following essentials has to be in place: - A sound and clear organization structure with managers’ responsibilities and their agreed job descriptions should be defined The relationship between budgetary controls and performance in Gtel... of four major factors including budgetary procedures, budgetary participation, budgetary motivation, budgetary evaluation In which the effective budgetary procedures include appropriation of budgetary manual/guideline, how budgetary process and budgetary monitoring This study will examine the level of relationship between budgetary control and performance as well as the effect of each factors on others... control increased, budgetary participant will increase He advocated that budgetary participation is an important moderating variable in the relations between type of budgetary control and subordinates’ performance Brownell (1982) found that budget application that including budgetary control have no direct effect on performance, while budgetary participation effects performance directly and negatively... studies stating that budgetary control have various drawbacks Budgetary control is subjected to human judgment, interpretation and evaluation The budgetary control system requires good and adequate standards and in some case it is hard to develop it, it requires skills, experiences, cost money and effort to make the system work successfully Budgets are mostly inflexible and rigid and do not respond to... game A rigid control system means that subordinates’ performances are The relationship between budgetary controls and performance in Gtel Mobile 21 evaluated primarily their abilities to attain budgetary objectives during each reporting period As per Brownell (1982), when budget control is rigid, the managers would want to know detailed targets and assessment criteria Therefore when budgetary control increased,... (BC and BM): Budgetary procedures are implemented by participation, as such budgetary procedures motivate managers to perform better and result-orientation to meet the objectives, as so when budgetary procedure is clear, budgetary motivation tends to be high H7 (BC and PF): Budgetary procedure effects directly on performance perception positively H8 (BCt and BF): Budgetary controls effects directly performance. .. implementing and representing Budgetary monitoring is the activity of managers and committee to evaluate and follow up the implementation of budget and take necessary action to achieve the defined targets The research will use responds of question 12, 13, 18 to analyze the levels of budgetary procedure The relationship between budgetary controls and performance in Gtel Mobile 35 Practical and appropriate... has a sound budgetary control system, revenue and EBITDA is improving year by year, however, the big gap between actual results and budgeted financial statement is a question The information and observation in Gtel Mobile showed that budgetary control directly effect on performance In the point of view of the author, budgetary controls in Gtel Mobile consist of four major factors including budgetary . Hanoi, August 10, 2013 _________________ _________________ Nguyen Thi Phuong Nguyen Van Thanh The relationship between budgetary. University and Hanoi Commercial University Author: Nguyen Thi Phuong Supervisor: PHD, Professional Nguyen Van Thanh Title: The relationship between budgetary