UNIVERSITY OF HARGEISA

COLLEGE OF BUSINESS AND PUBLIC ADMINISTRATION

DEPARTMENT OF ACCOUNTING AND FINANCE

THE EFFECT OF BUDGET ALLOCATION POLICY ON FINANCIAL

PERFORMANCE: A CASE STUDY AT STAR GROUP COMPANY IN HARGEISA,
SOMALILAND

A Thesis
Presented to the College of Business and Public Administration
At University of Hargeisa

By:
Bedra Omer Mohamed (ID: 1817885)
&
Ayan Abdirahman Abdullahi (ID: 1817880

In Partial Fulfillment of the Requirements for the Bachelor Degree of accounting and
Finance

July 2022
DECLARATION

We hereby declare that this is our original work and it has never before been elsewhere for
any academic award. The pieces of work from other sources have been referenced recognized.

Students’ Names & Signatures

Bedra Omer Mohamed Adan :

Ayan Abdirahman Abdullahi Mohamed :

Submitted Dated

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 APPROVAL SHEET

This proposal entitled “The Effect of Budget Allocation Policy on Financial Performance
at Star Group of Companies in Hargeisa, Somaliland” prepared and submitted by Bedra Omer
Mohamed Adan & Ayan Abdirahman Abdullahi Mohamed in partial fulfilment of the
requirements for Degree of Accounting and Finance has been at University of Hargeisa
examine and approved by the panel on oral examination with a grade of passed.

Name & Signature of Chairman

Name & Signature of the Supervisor Name & Signature of the Panelist

Name & Signature of the Panelist Name & Signature of the Panelist

Date of Comprehensive Examination :

Grade :

Name & Signature of the Director of Department

Name & Signature of the Academic Dean

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 DEDICATION

We dedicated this study to our parents Abdirahman & Saado and Omer & Amina. This journey
has only been possible because of your sacrifice early and later in my life in ensuring I get good
education background.

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 ACKNOWLEDGEMENT

First and foremost, we started the name of Allah who gave us a good health
(ALHAMDULILLAH) and allow to us the ability to complete the research paper. Second, we
heartily thank full to my supervisor Mr. Mohamed Amiin Osman whose encouragement
guidance and supported and supper form the initial to the final level enable us to develop
understanding of the subject we appreciate his immense knowledge that enabled me to shape this
research to what it is now. We would like to thank to our dean the dean of the faculty of business
Mrs. (Nasra Saed Jama) that supported us throughout our education with patience and knowledge
at the same time as we are grateful to all department of the business who attribute the level of our
degree to their encouragement and effort and without them this thesis would not have been
completed or written. We gratefully acknowledge the teacher for the teaching advice and crucial
contribution that made backbone of our life listening, managing, and solving the problem, their
involvements with their originality has triggered and nourished our intellectuality maturity that we
will benefit from, for longtime to come.

Furthermore, we wish to thank all our family members our beloved mother, brothers and sisters
for moral and financial support they give us during our study in academic arena, our great mothers
Saado Aden Xuseen and Amina Abdi Yusuf and our great heroes, our fathers Omar Mohamed
Aden and Abdirahman Abdillahi Mohamed for being in our side and helping us financial and
morally since we accomplished our research. we would also like to thank dearest ones of our
family brother Abdirahman Ahmed Aden for being our side and giving us all the assistances that
we needed and his countless encouragements.

And finally, we would like to thank everybody who was hold up to the realization completion
of this thesis, we expressing our apology as we would not mention everybody of our beloved
supporters we love you all thanks again.

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 ABSTRACT

This study aimed to assess the influence the effect of budget allocation policy on financial
performance: a case study of Star group of companies. The study was guided by the following
specific questions to know the level of company performance, to determine the relationship
between the effect of budgetary allocation on company performance. The study respondents were
selected by the use of purposive sampling technique. The researcher was conducted Hargeisa,
Somaliland; the study used descriptive research and case study designs and the study covered a
population of 40 out of which the sample of 36 used both primary and secondary way of collecting
data such as interviews, and quantitative methods. The data was analyzed using the statistics
package (SPSS) computer package. The data was interpreted using descriptive statistics through
questionnaire frequencies, percentages and correlation analysis. The findings were presented in
effective budgetary allocation policies, determine level of financial performance, clarity of form
of tables which were later interpreted scientifically and compared to the research responsibility, a
good budget plan and efficient use of company’s own assets and others have positive major
findings of the study shows that level of company performance and other factors such as post
hypothesis in order to provide some findings, conclusion and recommendations. The impacts on
financial performance of the firm. Again, the study shows that factors that constitute financial
performance such as employee commitment and dedication, motivation and inspiration, healthy
environment, paying attention on matters that can corporate performance. It is discovered from the
correlation an an impact the relationship between the effect of budget allocation on the business
performance have high impacts on SGC variable has strong positive relationship to the company
performance. Basing on the findings of the study and the summaries the conclusions and the
suggestions from the respondents, the following recommendations are necessary and the
correlation between budget allocation and company performance is significant (r=.704; sig.
adequate to the company. There is a need for the firm to perpetuate and Key words, Budget
allocation, Performance budgeting, Budget policies.

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 TABLE OF CONTENTS

DECLARATION ......................................................................................................................... I
APPROVAL SHEET .................................................................................................................. II
DEDICATION ........................................................................................................................... III
ABSTRACT................................................................................................................................ V
TABLE OF CONTENTS ............................................................................................................. I
LIST OF TABLES ..................................................................................................................... IV
LIST OF ABBREVIATIONS ..................................................................................................... V
CHAPTER ONE ........................................................................................................................... 6
INTRODUCTION......................................................................................................................... 6
1.1 BACKGROUND OF THE STUDY ................................................................................................ 6
1.3 RESEARCH OBJECTIVES .......................................................................................................... 9
1.3.1 General Objectives......................................................................................................... 9
1.3.2 Specific Objectives ......................................................................................................... 9
1.4 RESEARCH QUESTIONS ...................................................................................................... 9
1.5 SIGNIFICANCE OF THE STUDY ................................................................................................. 9
1.6 SCOPE OF THE STUDY ............................................................................................................. 9
1.6.1 Time scope ..................................................................................................................... 9
1.6.2 Geographical Scope ..................................................................................................... 10
1.6.3 Content scope ............................................................................................................... 10
1.7 OPERATIONAL DEFINITIONS OF KEY TERMS .......................................................................... 10
1.8 CONCEPTUAL FRAMEWORK ................................................................................................. 11
CHAPTER TWO ........................................................................................................................ 12
LITERATURE REVIEW ......................................................................................................... 12
2.0 INTRODUCTION..................................................................................................................... 12
2.1 CONCEPTS, IDEAS, OPINIONS FROM AUTHORS /EXPERTS ..................................................... 12
2.1.1 Concept of budget allocation ....................................................................................... 12
2.1.2 History of budgeting ................................................................................................. 14
2.1.3 Budgeting objectives ................................................................................................ 14
2.1.4 Budgeting choices ..................................................................................................... 15
2.1.5 Problems with budgeting in practice ........................................................................ 17
2.1.6 Budgets make people feel undervalued. .................................................................... 17
2.1.7 Budgeting principles ................................................................................................. 18
2.1.8 Concept of financial performance ............................................................................ 19
2.2 THEORETICAL LITERATURE REVIEW .................................................................................... 20
2.2.1 Priority-Based Budgeting Theory ................................................................................ 20

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 2.2.2 Risk Based Budgeting Theory ...................................................................................... 22
2.2.3 Incremental Budgeting Theory .................................................................................... 23
2.3 RELATED STUDIES ................................................................................................................ 27
2.4 THE RESEARCH GAP ............................................................................................................ 28
CHAPTER THREE .................................................................................................................... 29
RESEARCH METHODOLOGY .............................................................................................. 29
3.0 INTRODUCTION..................................................................................................................... 29
3.1 RESEARCH DESIGN ............................................................................................................... 29
3.2 RESEARCH APPROACH ......................................................................................................... 29
3.3 RESEARCH POPULATION ....................................................................................................... 29
3.3.1 Sample Size .................................................................................................................. 30
3.3.2 Sampling Frame ........................................................................................................... 31
3.3.3 Sampling Procedure..................................................................................................... 31
3.4 DATA COLLECTION METHODS ............................................................................................... 31
3.4.1 primary data................................................................................................................. 32
3.4.2 Secondary data............................................................................................................. 32
3.4.3 Data Collection Instruments ........................................................................................ 32
3.4.4 Interview ...................................................................................................................... 32
3.4.5 Questionnaire ............................................................................................................... 32
3.5 VALIDITY AND RELIABILITY ............................................................................................... 32
3.5.1 Validity ......................................................................................................................... 32
3.5.2 Reliability ..................................................................................................................... 33
3.6 DATA ANALYSIS ................................................................................................................. 33
3.7 ETHICAL CONSIDERATION ................................................................................................... 33
3.8 LIMITATIONS OF THE STUDY ............................................................................................... 33
CHAPTER FOUR ....................................................................................................................... 34
DATA PROCESSING AND ANALYSIS ................................................................................ 35
4.0 INTRODUCTION..................................................................................................................... 34
4.1 RESPONSE RATE ................................................................................................................... 34
4.2 RESPONDENTS PROFILE ........................................................................................................ 34
4.3 LIKERT SCALE INTERPRETATION GUIDE ............................................................................... 37
4.4 ANALYSIS OF BUSINESS BUDGETING POLICIES .................................................................... 37
4.5 LEVEL OF FINANCIAL PERFORMANCE ................................................................................... 39
4.6 THE RELATIONSHIP BETWEEN THE EFFECT OF BUDGET ALLOCATION ON FINANCIAL
PERFORMANCE ........................................................................................................................... 40
4.7 ACCORDING TO DESCRIPTIVE ANALYSIS .............................................................................. 40
CHAPTER FIVE .................................................................................................................... 42
FINDINGS, CONCLUSION AND RECOMMENDATIONS ............................................. 42

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5.0 INTRODUCTION..................................................................................................................... 42
5.1 SUMMARY OF THE FINDINGS .............................................................................................. 42
5.2 CONCLUSIONS ...................................................................................................................... 45
5.3 RECOMMENDATIONS ............................................................................................................ 46
REFERENCES ......................................................................................................................... 48
APPENDICES…………………………………………………………………………………...

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 LIST OF TABLES

TABLE 3.1: TARGET POPULATION AND SAMPLE FRAME .................................................................. 31

TABLE 4.2.1 GENDER OF THE RESPONDENTS ................................................................................. 35
TABLE 4.2.2 AGE OF THE RESPONDENTS ........................................................................................ 35
TABLE 4.2.3 EDUCATION LEVEL OF THE RESPONDENTS ................................................................ 35
4.2.4 EMPLOYEE WORK EXPERIENCE WITH THE COMPANY ............................................................. 36
TABLE 4.4.1 ASSESSMENT OF BUSINESS BUDGETING POLICIES ....................................................... 37
TABLE 4.5.1 LEVEL OF FINANCIAL PERFORMANCE ......................................................................... 39
TABLE 4.6.1 THE RELATIONSHIP BETWEEN THE EFFECT OF BUDGET ALLOCATION ON FINANCIAL
PERFORMANCE ....................................................................................................................... 40

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 LIST OF ABBREVIATIONS

HRM : Human Resource Management

SPSS : Statistical Package for Social Science

HR : Human Resource
WPM : Workers Participation Management
IV : Independent variable
DV : Dependent variable

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 CHAPTER ONE

INTRODUCTION

This chapter entails on the Background of the Study, statement of the problem, research
objectives, research questions, scope of study, significant of study, operational key terms of the
study and conceptual framework.

1.1 Background of the Study

Business budget had a basic and essential process that allows businesses to attain many goals
in one course of action. There are several goals that many businesses seek to achieve (or should
be trying to work toward) when they create and implement a budget. These goals include control
and evaluation, planning, communication, and motivation (Lucey, 2004). (Kariuki, 2010),
suggests that Business budgeting is a process of planning the financial operations of a business.
Budgeting as a management tool helps to organize and formulize management's planning of
activities. Historical: Prior to19th century, in globally budget in most countries was characterized
by weak executive power, little central control and processes that were ad hoc and idiosyncratic.
In the modern era debates about public expenditure management have tended to focus on means
of making the budget process more responsive to policy direction, focused on the achievement of
results rather than control of resources, and increasing openness, transparency and accountability
(Norton & Elson, 2004). According to WB (1998), the broad functions of budgeting that are
competing for attention are control of public resources, planning for the future allocation of
resources and management of resources. The budget allocation in Star co. incorporates a policy
in financial welfare. For instance, it indicates how money is distributed by the management to the
different departments and key areas to focus on. This helps the management in planning and
forecasting in order to reduce costs and unnecessary spending and also to increase profits so that
the company may fulfil its company's vision and mission and also to enable the company to fulfil
its debts if any and to ensure the company’s long term technical and financial viability. (Horngren,
1990).

Theoretical: The theories on which this study is anchored include; Budget Incremental theory,
the Priority-Based theory of Business budgeting and the Risk Based theory of theory. The Budget
Incremental theory suggests that the firm’s future budget allocations should be based on its current

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allocations to enhance efficiency and improvement in performance (Wildavsky, 1966). The
Priority-Based Budgeting theory has an underlying assumption of priority-driven budgeting
(Kavanagh, Johnson & Fabian, 2011). This affect the firm investment decision hence performance.
Risk Based Budgeting theory alternatively suggests that when budgeting, the managers also
consider the risks (Maillard, Roncalli & Teiletche, 2010) Conceptual: Budget allocation is when
an organization allocates the maximum amount of funding they are willing to spend on an activity
or program. Essentially, it is a limit that employees cannot exceed when charging expenses.
Organizations create a budget with consideration of the expenditures from the previous year.
Managers were also estimate how much revenue they expect to have in the upcoming year so they
can identify the level of resources they will have available. This helps them to take into account
all the needs of the organization and how they can best allocate their money.Performance is the
quality of results achieved from firm activities (Frich, 2009). Financial performance refers to an
entity’s financial condition in a given time (Bien, 2002). It is also a measure of how well a firm
can use its resources to generate revenue of achieve its set financial objectives. According Bien
(2002) measures used to measure the organization’s financial performance are divided into
accounting and market-based measures. The accounting-based measures are measures that are
derived from calculations while market based are measures which are derived from the financial
markets where the organization’s financial assets are traded. performance of Star co. in relation to
budgeting process. The study employs parameters such as; Return on Investment (ROI), Market
share growth, Total cost reduction and Sale growth. Contextual: Financial performance is a
subjective measure of how well a firm can use assets from its primary mode of business and
generate revenues. The term is also used as a general measure of a firm's overall financial health
over a given period. Analysts and investors use financial performance to compare similar firms
across the same industry or to compare industries or sectors in aggregate. In Star group of
companies there is poor financial performance that is caused by a poor budgeting process;
planning, controlling, communication and evaluation.

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1.2 Statement of the problem

Budgeting in a business has benefits and consequences that go beyond the organization’s
management and have more to do with financial dimension in general, key in which, financial
performance. Over the years, companies have undertaken various attempts aimed at improving its
budgetary process with the objectives of imposing greater fiscal discipline on management
agencies of both private and public companies. today most companies boast of having a strong
detailed and well laid budgeting legal process which the top executives use as a tool to allocate
revenue resources (Anderson, 1996). Budgeting is the process used by the management of
companies to formalize its plans (Horngren, 2000).

Specific research studies extensively on the relationship between budgeting and the financial
performance of Companies, at Star co. on which limited research work has been done, was not
comparable to those companies in the developed world or middle-income countries where the
empirical studies have been conducted and as a result. Specific problem Budgetary allocation
decisions were not automatically transformed into budgetary outcomes; resource allocation is also
determined by budget execution. The budgeting process as well as the analysis of expenditure
policy and resulting resource allocations.The problem was seen within the company sectors owing
to information constraints application in higher-level, inter-sectoral/ program allocation decisions
was more problematic and the company performance will decline day by day.The company lost
track of her spending, lack of savings, less financial security, out of control spending, a higher
likelihood of going into debt, and more financial stress.The possible causes Rigid Decision-
Making, Gaming the System, Blame for Outcomes, Expense Allocations, Use It or Lose It method,
Only Considers Financial Outcomes.The selected cause Only considers financial outcomes: The
nature of the budget is numeric, so it tends to focus management attention on the quantitative
aspects of a business; this usually means an intent focus on improving or maintaining profitability.
In reality, customers do not care about the profits of a business – they only buy from the company
as long as they receive good service and well-constructed products at a fair price. Unfortunately,
it is quite difficult to build these concepts into a budget, since they are qualitative in nature. Thus,
the budgeting concept does not necessarily support the needs of customers.The gap that was found
during this study by the researcher was contextual gap because the above studies was not
conducted before in Star group of companies in Hargeisa, Somaliland.

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1.3 Research Objectives
1.3.1 General Objectives
The objective of this study was to determine the effect of budget allocation on financial
performance. A case Study of Star Group Company, Hargeisa Somaliland.
1.3.2 Specific Objectives
1) To determine how Star group of company allocates budget with respect financial
performance.
2) To evaluate effect of budget allocation policies in the company performance.
3) To identify the possible ways of managing challenges that the company faces during the
budgeting.
4) There is direct relationship between the effect budget allocation growth and the rising of
Somaliland business growth.

1.4 Research Questions

1) What is the profile of the respondents in terms of age, gender, education level,
2) To determine the level of the financial performance at Star group companies?
3) What are the challenges and hindrances of commercial companies?
4) What are the benefits of the commercial companies’ financial performance to the large
business directly and indirectly to the Somaliland business growth?

1.5 Significance of the study

The research was to help to develop an understanding of the advantages and disadvantages of
budget allocation policy of Star company. The study had implications for other companies to help
trying to make decision Considering about budget allocation. The finding reveals the importance
of budget allocation for Star company in terms of performance and practice of budget process,
budget allocation, and budget approval according to the study, the findings of the study had to use
to the future academic researchers to improve on their topic in another period.

1.6 Scope of the study

1.6.1 Time scope
Time scope of the study started March till August which was collected, analyzed and
interpreted the finding of the study in between these months.

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1.6.2 Geographical Scope
The geographical scope of the study involves Star group of companies. Due to competition in
recent times in the company, the study covers in Mohamoud Haybe district.

1.6.3 Content scope

The content of study centered on the impact of budget allocation on company’s performance
on Star group of companies.

1.7 Operational definitions of key terms

Budget Allocation: It refers to the amount of spending allocated to each expenditure line, which
in layman’s terms basically means the amount of money you spend on each thing your company
spends money on. In a budget allocation, you don’t go right down to the nitty-gritty. Generally,
it’s kept to the department level.Budget policies are typically adopted to clarify the budget process.
Operating budget policies address roles and responsibilities of the budget process, timelines,
definitions of a balanced budget, and budget controls such as fund balance levels. Budget policies
are an important step in a more strategic and long-term financial planning approach to the fiscal
wellbeing of the companies. These policies are often adopted every budget cycle as part of the
budget document, or as part of a comprehensive financial management policy. Sometimes they are
adopted as stand-alone policies.

Performance budgeting: a system that uses performance information for the allocation,
spending, and management of a government’s financial resources. Governments adopt
performance-based budgeting to improve spending prioritization and to increase the efficiency and
effectiveness of public expenditure.Allocated Costs Central costs for
services/obligations/infrastructure that are charged out to County departments based on varying
criteria. Allocated costs include internal services or overhead costs, such as insurance, facility
maintenance, debt service, fleet management, central information technology, central finance and
accounting and central budget administration. Budget Appropriation A legal limit on how much
can be spent annually by each budget unit and object of expenditure. In adopting the budget, the
Board of Supervisors approves an appropriation level for each budget unit and object of
expenditure. Budget process the budgeting process lets an organization plan and prepare its
budgets for a set period. It involves reviewing past budgets, identifying and forecasting revenue
for the coming period, and assigning amounts to spend on a company's various costs.

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 1.8 Conceptual Framework
Independent Variable Dependent Variables

Budget allocation or Business budgeting Financial performance

policies :
• Increase in sales and growth
• Planning and Controlling • Increase in return on Assets
• Evaluation • Increase in revenue and profitability
• Communication and co-ordination • Manageable debt
• Healthy amount of free cash flow

Intervention Variables

• Communication
• Performance appraisal
• Insufficient money
• Good estimation and accounting

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 CHAPTER TWO

LITERATURE REVIEW
2.0 Introduction
In this section, the literature which forms the basis of this study was presented to help identify
the gaps in knowledge. The literature, both theoretical and empirical were examined by examining
different theories and empirical studies on the effect of budget allocation policies on the financial
performance of Companies.

2.1 Concepts, Ideas, Opinions from Authors /Experts

2.1.1 Concept of budget allocation
Budget allocation is when an organization allocates the maximum amount of funding they are
willing to spend on an activity or program. Essentially, it is a limit that employees cannot exceed
when charging expenses. Budget allocation theory is the academic study of political and social
motivations behind government and firms budgeting. Classic theorists in Public Budgeting include
Henry Adams, William F. Willoughby, V. O. Key, Jr., and, more recently, Aaron Wildavsky.
Notable recent theorists include Frank R. Baumgartner, Bryan D. Jones, Richard Fenno, Allen
Schick, Dennis Ippolito, Naomi Caiden, Irene Rubin, James D. Savage, Thomas Greitens, Gary
Wamsley, and Usman W. Chohan. Budget theory was a central topic during the Progressive Era
and was much discussed in municipal bureaus and other academic and quasi-academic facilities
of that time such as the nascent Brookings Institution.

The dominant theory of the budgetary allocation (Fenno, 1966; Wildavsky, 1964) emphasized
stable budgetary roles in the making of incremental choices over time. But while the traditional
theory has been unusually successful, at least two major problems have developed over the last
decade. First, recent empirical research has reconsidered the role of partisanship in the budgetary
process. And second, more recent descriptive analyses of the appropriations process have
suggested that the institutional roles identified by Fenno and Wildavsky changed to a considerable
degree during the 1970s. What, then, is the status of the traditional theory of the budgetary process?
We analyze this question by updating Fenno's analysis of the tie period FY48 through FY84 and
examining both the changing nature of institutional roles and the influence of partisanship in the
play of those roles over time. The analysis is used to reinterpret the traditional theory—especially

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the traditional interpretations of the roles of advocate, guardian, and appeals court as well as the
influence of partisanship—in light of events that have occurred since the original development of
Wildavsky and Fenno's model.Companies will create a budget with consideration of the
expenditures from the previous year. Managers will also estimate how much revenue they expect
to have in the upcoming year so they can identify the level of resources they will have available.
This helps them to take into account all t of the organization and how they can best allocate their
money.

Planning and Controlling process

Budgets were applied in organizations as it can provide various uses and play different roles
(Emmanuel and Otley, 1985, Ahmed et al. 2003). Several authors list down the purpose of
budget.Sulaiman et al. 2004, for example, explained that budgets aid planning and facilitate
interdepartmental communication and coordination. Meanwhile Drury 1998, Emmanuel and
Otley, 1985 said that budgets can be used as a means of forecasting and planning in an attempt to
shape the future by altering those factors that are controllable in the light of available forecast.
Meanwhile according to Warren et al. (2002), budget provides the company a “game plan” for the
year. Budget involves establishing specific goals where this is a part of the planning function,
executing plan to achieve the goals which is the directing function of management and periodically
comparing actual results with organization’s goals which is the controlling function of
management.

With respect to this, Jones (1998) stated that there are two key elements of budgets namely
planning and control. Budgetary planning is the financial plan for the future whereas budgetary
control is the use of the set budgets to monitor and control actual performance. He further
elaborated that an effective budgetary planning and control process could assist managers in
achieving both short and long-term operational and strategic goals. Joshi and Abdulla (1995)
meanwhile mentioned that budgets are an excellent control and evaluation tool, as they provide a
set of criteria against which results are compared and corrective actions are initiated.

Coordinating and communication process

Emmanuel and Otley (1985) further stated that budget act as a channel of communication and
co-ordination when it communicated related information that will enable managers in different

13
parts of organizations to coordinate their activities more efficiently. Drury (1998) pointed out that
to coordinate the activities of the various parts of the organization and to ensure that the parts are
in harmony with each other the budget serves as a vehicle through which the action of the different
part of an organization can be brought together and reconciled into a common plan.

2.1.2 History of budgeting

Used in a responsible way, budgets provide the basis for clear understanding between
organizational levels and can help senior executives maintain control over multiple divisions and
business units (Hope and Fraser, 2003). The budgeting process emerged in the 1920s as a tool for
managing costs and cash flows in large industrial organizations such as DuPont, General Motors
and Siemens. However, in the 1960s companies used accounting rules not just to keep score but
also to dictate the actions of people at all levels of the organization (Johnson and Kaplan, 1991).
By the early 1970s, a new generation of leaders schooled in the finer arts of financial planning had
begun to rely on financial targets and incentives to drive performance improvement. However,
rigid adherence to annual fixed plans and budgets stifled innovation, hindering the cost pressures
that arose in the 1980s and 1990s. Business units became preoccupied with meeting sales targets
rather than satisfying customers. Eventually, a few companies realized that budgeting played a
powerful role in defining and enforcing cultural norms that discourage frontline people from taking
responsibility for performance (Hope and Fraser, 2003). In the past decade, more alternatives to
traditional budgeting have emerged.

2.1.3 Budgeting objectives

According to Merchant and van der Stede (2007), there are four main purposes for preparing
a budget. One purpose is planning. Most people tend to be preoccupied with their seemingly
urgent, day-to-day problems. Unless they are encouraged to do so, they fail to engage in strategic,
long-term thinking. A planning and budgeting system can provide the needed encouragement. It
is a powerful form of action control forcing managers to think about the future and make decisions
in advance. An effective planning and budgeting process makes the control systems proactive, not
just reactive. Therefore, they help managers shape the future, not just respond to conditions they
face and performance they observe. A second purpose of a planning and budgeting system is
coordination. The planning and budgeting processes force the sharing of information across the
organization. The processes should involve a topdown communication of organizational goals and

14
priorities and bottom-up communication of opportunities, resource needs, constraints, and risks.
The process also should contain a sideways communication stream that enhances the abilities of
organizational entities (e.g. business units) learning from each other and working together toward
common goals. In this way, everyone involved becomes more informed, so the process is more
likely to result in decisions that consider all perspectives. A third purpose is facilitating top
management oversight. This oversight primarily occurs in the form of preaction reviews, as plans
are discussed, and approved before actions are taken at successively higher levels in the
organization. Top management also uses plans as the performance standards used to implement
the management-by-exception form of control. This means that the manager only intervenes in
case of a measured performance below target levels. Therefore, a planning and budgeting system
reduces uncertainty and is time-efficient for top-managers.The final purpose is motivation. The
plans and budgets become targets that affect manager motivation because the targets are linked to
performance evaluations and, in turn, various organizational rewards.

2.1.4 Budgeting choices

Neil Churchill (1984) argues that budgets should be considered from a broader perspective. He
views them as having two primary functions: planning and control. Nevertheless, no matter
whether it is used for planning or for control, a budget is more than a forecast. A forecast is a
prediction of what may happen and sometimes contains prescriptions for dealing with future
events. A budget, on the other hand, involves a commitment to a forecast to make an agreed-on
outcome happen (Churchill, 1984). From a planning perspective, a budget is the glue that makes
the different parts of the organization fit together. It translates the strategic plans of the
organization and its implementation programs into period-oriented operational guides to company
activities (Churchill, 1984). According to Curchill (1984), there are three important decisions to
make regarding the planning choices of preparing a budget. These issues will be discussed
below.First, it is important to consider initiation and participation. Who should initiate budgets?
What is the extent to which budget formulation involves all management levels? The question is
whether the budget should be primarily prepared top-down or bottom-up. According to Churchill
(1984), a budget prepared at the level at which it is to be implemented, is more likely to evoke
commitment that one imposed topdown. Moreover, only when unit managers contribute to budget
preparation can they be held accountable for the long-term performance of their operating units.
Searfoss and Moczka (1973) also find a positive relationship between perceived participation and

15
motivation to achieve the budget. Finally, Magner et al (1995) argue that employees view
participation as a means of influencing the budgetary process to get the budget they want.
Therefore, employees have more positive feelings toward decision makers who afford them this
opportunity. In essence, participation promotes the view that the unfavorable outcome is the best
that can be expected under the circumstances. The second planning issue is the implementation
choice. How can a company blend the overview of top management with the depth of knowledge
of operations found in operating units (Churchill, 1984) Churchill (1984) argues a cyclical process
whereby the initial budget formulation is done in broad terms, with details added after everyone
agrees on planning assumptions, can be quite effective. This type of budgeting provides initial top-
level input into the process and allows top-management to retain overall control. It also permits
operating managers to contribute before detail has been built into the budget (Churchill, 1984).
Finally, the planning issue timing needs to be considered. It is important to decide when to start
the budget process and when it is completed.

Furthermore, the budget process needs to be linked to the strategic planning process. Besides
planning choices, there are also five choices to make regarding the control function of the budget.
These issues will be described below.First, an organization should decide about rolling budgets
and revision. It is important to have clear understanding whether or not you make the budget
rolling. The question is if the budget period should be for a 12 months period followed by another
12 months budget a year later, or should a quarter be added each time a calendar quarter expires.
A rolling forecast is usually produced monthly or quarterly, and enables organizations to
periodically adjust its expected numbers within an annual period to reflect the current market
realities faced by companies (Haka and Krishnan, 2005). By forecasting over short periods, the
rolling forecast reduces the time interval between planning and business reality (Sivabalan et al,
2009). Furthermore, an organization must decide to remain the budget for a fixed period, or revise
it periodically during the period (Churchill, 1984). Frow et al (2010) argue revision of a budget
seeks to avoid the inherently restrictive nature of budgetary control by enabling managers, when
confronted with unexpected events, to consider, a revision of plans and reallocation of resources
in pursuit of strategic organizational objectives. The second decision to make regarding the control
function of a budget is whether the budget is fixed or flexible. Usually the results are periodically
compared against the estimates to determine if corrective actions or revised plans are needed. The
question is whether the performance should be evaluated against the original budget or against a

16
budget that incorporates the actual activity level of the business. According to Churchill (1984), a
flexible budget can help management to identify problems, since it isolates the effects of changes
in sales volume or production level from other performance factors. The third control decision to
make is whether you base bonuses on budgets. It is important to consider whether incentive
compensation should be based on actual versus budgeted performance, or on actual performance
against some other standards (Churchill, 1984). Many companies use budgets to evaluate a
managers’ performance. These evaluations commonly result in bonuses based on achieved targets.

2.1.5 Problems with budgeting in practice

Budget is the cornerstone of the management control process in nearly all organizations, but
despite its widespread use, it is far from perfect (Hansen et al, 2003). The practitioners argue that
budgets impede the allocation of organizational resources to their best uses and encourage myopic
decision-making and other dysfunctional budget games (Hansen et al, 2003). They attribute these
problems, to traditional budgeting’s financial, top-down, command-and-control orientation as
embedded in annual planning and performance evaluation processes (Hope and Fraser, 2003). A
report written by Neely et al. (2001), drawn primarily from the practitioner literature lists the
twelve most cited weaknesses of budgetary control. These weaknesses are listed below.

1) Budgets are time consuming to put together.

2) Budgets constrain responsiveness and are often a barrier to change.
3) Budgets are rarely strategically focused and often contradictory.
4) Budgets add little value, especially given the time required to prepare them.
5) Budgets concentrate on cost reduction and not value creation.
6) Budgets strengthen vertical command-and-control.
7) Budgets do not reflect the emerging network structures that organizations are adopting.
8) Budgets encourage gaming and perverse behaviors.
9) Budgets are developed and updated too infrequently (usually annually).
10) Budgets are based on unsupported assumptions and guesswork.
11) Budgets reinforce departmental barriers rather than encourage knowledge sharing.

2.1.6 Budgets make people feel undervalued.

The weaknesses summed up above were the most important critics about the use of budgets.
Some of the twelve different claims can be grouped together. First, critics 1,4,9 and 10 relate to

17
the recurring criticism that by the time budgets are used, their assumptions are typically outdated,
reducing the value of the budgeting process (Hansen et al., 2003). Wallender (1999) argues that
conventional budgets can never be valid because they cannot capture the uncertainty involved in
rapidly changing environments. Therefore, Berry and Otley (1980) argue that the operation of a
useful budgetary control system requires two related elements. First, there must be a high degree
of operational stability, in order to provide a valid plan for a reasonable period of time. Second,
managers must have good predictive models so that the budget provides a reasonable performance
standard against managers can be held accountable. Second, critics 2,3,5,6, and 8 relate to the
claim that budgetary controls impose a vertical command-and control structure, centralize
decision-making, stifle initiative, and focus on cost reductions rather than value creation. Finally,
critics 7, 11 and 12 relate to organizational and people-related budgeting issues. Hansen et al.
(2003) argue that the behavioural consequences of relying solely on budgets include: (1) failing to
create a high performance climate based on competitive success because a fixed target is the
definitive measure of success; (2) failing to make people accountable for satisfied customers
because financial performance measures dominate; and (3) failing to empower people to act by
providing them with resource capabilities because resources have been committed for the
budgeting period. Given these critics about the use of budgets, it seems odd that the vast majority
of companies still use budgets today (Ekholm and Wallin, 2000). Scapens and Roberts (1993)
argue that one reason budgets may be retained in most firms is because they are so deeply ingrained
in an organization’s fabric. Furthermore, Neely et al. (2001) constitute that budgets are the only
process that covers all areas of organizational activity. However, in the last decade new approaches
towards the budgeting process have been designed. Some of these approaches aim to improve the
budget, while others take a more drastic approach in opting to abandon the budget.

2.1.7 Budgeting principles

After the literature research conducted in the previous paragraphs, the research was identified
the most important budget principles according to the existing literature. In the first place, several
objectives need to be considered when preparing a budget. According to the existing scientific
literature, there are four main purposes for preparing a budget. Furthermore, there a several choices
to make when preparing a budget. These choices and objectives are combined the most important
principles that need to be considered during the budgeting process. This research has divided the
principles in three key principles. These three main principles that need to be considered when

18
preparing a budget, are based on the problems with budgeting in practice. First, the way of
decision-making need to be considered. Whether the process is centralized, or decentralized is an
important decision to take. What is the level of participation and influence of all stakeholders?
How is the coordination between different people and is there an appropriate balance between
management oversight and a bottom-up procedure? Second, people need to be considered during
the budgeting process. This also connects to the previous principle. The level of motivation and
commitment of the people is dependent upon the participation in the budgeting process of these
people. How to achieve this motivation and commitment of the people is an important principle to
consider when designing a planning and budgeting system. Finally, the problem that a budget is
quickly outdated should be considered when designing a budgeting system. The people responsible
for the budgeting process should consider the timing, tightness and revision of the budget.
Furthermore, the choice whether the budget is fixed or flexible should be made. The focus of this
research will be mainly on the identified principles about centralization and the people concerning
the budgeting process. In the next chapter, this research will look at the different alternatives to
traditional budgeting and how these alternatives use the principles identified above

2.1.8 Concept of financial performance

According to Pandey (2004), financial performance involves assessing polices of a firm and
its operations in economic terms. Financial performance outcome is reflected same firms across
the industry or sectors. monetary terms. It can also be defined as the subjective measure of how
well the firm utilises its assets to generate revenues. It is also applied to assess the general measure
of a business overa certain period of time that is expressed in terms of profits and of the entire
financial health of a firm in a stipulated time as well as comparing the on the firm’s return on
investment, value addition and return on assets among others. Penman (2007) posit that financial
performance can be described as the performance losses. Through examining the financial
performance of a business, decision-makers can judge the outcome of business strategies and
activities objectively in form of monetary terms. It can also be defined as the subjective measure
of how well the firm same firms across the industry or sectors. utilises its assets to generate
revenues. It is also applied to assess the general measure of the entire financial health of a firm in
a stipulated time as well as comparing the same firms across the industry or sectors.

19
Profitability and Increase in revenue

Performance and financial competitiveness represent a certain form of success or result of the
action, leading to the success. Ratios used to measure performance and financial competitiveness
are very diverse; some of them are classified as classical, some of them as modern. Within the
framework of this "diagnostics" of the company performance, financial performance is evaluated
from the point of ability to make a profit or is usually associated with its profitability; therefore,
profitability ratios are usually accepted and used to measure performance (Monea and Guță, 2011).

Growth and competitiveness

One of the most important steps to measure and evaluate the success of the firm is its financial
results; the growth and progress can be achieved only by the achievement of a certain performance.
Financial performance is usually measured by profits and profitability ratios. One of the main
objectives of the company is to survive in a competitive market; profit generation is included in
such objective. The term "performance" is increasingly being used to explain various company
terms such as growth, turnover, profitability, competitiveness (Colasse, 2009; Sebestova, 2012).

2.2 Theoretical Literature Review

This section involves review of theories underlying the study. The theories discussed in this
study are Priority-Based Budgeting Theory, Risk Based Budgeting Theory and Incremental
Budgeting Theory

2.2.1 Priority-Based Budgeting Theory

The traditional approach to budgeting has always been incremental, with last year's budget
serving framework and providing a "new lens" through which the organization can clearly see
where solution to this dilemma, our organization has partnered with ResourceX toward
establishing a priority, and do not directly link to strategic goals or performance measurement. As
part of the zero-based approach, where accounts for certain line items essentially start with zero
and every planned purchase is detailed. Unfortunately, these budgeting methods do not adequately
address as the basis for the budget of the following year. This has typically been done in concert
with a opportunities exist - therefore making more effective use of finite resources and continuing
to serve in the most effective, efficient and fiscally responsible manner possible.

20
 The Priority Based Budgeting (PBB) model provides a comprehensive review of the entire of
the community's priorities. The diagnostic process enables policy makers to link funding decisions
to priorities in the strategic plan. The PBB philosophy involves "Results", which are the
fundamental reason of company exists, and what the company is in business to provide. Company
operating budget, identifying and ranking services (programs) offered on the basis Result
definitions detail and expand on the factors influencing the results our organization aims to achieve
- and for which all services/programs would then be gauged by and ranked on. PROCESS
OVERVIEW: The methodology involved in implementation of Priority Based Budgeting process
can be broken out into five distinct steps:

Step 1 - Determine and Clarify Vision/Results

The first step is to determine the results used in Priority Based Budgeting. These results are
based on best practices and align with other initiatives (for example, a Strategic Plan) that have
defined definitions. At a high level, "Results" are the fundamental reason that a firm exists, and an
company goals. Two sets of results were created to distinguish between community oriented and
governance-oriented results. These "Result" areas are further supported by Result what an
organization is in the business to provide.

Step 2 - Identify Programs and Services

Each department then set outta develop a comprehensive list of programs and services offered
by providing support services within the city to other departments providing direct service to
residents and businesses, while governance programs are those procedures. The inventories
include a description of the program including services provided, and identify the program as either
community or governance-cantered. Community programs are those that department (what exactly
we do). These 'Program Inventories' build a common understanding of what the organization is
offering to the community and in support of internal operations and procedures. The inventories
include a description of the program including services provided, and providing direct service to
residents and businesses, while governance programs are those identify the program as either
community or governance-centered. Community programs are those providing support services
within the city to other departments.

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Step 3 - Allocate Costs/Resources to Programs

After program identification, departments then provided comprehensive and detailed cost
information for each individual program. Through this process, departments estimated the level of
staff time and other department budget expenditures/costs dedicated to each program, as well as
identifying any revenues generated from these services. These each labeled as personnel or non-
personnel costs.

Step 4 - Score Programs Based on Results

For the program, and the portion of the community served by the program. Once departments
achieving each result. Departments also scored other attributes of each program, such as the level
scored their programs based on these criteria/results, multi-departmental teams conducted follow
of mandate to provide the program, the amount of cost recovery of the program, change in demand
in this step, departments then evaluated each program on how much every program contributes to
up review, validation, and crosschecking of these scores through a formalized objective peer
review authentication process.

Step 5 -Resource Alignment Diagnostic Tool

Rank relative to each other in order of highest priority (those programs most relevant to
achieving in the final step, program costs and scores are combined into a comprehensive Resource
Alignment representation of how the organization allocates money to each program, and how those
programs Diagnostic Tool. This tool allows for multiple methods of sorting the information, gives
a visual result – (Quartile 1to lowest priority (those programs least relevant to achieving results -
Quartile 4).

2.2.2 Risk Based Budgeting Theory

This theory was developed from the work of Maillard, Roncalli and Teiletche (2010) who
suggests that the risk aspect should be included in the budgeting process. According to Maillard et
al. (2010) budgeting for risk involves decomposing the portfolios’ combined risk into smaller risks
on a quantitative basis. This ensures diversification in the investment process which reduces the
risk involves in budgeting for the investments. A risk-based investment also reduces variation in
returns because including the risk ensures that the risk involved is carefully addressed.Risk Based
budgeting theory argues that Star Group Companies just like other entities should include risk in

22
budgeting process to address the risks involved in the investments so that they reduce variations
in returns. This theory is relevant to this study for its suggestion that that every firm should include
the aspect of risk when budgeting so as to reduce variations in different aspects of their budgets
which enhance firm performance.

2.2.3 Incremental Budgeting Theory

This theory was developed from the work of Aaron Wildavsky in the1960s. This theory
suggests that budgeting should be done basing on the previous period budget. This theory is based
on expenditures increases of reductions depending on economic growth and not from resource
redistribution. According to Wildavsky (1966) budgets should start with the projected amount of
the current financial year then add or subtract increments accommodate budget increases or cut for
the coming year. With the absence of projected amount of the current financial year, the firm may
use provisional accounts of actual expenditure in the previous financial year. Incremental
Budgeting is the most reorganized description of how budget process works. Many scholars and
participants prefer it as the prescription of how the budgeting process should work (Schick, 2014).
According to this theory, Star Group of Companies like other firms should start budgeting with
the projected amount of the current year then add or subtract increments according to their
objectives. This approach is used mostly by Northern Ireland and the UK among other countries.
The countries carried forward the previous year’s budget to the next annual budget than do some
adjustment to them for known factors for instance; additional resources, new legislative
requirements, change in priorities, service developments or anticipated inflation (Pidgeon, 2010).

This theory is criticized on the grounds that the allocation of resources is based on the existing
patterns thus when the activities are changed significantly, it brings a problem. This implies that
the Incremental budgeting model discourages developing new programs since it fails to consider
change in circumstances (Pidgeon, 2010). The model is also attributed to the assumption that the
funding level that exists is right although it may be too low or high to sustain the firm activities.
The Incremental Budgeting theory is relevant to this study for its suggestion that adjusting the firm
or country’s projected amount of the current year budget for factors such as additional resources,
change in priorities, new legislative requirements, among others enhances the budgeting process
which makes an effective budget.

Determinants of Firm Financial Performance

23
 Determinants of firm financial performance are divided into firm specific (Internal) factors and
external factors. Firm specific factors that affect firm performance include; firm risk, asset quality,
liquidity management, firm size, leverage, growth rate, asset tangibility, capital adequacy,
management efficiency. External factors on the other hand include; taxes, the country’s Gross
Domestic Product (GDP), macroeconomic policy stability, interest rate, political instability and
inflationHammed (2015) found that firm size, liquidity and leverage were critical financial
performance. Dang (2011) evaluated capital adequacy using capital adequacy ratio performance
determinants. Thus, firm size and leverage were inversely related. (CAR); this ratio depicts the
bank’s internal strength that enables it to tolerate losses in time of financial crisis. Sangmi and
Tabassum (2010) showed that if a bank has Contrary to this, liquidity ratio was significantly and
positively linked to financial adequate amount of capital it has less chances of failing.

• Liquidity Management

Liquidity is the firms’ ability to fulfill its financial obligations. According to Ross (2014),
liquidity management are of two forms; ability to trade assets on the market for instance bonds or
stocks at their current prices; or meeting the cash obligations without sustaining considerable
losses. Liquidity management is an important aspect of the firm’s performance. According to Dang
(2011) when a firm maintains an adequate level of liquidity, it was profitable hence perform well
since firm liquidity is positively associated with its profitability. Scholars such Olagunju et al.
(2011) on their study on Nigerian banks suggest that effective liquidity management in a firm
enhances the firm profitability hence performance. Agbada and Osuji (2013) also suggested there
being a positive relationship which is significant to efficient liquidity management and firm
performance.

Liquidity of the company which is the ability of the company to meet its short-term Extant
literature considers liquidity as a critical component which impacts on the When a company’s
faces financial problems it might opt to raise more funds through debt or in China and liquidity
was considered to be one of the factors that affected firm expected banks to maintain a certain
level of liquid assets. A company is liquid if it’s able financial obligations. It is ratio of current
assets to current liabilities (Pandey, 2005). positive association between liquidity and firm
profitability. Wang (2009) tested the performance. Richards and Laughlin, (2008) note that
regulators of commercial concluded that company’s profitability was positively connected. Saleem

24
and Ramiz, (2011) bank is disposing its bad assets and this might result to a decline in demand
hence low to generate adequate funds to meet its financial compulsions did an assessment
involving the link between liquidity and profitability of 20 companies. A nexus between liquidity
and firm profitability of steel and aluminium industries and firm’s choice of capital structure. Wu
(2007) explored capital structure determinants prices for liquid assets resulting into loss of income
from sale of liquid assets. Eljelly (2004) evaluated the impact of liquidity on firm profitability and
the results showed a disposing its liquid assets. This might develop a perception to the investors
that the positive association was found to exist between liquidity and firm profitability.

• Firm Size

Firm size is a very significant determinant of a firm’s performance (Core, Guay &Rusticus,
2005). Firm size can be measured in various ways for instance the number of employees, the total
assets owned by the firm or the market share acquired by the firm. The association between firm
size and performance gives mixed results. Scholars on one hand suggest that the size of the firm
positively and significantly effects on the performance of firms while others on the other hand
suggest a negative relationship. Some scholars even imply that there is no relationship. Large firms
are said to be more diversified and with smaller chances of bankruptcy which is suggested to has
a positive relationship between their sizes and profitability hence general performance (Titman &
Wessels, 1988). Rajan and Zingales (1995) on the contrary assert that that there is less
asymmetrical information about the larger firms and associates this with a negative relationship
between firm size and performance.

• Leverage

The impact of financial leverage and performance has been studied by the abundance of
research in the literature. The famous influential paper by Modigliani and Miller (1958) has
developed different theoretical predictions to build a solid foundation of the relationship between
financial leverage and firm performance. However, capital structure affects the tax-deductibility
of debt interest and agency theory profitability on the degree of agency problem associated with
firms. For example, Schoubben and Van Hulle (2005) Sipahioglu (2004) report insignificant
results between financial leverage and firm performance. Based on value. The previous studies
results remain unclear in determining this relationship. Titman (1984) argues that leverage affects
the likelihood of a firm’s liquidation. Maksimovic and Titman Candasamy (2011), Wang (2003)

25
and Goyal (2013) find a positive relationship between leverage and for example, Fama and French
(2002), Gill, Biger, and Mathur (2011), Ramachandran and others report positive a or insignificant
effect. Sheikh and Wang (2013), Mireku, Mensah, and Ogoe(2014), Krishnan and Moyer (1997)
and King and previous literature, empirical conclusions have mixed results. Some report negative
relationship while on the other hand, Pouraghajan and Malekian (2012), Olokoyo (2013), Quang
and Xin (2014), (1991) suggest that a high level of leverage has a negative effect on firm
performance. Philips and Modigliant and Miller (1958) expect that capital structure of a firm is
irrelevant to its Santor (2008) find a negative relationship between leverage and firm performance.
Some studies suggest that the relationship between the leverage and performance is conditional
show that leverage has a positive effect on quoted firms but a negative on non-quoted firms. Ruland
and Myers (1997) expect that leverage may affect the investment and reduce the market value of
the firm. Zhou (2005) find that leverage improves the performance of diversified firms.

• Management Efficiency

Management Efficiency is also important in determining the profitability hence performance

of firms. Management Efficiency is however complex to capture using financial ratios. Common
ratios used to measure managerial efficiency include, loan growth rate, total asset growth and
earnings growth rate. Other firms also use operational efficiency to measure the efficiencies of its
management. The management’s ability and capability to efficiently deploy the firm’s resources
efficiently to ensure that they maximize their revenue and also reduce their operating costs can
also act as a measure of management efficiency (Ongore & Kusa, 2013). Performance of
management in many instances is qualitatively expressed by a subjective evaluation of firm aspects
such as, the quality of the staff, systems for instance the management systems control and among
others aspects. Management efficiency also determine the decisions managers make for instance
financial structure adopted by the firm (Hart & Moore, 1995).

• Macro-Economic Factors

Macro-Economic Factors on the other hand include; taxes, the country’s Gross Domestic
Product (GDP), macroeconomic policy stability, interest rate, political instability and inflation. If
the country’s taxes are high, they affect the firm performance negatively. The country’s trend of
GDP growth also affects the performance of firms through shifting the firms demand and
availability of credit (Athanasoglou et al., 2005). Ayanda et al. (2013) suggested that a country’s

26
GDP growth rate and Inflation Rate does not significantly affect the firm’s profitability. The
stability of a country’s macroeconomic policies also determines firm performance. The
relationship between inflation level and banks performance has remained unclear although money
supply has a significant positive relationship with firm profitability. Interest rates also affect the
firm performance in that they raise or lower the cost of borrowing (Dinh, Malesky, To & Nyuyen,
2013). Political instability negatively affects firm performance through either increasing or
reducing the risk of doing business.

2.3 Related studies

Relationship between budget allocating and the financial performance Maritim (2013)
evaluated the relationship between budgeting processes and the financial performance of
commercial and manufacturing Parastatals in Kenya. The study used a descriptive research design.
The study adopted questionnaires which are administered to collect data. The study established
that the budgeting practices that are common among manufacturing Parastatals in Kenya include;
budget planning, budget participation and budgetary sophistication. The researcher also
established that budgeting process participation by employees enhanced the success in the
actualization of the budget plans. The study then recommended that there is a need for a
participatory budgeting process whereby all cadres of staff through their sectional heads are
involved and their views are incorporated in the budget process. Impact of budgetary process on
organizational performance Salva and Jayamaha (2013) assessed whether the budgetary Process
of Apparel Industry in Sri Lanka had a significant impact on organizational performance. The
researchers used variables such as planning, coordination, control, communication and evaluation
to assess the budgetary Process of apparel industry. The study used Return on Assets to evaluate
the performance of apparel industry in Sri Lanka. From the data extracted from the financial
statements, the researchers established that the budgetary process of firms a significant relationship
with the firm’s performance. The researcher further concluded that apparel companies maintain an
effective budgetary process which improves their performance levels Effect of the budgetary
process on the performance of small and medium companies Mulani, Chi and Yong (2013)
examined the effects of the budgetary process on the performance of small and medium companies
in India. The researcher adopted an exploratory study. The study used a sample of 268 Small and
Medium companies selected from three districts of Mumbai, Pune and Solapur. The study also
employed a questionnaire. The researchers established that the budgeting process effects the

27
performance of the company positively. The study also found that that performance of Small and
Medium Firms in India is affected by the characteristics of the budget goals. The researchers also
found that employee motivation to participate and also achieve budgeting objectives is also
improved by tight but achievable firm goals which also improve the performance of Small and
medium companies in India. It will also be established that formal and tight budgetary process
control mechanism increases the performance of Small and medium firms in India

2.4 The Research Gap

It is thus glaring from the literature review that budgeting and financial performance are
important part of any institution’s credibility. Therefore, every institution should take keen interest
in trying to see that they coordinate the budgeting with its financial performance and this will
contribute to its sound financial sustainability. However, from all the literature reviewed
(Likalama, 2017; Isaboke & Kwasira, 2016; Obi, 2015; Siyanbula, 2013; Weygandt et al, 2012),
there is no or limited studies done within South Sudan on the two variables of budget allocation
and financial performance. And the gap that was found during this study specifically by the
researcher is contextual gap because the above studies are not conducted before in Star group of
companies, Hargeisa, Somaliland (director of SGOC; Abdirahman Abdullahi, 2022) when we
went to SGOC and got some information about it.

28
 CHAPTER THREE

RESEARCH METHODOLOGY
3.0 Introduction
This chapter presents research methodologies that used in this study. The sections of the
chapter include the research design, research approach, research population, sample size, sampling
frame, sample procedures, sources of data collection, sample technique, validity and reliability,
date analysis, ethical considerations and limitations of the study.

3.1 Research Design

Research design refers to the general plan that used in order to obtain answers to the questions
posed by the research and also how to tackle the difficulties that may arise (Polit & Beck, 2003).
This study is a correlation and cross-sectional research design in order to describe how budgeting
process affects the performance of Star group of companies in Somaliland Descriptive research
design is suitable since it allows generalization of sample findings to the entire population of the
study. To obtain information that describes the state of the performance of the star group of
companies. Descriptive research design is very useful in identifying research variables and the
hypothetical constructs that were used to test the theories on which the study is anchored.
According to Babbie (2002), descriptive research design involves gathering data that describes an
event, organizing the data, tabulating it and portraying it. Cooper and Schindler (2000) argue that
descriptive research design is very effective for discovering and measuring the cause and effect
relationships among variables of the study.

3.2 Research Approach

According to Creswell (2014) research approach are plan and procedures for research that span
the steps from broad assumptions to detailed methods of collecting data, analyzing and
interpretation. This research will use quantitative and qualitative approach. quantitative research
is based on the measurement of the quantity. Since there are numerical data like percentage, ranges,
tables and figures.

3.3 Research population

According to Mugenda, (2005) the research population is a complete set of individual, cases
or objects with the same common characteristics to which the researcher wants to generalize the

29
results of the study. The research population is estimated 60 and the target population of study was
40 of employees In Star group of companies Hargeisa, Somaliland. These was the number of
respondents of the study. According to inclusion and exclusion criteria we selected specific
population, including top managers and middle managers that have full information about the
company also including some employees that we are trusting them and trusting their information.
We are excluded lower employees and staffs that do not know more about the company and its
policies of managing budget and allocation, most of exclusion respondents are uneducated, while
inclusion respondents are educated people.

3.3.1 Sample Size

According to Amedahe (2004), sampling is the process of selecting a portion of the population
to represent the entire population in the study. According to Sarantakos, (2005) a sample consists
of a carefully selected unit of the population for a particular study. The target populations are
different and include both managers and employees. The sample size of this study will be drift
from the whole population using According Slovenes formula.

𝐍
𝒏=
𝟏+𝐍(𝐞)𝟐

Where:

𝒏 = sample size
𝐍 = target population
e = 0.05 level of significance

Therefore

40
𝒏=
𝟏+40(0.05)𝟐

= 36

30
3.3.2 Sampling Frame

Table 3.1: Target population and sample frame

No Categories Target Population Sample Size

1 Chief of finance 13 11
2 Logistics and procurement 6 5
3 Accountants & Head cashier 8 7
4 Star aviation International 5 5
5 Star Hotel and restaurant 3 3
6 Star petroleum 5 5
Total 40 36

3.3.3 Sampling Procedure

Sampling procedure in this study was purposive sampling. Purposive sample was especially
exemplified through the key informant technique (Bernard 2002 Garcia 2006, Gustad et al. 2004,
Jarvis et al. 2004, Lyon & Hardesty 2005), where in one or a few individuals were solicited to act
as guides to a culture. Purposive sampling had been used through the years (Campbell 1955,
Godambe 1982) and is currently actively employed in ethnobotany (Lewis & Sheppard 2006,
McDonald et al. 2003, McFoy 2004, Neupane & Thapa 2001, Neupane et al. 2002, Orozco &
Lentz 2005). Purposive sample can be applied to research in a number of ways (Table 1), such as
in preliminary studies where the researcher is still testing the feasibility of a proposed study
(Poggie 1972), sampling informants with a specific type of knowledge or skill (Li et al. 2006,
Prance 2004, Vargas & van Andel 2005), comparisons of cultural practices (Neupane et al. 2002),
case studies (Dolisca et al. 2007, Parlee & Berkes 2006), and when the population is too small for
a random sample (Tran & Perry 2003).

3.4 Data collection methods

Both primary and secondary data were used in conducting the research.

31
3.4.1 primary data
According to Douglas, (2015) primary data is one which is collected for the first time by the
researcher. The study will mainly focus on data collection by using both close-ended and open
questionnaire. The respondent will consist of the levels of management and operational staff of
Star group of companies.

3.4.2 Secondary data

According to Kothari (2004) defined secondary data as data that is already available, referring
to the data which have already been collected and analyzed by someone else.Polit and Kothari
(2004) explained that secondary research involves the use of data gathered in a previous study to
test new hypothesis or explore new relationships.

3.4.3 Data Collection Instruments

Data collection instruments that is set to use in this study were questionnaires and interviews.
The research instrument structured in conformity of the objectives of the study.

3.4.4 Interview
According to Scott and others, “an interview is a purposeful exchange of ideas, the answering
of questions and communication between two or more persons”. Bingham and others define an
interview as a ‘conversation with a purpose”.

3.4.5 Questionnaire
According to Saul McLeod, a questionnaire is a research instrument consisting of a series of
questions for the purpose of gathering information from respondents. Questionnaires can be
thought of as a kind of written interview. They can be carried out face to face, by telephone,
computer or post.

3.5 Validity and Reliability

3.5.1 Validity
those developed measures and that genuine scientific measurement is foremost in the minds of
those who seek valid outcomes from assessment. According to Salkind, According to Bond (2003)
comments that. validity is foremost on the mind of (2000) validity is the quality of the test doing
what is designed to do.

32
3.5.2 Reliability
According to Rosenthal & Rosnow, (1991) the researcher test and procedure is to administer
the test to a group of respondents and then administer retest method to measure the reliability of
the data. Test-retest reliability refers to the temporal stability of a test from one measurement
session to another. The same test to the same respondents at a later date. The correlation between
scores on the identical tests given at different times operationally defines its test retest reliability.

3.6 Data Analysis

The study used quantitative and qualitative method of data analysis which is aimed at
determining relationship between variable of research data.All data collected were organized and
checked before they are presented and analyzed to ensure completeness, accuracy, validity and
data analysis composed of arranged a variety of statistical procedures and tests on the data
percentage will being based on, generating frequency distribution tables, charts, figures, graphs
and percentages. The data will being grasped and analyzed by Statistical Package for Social
Science (SPSS) and descriptive analysis.

3.7 Ethical consideration

According to Creswell (2014) First and foremost, the researcher has an privacy to respondents
Address by unnecessarily not exposing the respondents’ and justice as it is insisted. The researcher
maintained confidentiality and privacy to respondents Address by unnecessarily not exposing the
respondents’ identity or names in order to fill the questionnaires. According to Marczyk, et al
(2005) codes of research ethics all emphasizing the obligation to respect the rights, needs, values,
and desires of the informant. Protection of human participation are established to ensure autonomy,
beneficence, identity or names in order to fill the questionnaires.

3.8 Limitations of the study

Gathering the information of this study, the problems that arise during the research are lack of
available of the main research center’s in Hargeisa Somaliland. Some areas of data collection
wouldn’t easy to get and the area of data collection is far apart, and even there’s some questions
that are literally Sensitive to response.

33
 CHAPTER FOUR

DATA PROCESSING AND ANALYSIS

4.0 Introduction

This chapter presents the analysis and interpretations of the study with respective to the
research objectives. The data was collected the employees of Star Group of Companies mainly
covers the profile of the respondents in terms of gender, age, education and their experience;
assessing the budget allocation policies to determine the business budgeting policies and how the
company allocates its budget; evaluating the level of financial performance of Star Group of
Companies and analysis on the company could promote its business growth via setting proper
business budgeting policies, preparation of sound budget allocation, follow of standardized
financial procedures to enhance the financial performance of the company.The chapter constitutes
four sections. In the first chapter covers the general information on the respondents; the second
chapter covers the analysis of the company’s business budgeting policies; whereas the third chapter
presents the determinants of the company’s financial performance.

4.1 Response Rate

The sample size of the study was 36 respondents. The questionnaires were distributed 36
randomly selected employees from the Star Group of Companies. All questionnaires were duly
filled with a response rate of 100% and returned accordingly.

4.2 Respondents profile

In this section, it is presented the profile of the study respondents in terms of their respective
age, gender, level of education and working experience with the company. To enable the
researchers to analyze and interpret, the respondents were asked through both closed-ended and
open-ended questions. All the responses in these sections were analyzed using descriptive statistics
such as frequencies and percentages as summarized in below tables.

34
Table 4.2.1 Gender of the Respondents

Frequency Percent Valid Percent Cumulative Percent

Valid Male 29 80.6 80.6 80.6
Female 7 19.4 19.4 100.0
Total 36 100.0 100.0

Source: The author, (2022)

As shown in table 4.2.1 above, 80.6% of the respondents were male whereas only 19.4% of
them were female. This indicates that majority of the employees that work for the Star Group of
Companies are male.

Table 4.2.2 Age of the Respondents

Frequency Percent Valid Percent Cumulative Percent

Valid 25 years and below 11 30.6 30.6 30.6
26-35 years 17 47.2 47.2 77.8
36-45 years 5 13.9 13.9 91.7
46 and above 3 8.3 8.3 100.0
Total 36 100.0 100.0

Source: The author, (2022)

As indicated in table 4.2.2. above, 47.2% of the respondents were between 26-35 years of age.
30.6% of the respondents were 25 years or younger, whereas 13.9% of the respondents were
between 36-45 years of old. Only 8.3% of the respondents reported that they were 46 years old
and above. In summary, 91.7% of the company’s workforce were 45 years old and below.

Table 4.2.3 Education Level of the Respondents

Frequency Percent Valid Percent Cumulative Percent

Valid High School 5 13.9 13.9 13.9
Certificate/Diploma 3 8.3 8.3 22.2
Degree 22 61.1 61.1 83.3
Master 6 16.7 16.7 100.0
Total 36 100.0 100.0

Source: The author, (2022)

35
 Table 4.2.3. above shows that 61.1% of the respondents holds degree from a university, 16.7%
were master holders, followed 13.9% who have high school qualification. The remaining 8.3% of
the respondents have certificate/diploma education. This means majority (77.7%) of the employees
of the company are university graduated with degree and master qualifications.

4.2.4 Employee work experience with the company

Frequency Percent Valid Percent Cumulative Percent

Valid 1 year and below 6 16.7 16.7 16.7
2-5 years 16 44.4 44.4 61.1
6-9 years 8 22.2 22.2 83.3
10 years and above 6 16.7 16.7 100.0
Total 36 100.0 100.0

Source: The author, (2022)

Table 4.2.4 depicts that 44.4% of the respondents were worked for the company between 2-5
years, whereas 22.2% of them reported that they have stayed with the company between 6-9 years.
16.7% of the respondents was indicated that they worked for the company only 1 year and below.
On the other hand, 16.7% have been with the company for 10 years and above. In summary, the
company encourages long term career relationship with its employees as 38.9% of its employees
have been working for the company for 6 and above years.

Table 4.2.5 Staff Category of the Respondents

Frequency Percent Valid Percent Cumulative Percent
Valid Junior Staff 13 36.1 36.1 36.1
Senior Staff 19 52.8 52.8 88.9
Management 4 11.1 11.1 100.0
Total 36 100.0 100.0

Source: The author, (2022)

As summary in above table 4.2.5, majority of the respondents in this study were senior staff
(52.8%), and 36.1% of them were junior staff. Whereas the remaining 11.1% of the respondents
were 11.1%. In summary, study randomly reached all levels of the staff who work for Star Group
of Companies and their responses can represent the whole company.

36
4.3 Likert Scale interpretation guide
Regarding the descriptive interpretations for the variables or dimensions used Likert Scale; the
measurement was used on the basis of the study: Strongly Agree, Agree, Disagree, and Strongly
Disagree. The interpretation guide (mean range) is categorized as follows:

Mean Rage Response Mode

3.26 – 4.00 Strongly Agree
2.51 – 3.25 Agree
1.76 – 2.5 Disagree
1.00 – 1.75 Strongly Disagree
Source: The author, (2022)

4.4 Analysis of Business Budgeting Policies

In this section, the business budgeting policies of Star Group of Companies were analyzed
using various descriptive statistical tools. The study assessed the budget allocation policies of Star
Group of Companies; particularly, how the company allocates its budget with respect to financial
performance. The findings of the questionnaire were analyzed using on a 4-point Likert Scale as
follows.

Table 4.4.1 Assessment of business budgeting policies

Statement N Mean Std.

Deviation
1 If the company adjusted plan and maintaining control over finance, it will fast 36 3.50 0.910
the performance
2 If the company have a detailed evaluation plan, completing a realistic budget 36 3.61 0.728
may be done
3 A good budget aids in coordination and communication between separate 36 3.08 1.052
activity units to ensure that all parts of the company are in balance with each
other and know how they fit in
4 Setting a clear policy and procedure on budget helps the company to come 36 3.17 1.028
over with challenges
5 If the company budget allocation is being monitored and reviewed, it 36 3.22 0.989
contributes to the performance
6 The budget must be driven through bottom-up participation 36 3.17 1.028

37
7 Budget systems and processes are included in disaster recovery and business 36 3.17 0.971
continuity arrangements
8 Budgeting allocation plays an essential role of the Star Group of Companies 36 3.44 0.877
performance
9 In reviewing the budget, it must be consult through experts 36 2.19 1.238
10 Performance reviews are made of specific functions or activities 36 3.72 0.701
Overall Mean 36 3.22 0.952

Source: The author, (2022)

As shown in table 4.3.1 above, majority of the respondents strongly agreed with that the
company’s performance was positively correlated with the proper budget plan and control with a
mean of 3.5 and that the achievement of realist budget depends on the availability of a detailed
evaluation plan (with a mean of 3.61).

Furthermore, the respondents agreed with that setting clear business budgeting policies and
procedures positively contributes to company coordination and communication efforts with a mean
agreement of 3.08; overcoming challenges with a mean agreement of 3.17; budget allocation that
contributes of company’s performance with a agreement of 3.22; encouraging bottom up budget
participation with a mean agreement of 3.17; with budget system that is inline with disaster
recovery and business continuity with a mean average of 3.17.

The respondents also strongly agreed (with a mean of 3.44) that budgeting plays an essential
role of the performance of the Star Group of Companies. On other hand, the respondents disagreed
that there is a need for consulting experts regarding budget review with a mean average of 2.19.
However, the majority of the respondents strongly agreed (with a mean of 3.72) that the company
to make performance review specific functions and activities that are routinely conducted within
the company.

In conclusion, the respondents agree with that proper business budgeting policies contributes
to the financial performance of the company with overall mean of 3.22 and standard deviation of
only 0.925.

38
4.5 Level of financial performance
In this section, the study looked into the level of financial performance of Star Group of
Companies in relation to business growth and managing challenges such as risks from debts and
cash flow constrains.

Table 4.5.1 Level of financial performance

Statement N Mean Std. Deviation

A good budget plan is a cornerstone of increasing sales of every successful 36 3.53 0.774
business
Return on assets could measure of how efficiently the company can use the 36 3.67 0.632
assets it owns to generate profits
A track record of steadily increasing revenue can be convincingly projected into 36 3.39 0.903
future, post-sale growth that will help of improving performance
Manageable debts, that you can comfortably pay back over an agreed period are 36 3.22 0.929
essential for the survival of the company
It is important to have a healthy cash flow that helps the company to maintain 36 2.83 0.971
positive relationships with both customers and suppliers
Using your company's budget as a communication tool allows you to vocalize 36 3.19 0.951
ideas and strategies to your employees
Budgets are a component of performance measurement for the companies 36 3.03 0.999
A well managed budget establishes a baseline against which management will 36 3.31 0.951
evaluate their performance
Cost awareness is critical for optimizing financial performance 36 2.56 1.081
A good internal control policy will further have a positive effect on the 36 3.53 0.909
shareholder's confidence on the financial reporting of the company
Overall Mean 36 3.23 0.911

Source: The author, (2022)

As illustrated figure 4.5.1 above, the respondents strongly agreed that a good budget plan and
efficient use of company’s own asset to are crucial for generating returns on sales with mean
agreements of 3.53 and 3.67 respectively.For the company to improve its performance, the
responds agreed that it is vital to have a steady track record of revenue and post-sale growth
projects (with a mean of 3.39); manage debts (with a mean of 3.22); maintain healthy cash flows
and positive relations with customer and suppliers (with a mean agreement of 2.83); use company’s
budget as communication tool, as a measurement of good performance, and as a performance

39
evaluation tool (with a means of 3.19, 3.03, and 3.31 respectively);In addition, the respondents
reported that a good cost awareness is critical for optimum financial performance with a mean
agreement of 3.53. They also strongly agreed (with a mean of 3.53) development of company’s
internal control will positively affect confidence of financial reporting by the shareholders. In
summary, it is possible to infer from the above analysis that the level of business performance can
be promoted if effectively engaged budget plan a monitoring & evaluation tool, efficient use of
company’s assets, debt management, healthy cash flow and strong internal control.

4.6 The relationship between the effect of budget allocation on business performance
The study used Pearson correlation to find out the relationship between the effect of budget
allocation on the business performance.

Table 4.6.1 The relationship between the effect of budget allocation on financial performance

Variable Sample Sample Sample Std r-value Sig. Null

Correlates Size Mean Deviation Hypothesis
Budget 36 3.22 0.952
Allocati0n
0.704 0.01 Reject
Business 36 3.23 0.911
Performance
Source: The author, (2022)

As illustrated in table 4.6.1 above, the Pearson correlation indicated a positive correlation of
0.704 and statistically tested at 0.01 level of significance. Since the p-value of 0.01 is less than
0.05 level of significant, hence, the null hypothesis is rejected and accept the alternative
hypothesis. Therefore, it is concluded the budget allocation of the Star Group of Companies is
positively correlated to the its business performance with a significant correlation of 0.704.

4.7 According to Descriptive Analysis

1) Kindly suggest ways that could raise company’s performance?

According to this question, the key informants were interviewed with different
departments\positions at star company. The majority of the respondents said, that it must improve
cash flow and use new marketing techniques “Human resource manager.”

40
2) What kind of budget do you prepare for the Star group of companies?

Operational budgeting

Financial budgeting

Cash flow budgeting

3) Does the company follow the procedure of the budget allocation?

According to indicate the prime respondents said, yes, several training that held to the stuff
increases employee’s performance that in return will increase the overall company performance.
“Human resource manager”

The respondents unanimously agreed that Star Group Companies employ operational-based
budgeting which is inline the vision and mission of the company. 94% of the respondents also
agreed that the company is strictly adheres policies and procedures enacted for the company. This
indicates the company is well managed and has the capacity to grow and develop further. With
regards to viable options for developing the company, 46% of the respondents suggested strong
marketing team, 24% said effective debt management and reducing of overhead costs, 22%
proposed good strategic plan, while the remaining 8% expressed customer care as the best way for
raising the company performance. In conclusion, it appears that the respondents were aware and
understands the work of their company and have in their heart ways in developing it while at the
same time they are developing their career in business sector.

41
 CHAPTER FIVE

FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

5.0 Introduction
This chapter presents a discussion on the research findings guided by the study objectives. It
encompasses three sections; discussion of the findings, conclusion and recommendation.

5.1 Summary of the Findings

1) To determine the democratic characteristics of the respondent in term of age, gender,
experience and educational level
2) To know the effect of budget allocation policies in Star group of companies Hargeisa,
Somaliland
3) To know the level of financial performance in Star group of companies
4) To establish the relationship between the effect of Business Budget Allocation policies and
financial performance

As shown in table 4.2.1 above, 80.6% of the respondents were male whereas only 19.4% of
them were female. This indicates that majority of the employees that work for the Star Group of
Companies are male. As indicated in table 4.2.2. above, 47.2% of the respondents were between
26-35 years of age. 30.6% of the respondents were 25 years or younger, whereas 13.9% of the
respondents were between 36-45 years of old. Only 8.3% of the respondents reported that they
were 46 years old and above. In summary, 91.7% of the company’s workforce. Table 4.2.3. above
shows that 61.1% of the respondents holds degree from a university, 16.7% were master holders,
followed 13.9% who have high school qualification. The remaining 8.3% of the respondents have
certificate/diploma education. This means majority (77.7%) of the employees of the company are
university graduated with degree and master qualifications. Table 4.2.4 depicts that 44.4% of the
respondents have been working for the company between 2-5 years, whereas 22.2% of them
reported that they have stayed with the company between 6-9 years. 16.7% of the respondents have
indicated that they have been working for the company only 1 year and below. On the other hand,
16.7% have been with the company for 10 years and above. In summary, the company encourages
long term career relationship with its employees as 38.9% of its employees have been working for

42
the company for 6 and above years. As summary in above table 4.2.5, majority of the respondents
in this study were senior staff (52.8%), and 36.1% of them were junior staff. Whereas the
remaining 11.1% of the respondents were 11.1%. In summary, study randomly reached all levels
of the staff who work for Star Group of Companies and their responses can represent the whole
company.As shown in table 4.3.1 above, majority of the respondents strongly agreed with that the
company’s performance is positively correlated with the proper budget plan and control with a
mean of 3.5 and that the achievement of realist budget depends on the availability of a detailed
evaluation plan (with a mean of 3.61). Furthermore, the respondents agreed with that setting clear
business budgeting policies and procedures positively contributes to company coordination and
communication efforts with a mean agreement of 3.08; overcoming challenges with a mean
agreement of 3.17; budget allocation that contributes of company’s performance with a agreement
of 3.22; encouraging bottom up budget participation with a mean agreement of 3.17; with budget
system that is in line with disaster recovery and business continuity with a mean average of 3.17.
The respondents also strongly agreed (with a mean of 3.44) that budgeting plays an essential role
of the performance of the Star Group of Companies. On other hand, the respondents disagreed that
there is a need for consulting experts regarding budget review with a mean average of 2.19.
However, the majority of the respondents strongly agreed (with a mean of 3.72) that the company
to make performance review specific functions and activities that are routinely conducted within
the company. In conclusion, the respondents agree with that proper business budgeting policies
contributes to the financial performance of the company with overall mean of 3.22 and standard
deviation of only 0.925.

As illustrated figure 4.5.1 above, the respondents strongly agreed that a good budget plan and
efficient use of company’s own asset to are crucial for generating returns on sales with mean
agreements of 3.53 and 3.67 respectively. For the company to improve its performance, the
responds agreed that it is vital to have a steady track record of revenue and post-sale growth
projects (with a mean of 3.39); manage debts (with a mean of 3.22); maintain healthy cash flows
and positive relations with customer and suppliers (with a mean agreement of 2.83); use company’s
budget as communication tool, as a measurement of good performance, and as a performance
evaluation tool (with a means of 3.19, 3.03, and 3.31 respectively);In addition, the respondents
reported that a good cost awareness is critical for optimum financial performance with a mean
agreement of 3.53. They also strongly agreed (with a mean of 3.53) development of company’s

43
internal control was positively affect confidence of financial reporting by the shareholders.In
summary, it is possible to infer from the above analysis that the level of business performance can
be promoted if effectively engaged budget plan a monitoring & evaluation tool, efficient use of
company’s assets, debt management, healthy cash flow and strong internal control.The study was
uncovered that there was strong significant correlation and positive relationship between budget
allocation and financial performance at Star group of companies Hargeisa, Somaliland (r=.704,
p<0.01). Therefore, the study and research Null hypothesis is rejected to the fact that budget
allocation has an effect on financial performance

44
5.2 Conclusions
The study established the effect of Business Budget Allocation on Financial performance, in
this section the researcher gives conclusion to the study findings related to the study objectives.
Many indicators under employee of Star group of companies was analyzed to reach the specific
objectives of the study. The general objective or overall aim of this study was to investigate the
effect of Business Budget Allocation on financial performance of Star group of companies in
Hargeisa, Somaliland. There was also was strong positive correlation between business budget
allocation and financial performance at star group of companies. From the research findings,
conclusions can be drawn based on the independent variables; budgeting theories, planning and
Controlling budget and their effect on the dependent variable financial performance.

An improvement in the management of budget allocation through the use of right policies
would likely result into improved financial performance. In addition to that the hypothesis of the
researcher was rejected and the theory which the study is based on is proven because majority of
the respondents disagreed that relationship between the effect of business budget allocation affects
the level of financial performance. The study used a descriptive research design. The study adopted
questionnaires which are administered to collect data. The study established that the budgeting
practices that are common among manufacturing Parastatals in the country include; budget
planning, budget participation and budgetary sophistication. The researcher also established that
budgeting process participation by employees enhanced the success in the actualization of the
budget plans. The study then recommended that there is a need for a participatory budgeting
process whereby all cadres of staff through their sectional heads are involved and their views are
incorporated in the budget allocation.

45
5.3 Recommendations
The budget is a central policy document to the all companies generally that shows how annual
and multi-annual objectives will be prioritized and achieved. Alongside other instruments for the
budgetary policy – such as laws, regulation and joint action with other actors in society the budget
aims to turn plans and aspirations into reality against this background, the objective of this
recommendation is to draw together the lessons of a decade and more of work so the
recommendation provides a concise overview of good practices across the full spectrum of budget
activity, specifying in particular ten principles of good budgetary processes, which give clear
guidance for designing, implementing and improving budget systems to meet the challenges of the
future. The overall intention is to provide a useful reference tool for policy-makers and
practitioners around the world, and help ensure that public resources are planned, managed and
used effectively to make a positive impact on the company’s performance and every company
that wants to be financially viable and remain competitive must perform accurate budget planning.
This is a fundamental business management tool that provides companies with an updated financial
overview that facilitates decision-making accurate budget planning also prepares companies to
face changes that may arise over time. 2020 taught us that everything can change from one moment
to the next and that in times of crisis, financial planning is the real lifeline that companies can rely
on.

Based on the findings of the study, the researcher made the following recommendations for
Star company to improve on their budget allocation; all employees should be motivated to make
them strive to achieve the set objectives, the process of budgetary allocation’s in Star group of
companies should be comprehensive covering not only department but even the sections of the
company in order to sufficiently avail funds and ensure that all the needs of the company are
catered for in the budget and also should also be realistic but not putting much emphasis on past
performance and budget formats and also reflect the current trends of the environment in all aspects
and the future, Star employees should be encouraged to increase their performance and the
company must establish strong auditing on budget allocation if there project was implemented or

46
monitoring the project that was done or not, furthermore, management should clearly define
occupational health and safety responsibilities for all levels of staff in the company and practice in
a good way, employees are the most valuable in the business and successful budgeting depends on
performance, productivity of its workers so the business must reinforce and increase skills of it’s
workers they are linkage to success of the business and for all this Star company must prepare
budget that should have a high degree of expertise and knowledgeable to increase the capacity of
performance and Star company must have competent personnel spearhead financial analysis is a
money saver, as it provides the firm with timely, useful insight about its operating activities. This
occupational excellence also helps investors avoid casino-finance scenarios, make proper bets and
adequately review the four primary financial statements to improve their financial performance.

47
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50
 APPENDICES

APPENDIX I: COVER LETTER

Dear respondent,

We are a student undertaking a Bachelor of Arts Degree in Accounting & Finance at

University of Hargeisa College of Business. As part of my studies, we are carrying out a
research on “effect of budget allocation policy on Financial performance. A case study
in Star group of companies” You have been chosen to participate in the named research
as a respondent.

Your answer will lead us in writing my research report. You are asked not to write
your name in responding to these questionnaires, and any information you give is purely
intended for academic purposes and will be handled with utmost confidentiality. Your
contribution, participation and co-operation will be highly appreciated. Thank you.

Yours Faithfully,

Bedra Omer Mohamed (researcher)

Ayan Abdirahman Abdullahi (researcher)

 APPENDIX II: QUESTIONNAIRE

FIRST SHEET: Section A: Demographic characteristics of respondents

Please, make tick (√) your answer in the box.

1. Gender

a) Male b) Female

2. Age

a) 25 years and below b) 26-35 years

c) 36-45 years d) 46-above

3. Qualifications

a) High school b) Certificate/Diploma

c) Degree d) Master

e) PhD f) Other Specify ……………

4. How long have been working in this organization?

a) 1 year and below b) 2-5 years

c) 6-9 years d) Above 10 years

5. Which staff category do you belong?

a) Junior staff b) Senior staff c) Management

Section B: IV Business Budgeting Policies

This section contains statements assessing the budget allocation policy at Star Group of
Companies. Please tick as appropriate in the boxes using a tick (√) the statement that describes
your agreement or disagreement with each of the statements.

Strongly Strongly
No Statement Agree Disagree
Agree Disagree
If the company adjusted plan and maintaining
01. control over finance, it will fast the
performance.
If the company have a detailed evaluation plan,
02.
completing a realistic budget may be done
A good budget aids in coordination and
communication between separate activity units
03. to ensure that all parts of the company are in
balance with each other and know how they fit
in.
Setting a clear policy and procedure on budget
04. helps the company to come over with
challenges.
If the company budget allocation is being
05. monitored and review it contributes the
performance.
The budget must be driven through bottom-up
06.
participation.
Budget systems and processes are included in
07. disaster recovery and business continuity
arrangements.
Budgeting allocation plays an essential role of
08.
the Star group of Companies performance
In reviewing the budget, it must be consult
09
through experts
Performance reviews are made of specific
10.
functions or activities.
SACTION C: DV DETERMINE LEVEL OF FINANCIAL PERFORMANCE

Strongly Strongly
No Statement Agree Disagree
Agree Disagree

A good budget plan is a cornerstone of

01.
increasing sales of every successful business.
Return on assets could measure of how
02. efficiently the company can use the assets it
owns to generate profits
A track record of steadily increasing revenue
can be convincingly projected into future, post-
03.
sale growth that will help of improving
performance
Manageable debts, that you can comfortably
04. pay back over an agreed period, are essential
for the survival of the company
It is important to have a healthy cash flow that
helps the company to maintain positive
05.
financial relationships with both customers and
suppliers.
Using your company’s budget as a
06. communication tool allows you to vocalize
ideas and strategies to your employees
Budgets are a component of performance
07.
measurement for the companies
A well-managed budget establishes a baseline
08. against which management will evaluate their
performance
Cost awareness is critical for optimizing
09.
financial performance
A good internal control policy will further have
a positive effect on the shareholders'
10.
confidence on the financial reporting of the
company
 SACTION D: INTERVIEW QUESTIONS

1. Kindly suggest ways that could raise company’s financial performance

a. ………………………………………………………………………………………………………

b. ………………………………………………………………………………………………………

c. ………………………………………………………………………………………………………

2. What kind of budget do you prepare for the Star group of companies?

………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………

3. Does the company follow the procedure of the budget allocation?

………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
 APPENDIX III: THESIS PROPOSAL BUDGET

NO Description Unit cost in dollar

1. Printing $15

2. Cafeteria $3

Total $18

APPENDIX IV: TIME FRAME

NO Activities Duration

1. Title preparation Feb 08

2. Chapter One Submission Feb 15
3. Chapter Two Submission Feb 29
4. Chapter Three Submission March 5th

5. Proposal Submission March 30th

6. Chapter four submission April 5th

7. Chapter five submission May 15th

8. First thesis draft submission Jun 29th

9. Final thesis submission July 05

 RESEARCHERS’ CURRICULUM VITAE

Bedra Omar Mohamed Aden

Tel: +252 (0)63 4861936, Email: [email protected]
Hargeisa, Somaliland
Profile
Honest, resourceful, responsible, solution-oriented and a qualified person whose
accomplishment reflect strong academics with demonstrated capacity for self-organization.

Qualifications
• Bachelor of business administration (accounting stream) at University of Hargeisa, 2022
• General secondary certificates of GCSE from at Nouradin Girls High School, 2018
• Diploma of English Language and computer science at SIDAM, 2013

Skills
• Excellent computer skills especially MS Office applications.
• Excellent in multi-tasking and time management
• Well-developed organizational, verbal and written communication skills.
• Outstanding interpersonal skills.
• Sense of responsibility and commitment to job.
• Strong skills in coordination and information management
• Flexible, adaptable and able to work under pressure.

Interests and Hobbies

• Reading Books, academic journals and articles.
• Surfing the internet and watching documentary films.

Languages

Language Speaking Understanding Writing

Somali Native Native Native
English Fluent Fluent Fluent
Arabic Fluent Fluent Fluent
 Ayaan Abdirahman Abdillahi Mohamed
Tel: +252 (0)63 4837415, Email: [email protected]
Hargeisa, Somaliland
Profile
Honest, resourceful, responsible, solution-oriented and a qualified person whose
accomplishment reflect strong academics with demonstrated capacity for self-organization.

Qualifications
• Bachelor of business administration (accounting stream) at University of Hargeisa, 2022
• General secondary certificates of GCSE from at Nouradin Girls High School, 2018
• Diploma of English Language and computer science at SIDAM, 2013

Skills
• Excellent computer skills especially MS Office applications.
• Excellent in multi-tasking and time management
• Well-developed organizational, verbal and written communication skills.
• Outstanding interpersonal skills.
• Sense of responsibility and commitment to job.
• Strong skills in coordination and information management
• Flexible, adaptable and able to work under pressure.

Interests and Hobbies

• Reading Books, academic journals and articles.
• Surfing the internet and watching documentary films.

Languages

Language Speaking Understanding Writing

Somali Native Native Native
English Fluent Fluent Fluent
Arabic Fluent Fluent Fluent