ABSTRACT

ABSTRACT

The study sought to determine the effect that budgeting process has on the financial performance of
SMEs in Coimbatore city . The primary data was collected from the SMEs owners and workers using
semi-structured questionnaires.

The study adopted a descriptive technique in analysing data. The study use techniques such as standard
deviations and mean. The study findings were presented in figures and tables.

In this study, 100 questionnaires were taken manually to the owners and to workers in SME firms in
Coimbatore . The response rate was 88%

The study recommends that SMEs that have not adopted budgeting process should do so in order to enjoy
the benefits that accrue. The study faced various challenges.

The top 100 SMEs considered their information as confidential and legally privileged. This is why the
respondents were slow in availing the information for fear of the information being used to create
negative public image and the competitors using the information to have a competitive edge over them.

The researcher had to use an introduction letter from the university to prove that the data was being
sought to fulfil academic requirements and that it would be would be treated with utmost confidentiality.

Further, the researcher didn’t have control over the accuracy of the data. However, it provided a good
opportunity for the researcher to seek clarification over any contentious issues.The researcher handled the
challenge by consulting the respondents on any issues were deemed not clear.
 CHAPTER I
INTRODUCTION
 CHAPTER I

INTRODUCTION

Organizations use budgets in setting priorities through assigning limited resources to those
events and activities that are most crucial to the organization’s operations, thus effective
management of the firm’s budget ensures effective allocation of resources (Goldstein,
2005). Among SMEs, budgeting is used as a planning tool (Flamholtz, 2014). There is a
high rate of failing by small and medium firms soon after they are established. Poor
budgeting process is given as one of the major reasons causing this phenomenon.
According to Warue and Wanjira (2013), since the budgets indicates the plan of action the
firm is taking, firm managers ought to maintain proper, updated and reviewed budgets lack
of which make their firms remain small, stagnant and even close down.

The theories on which this study is anchored include; Budget Incremental theory, the
Priority-Based theory of 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 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).
 1.1 OBJECTIVE OF THE STUDY

 To study of theoretical impact of budgeting on performance in small and medium enterprises

 To define and determine how to measure performance in SMEs

 To understand how budgeting affects on the performance in Coimbatore SMEs

 The Impact of the Budgeting Process on Performance of SMEs in Coimbatore city

 1.2 SCOPE OF THE STUDY

 This study will be of significant to parties such as; the government and other regulators,
the SMEs and other organizations interested in budgeting, and to researchers and
academicians.
 To the Small and Medium Firms and other organizations interested in budgeting, the
findings will shed light on the impact that the budgeting process has on firm
performance thus enable them to make budgetary decisions that enhance their
performance for survive and grow.

 To the government and other regulators of operations of the Small and Medium Firms in
Coimbatore this study will enlighten them on setting effective policies that would not
only control the operations of the firms in the sector but also enable the industry to grow
which in turn contribute to economic development.
 1.3 LIMITATION OF THE STUDY

 The sample size is limited to 100 respondent

 Non responsiveness from respondents due to their time constraints

 Since the sample size is small , the facts revealed in this study may not be exact find a
solutions

 Time frame for the study is limitedly three months

 1.4 ABOUT THE STUDY

To reveal the nature of budgeting at business organizational level, it would be best to begin with two
comparisons of budgeting, viz. with business planning; and with accounting and finance.

• Business Planning VS. Budgeting

Business planning, as described by several scholars in a similar way1 in the past, is, in general, the
conscious determination of courses of action to achieve preconceived objectives. It is based on what is
known about the present business environment of that future business. Rather than being a fixed
document, a business plan must be flexible enough to change to suit the current environment. It must be
constantly reassessed to adapt to changing market conditions such as new competition, price changes,
personnel availability, and so on . In contrast to business planning, budgeting underlines predicting and
quantifying the future in financial terms and predicting the future needs for finance.

 Budgeting, Accounting, and Finance

Budgeting and accounting have different meanings among managers, planners, and the personnel who use
these. Both are critical components that must interact to achieve the goals and objectives of an
organization. Accounting is a system used to record, classify, and summarize business operation

The role of keeping the financial information and on-going analysis necessary to provide management
and outside interests with the facts necessary for decision, is also considered .

Relying on certain standards and GAAP (General Accepted Accounting Principles), the accountant of a
company develops and reports data to measure firm performance; to assess its financial position, to
comply with and file reports needed by securities regulators; to file and pay taxes; and to prepare the
balance sheet, financial statements, and the cash flow of the company to recognize sales revenue,
expenses etc. when they are incurred.
 1.4.1 Performance Measurement in SMEs

Financial performance (e.g. profitability, growth) is used, in the vast majority of existing studies, to
measure business performance. However, the use of financial performance measures to evaluate
organizational effectiveness has been criticized for being too narrowly focused. In a pioneering work by
Hopwood in 1972, he explores the role of accounting data in performance evaluation and points to five
negative aspects of reliance on accounting performance measures (RAPM).

Firstly, not all the relevant dimensions of performance are included in an accounting report, for example
managerial activity. Secondly, an organization’s economic cost function is rarely known precisely and an
accounting system can only attempt to approximately represent its complexity.

Thirdly, the accounting data are primarily concerned with representing outcome, however, managerial
activity in an organization is concerned with the detailed process resulting in the final outcomes.

Fourthly, the main emphasis in accounting reports is on short-term performance, without more longterm
considerations. Finally, accounting reports can fail to perfectly satisfy the requirements for any single
purpose, since the reports are used to serve many purposes. Following Hopwood, a lot of researchers have
continued the work on RAPM. For instance, Chakravarthy (1986) states that accounting performance
measures are considered necessary, but not sufficient to define overall effectiveness
 1.4.2 Budgeting Process

A budget is collection of interrelated plans which define the film’s expected future
operations quantitatively .This implies that budgets establish firm performance objectives
for each of the firm’s activities in terms of costs and revenues. Budgeting is defined as a set
of activities that involve forecasting of the firm’s financial demands

Budgeting process is the procedure the firm plans to use to build its budget .A good
procedure should engage all that are responsible for adhering to the budget and also
implement the firm’s objectives when creating the budget.

A good budgeting process should also integrate the strategic planning initiatives and
anticipate for income before expenses.

Although budgeting process steps and timing may vary across organizations, common steps
include; assessing the variance between the budgeted and the actual amount ascertaining
and prioritizing business objectives and needs of the approaching period; projecting and
evaluating components such as, current trends in the business environment, incoming
revenues and the risks involved ensuring that the funding proposal align with the firms
strategic objectives and that approaches and procedures are put in place for plan execution
and monitoring then lastly wrapping and communicating the requests for funds to the board
responsible for reviewing and approving the budget .
 1.4.3 Financial Performance

Performance is the quality of results achieved from firm activities .Financial performance
refers to an entity’s financial condition in a given time .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.

Firms measure their financial performance for different reasons but the most common
include; to increase effectiveness and efficiency and to improve the ability of the firm to
deliver goods or services and retain customer satisfaction. Others measure performance for
continuous improvement. Assert that firms measure financial performance: to identifying
success, to identify if and when customer needs are met, to better understand processes and
bottlenecks, to identify waste, to detect problems and improvement opportunities. Different
firms use different parameters to measure their financial performance. Most firms use;
return on investment, ROA and the ROE because these results can be easily calculated.

This study involve the measurement of the financial performance of the top 100 small and
medium firms in relation to budgeting process. The study employ parameters such as;
Return on Investment (ROI), Market share growth, Total cost reduction and Sale growth.
 1.4.4 ABOUT INDIAN SMES

SME sector of India is considered as the backbone of economy contributing to 45% of the industrial
output, 40% of India’s exports, employing 60 million people, create 1.3 million jobs every year and
produce more than 8000 quality products for the Indian and international markets.

With approximately 30 million SMEs in India, 12 million people expected to join the workforce in next 3
years and the sector growing at a rate of 8% per year, Government of India is taking different measures so
as to increase their competitiveness in the international market.

There are several factors that have contributed towards the growth of Indian SMEs. Few of these include;
funding of SMEs by local and foreign investors, the new technology that is used in the market is assisting
SMEs add considerable value to their business, various trade directories and trade portals help facilitate
trade between buyer and supplier and thus reducing the barrier to trade

With this huge potential, backed up by strong government support Indian SMEs continue to post their
growth stories.

Despite of this strong growth, there is huge potential amongst Indian SMEs that still remains untapped.

Once this untapped potential becomes the source for growth of these units, there would be no stopping to
India posting a GDP higher than that of US and China and becoming the world’s economic powerhouse.
 1.4.5 PROBLEMS OF SMES IN INDIA

 Scarcity of Resources. One of the most important challenge faced by SMEs in India is Scarcity of

Resources such as Raw material and labor.

 Lack of FDI's

 Lack of Finance

 Lack of Technology

 Bad Economic Environment

 Lack of Marketing Assistance.

 1.4.5 SME CONTRIBUTE TO GDP

In emerging economies, SMEs contribute up to 45% of total employment and 33% of GDP. When
taking the contribution of informal businesses into account, SMEs contribute to more than half of
employment and GDP in most countries irrespective of income levels

SMES LOANS IN INDIA

Types of SME Loans in India. In India, both banks and non-banking financial companies (NBFCs)
provide different types of loan products to the small and medium enterprises (SME). Some of
these loan products are collateral-free, whereas others require the borrower to pledge his personal or
business assets as collateral

SMES IMPORTANTS

The SMEs are becoming more and more present in the countries' economies. They play a significant role
in national economy by providing various goods and services, creating job opportunities, developing
regional economies and communities, helping the competition in the market and offering innovation.

ROLE OF SMES

A subject matter expert (SME) provides the knowledge and expertise in a specific subject for a project.
The SME ensures that the content is accurate. Learn more about subject matter experts and test your
knowledge with quiz questions.
 1.4.6 Challenges and opportunities for Indian SMEs

 Inadequate access and marketing platform

 Lack of access to new technology

 Lack of required credit

 Cumbersome regulatory practices

 Leveraging the e-commerce trend

 Adoption of technology

 Taking advantage of Government schemes

 Abundance of Fin tech firms

 1.5 Manufacturing Enterprises

Manufacturing Enterprises are the enterprises engaged in the manufacture or production of goods

pertaining to any industry specified in the first schedule to the Industries (Development and Regulation)
Act, 1951 or employing plant and machinery in the process of value addition to the final product having a
distinct name or character or use.

The Manufacturing Enterprise are defined in terms of investment in Plant & Machinery.

Manufacturing Sector

Enterprises Investment in plant machinery

Micro Enterprises Does not exceed 25 lakh rupees

Small Enterprises More than 25 lakh rupees but does not exceed 5 crore rupees

Medium Enterprises More than 5 crore rupees but does not exceed 10 crore rupees
 1.5.1 Service Enterprises

Service Enterprises  are the enterprises engaged in providing or rendering of services and are defined in
terms of investment in equipment.

The limit for investment in plant and machinery / equipment for manufacturing / service enterprises, as
notified on 29-09-2006 are as under

Service Sector

Enterprises Investment in equipments

Micro Enterprises Does not exceed 10 lakh rupees:

Small Enterprises More than10 lakh rupees but does not exceed 2 crore rupees

Medium Enterprises More than 2 crore rupees but does not exceed 5 core rupees
 1.6 SWOT ANALIYIS OF SMES IN INDIA

Swot Analysis

Strengths Weakness

Commitment and focus in pursuit of vision Creative and sustainable thinking

Hard work and perseverance Learning through literature

Self-awareness
Networking Not well prepared on planning and
management

Opportunities Threats

Learning through experience Dealing and coping with uncertainty

Establish a good relationship (business and non-business Taking risks without calculation
relation

Communication/negotiation Not well on team work

 CHAPTER - II

REVIEW OF LITERATURE
 CHAPTER II

REVIEW OF LITERATURE

MSMEs are the engines of economic growth in the country. We need to develop strategies for sustainable
growth. The hurdles faced by the MSMEs are in terms of human resource management, working capital,
achieving sustainable growth, awareness and adoption of new technologies etc. This sector needs to
address many issues to be competitive in the global market.

Strengthening this sector to meet global competition would mean empowering the entire spectrum of
MSMEs, including those in the informal sector and not just export-oriented units. There is no doubt that
critical institutional mechanism is needed which provides support, mentoring, information and market
intelligence, training opportunities and a technology dissemination system with a countrywide network
that reaches out to all enterprises. Institutional setup to reach out to MSMEs in addressing such challenges
does exist even in countries like U.S.A.

In fact, there are about 1000 small business development centers that provide such support. But during the
literature review it was found out that the support systems efficacy, effectiveness and efficiency varies
from one country to the other, depending upon many factors such as culture, stage of economic
development, level of competition etc.

Vinayak, Shankarrao Bhoyar (1984) states that programme of co-operative industrial estates coupled
with co-operatives in other related fields is a powerful instrument, which possesses the capacity to
transform the backward areas into advanced ones. The task force on small-scale industries 9 (1984) found
that available subsidies and concessions are not distributed to eligible units at the right time. Such
assistance announced by the government is badly delayed for several reasons such as delay in issuing
detailed orders, inadequacy ofbudget provisions etc.
Chita and Lied Holm (1985) in a comprehensive study of SSI in Sierra Loeone provide a new insight
into the role of SSI in providing production, employment and earning opportunities. Besides giving an
overview of the role ofthe rural and urban industry in Sierra Leone, the determinants ofthe demand for
and supply of SSI products are examined.

The report ofthe sub group on small-scale industries for the Seventh Plan11 (1985) had found that the
efforts ofthe government have not met with the same degree ofsuccess in different parts ofthe country nor
have they removed the basic weaknesses ofthe small-scale sector. Ashok Kumar Singh12(1985) in his
thesis made an effort to study the incentives and assistance provided by the government and the
infrastructure facilities available in Bihar.

Tarun and Devandra Thanar 1986) reveal that the fundamental problem of industrial development in
India is the problem of transplanting and acclimatizing the fruits of technology so as to raise the whole
level of productivity. Sandesara14 (1988) made a study of assistance programmes for small-scale
industries.

Tambunan Tulus (1991) examines the role of small-scale industries in economic- development
ofIndonesia. This survey at the macro - level leads us to a much less pessimistic view of the performance
of SSI units in Indonesia though imperfections in comparison with medium and large-scale industries do
exist. It also gives attention to a critical question of appropriate policies needed to support this sector.

Steel William and Webster Leila (1991) investigates the hypothesis that small enteiprises play an
important and dynamic role in the structural adjustment process and in Africa’s industrial development. It
discuses the role of small enterprises in the industrial development and introduces the adjustment context,
the evolution of large and small-scale industry in Ghana, and the economic recovery program and its
impact.

Suresh Chandra Jain (1973) in his study emphasizes the need for greater co-ordination of financial
institutions and non-fmancial institution and agencies engaged in the promotion ofsmall-scale industries.
Pritam Singh51 (1976) in his study argues that some incentives, for example capital subsidy schemes of
the central and state government based on capital cost of fixed assets are not favorable to labor intensive
units. It could be related to the number of persons employed in the units.
Rajan and Petersen (2003) did the study on relationship between banking market competition and credit
availability. Competitive banking market can weaken relationship building by depriving banks ofthe
incentive to invest in soft information. Therefore, less competitive markets may be associated with more
credit availability. Basant, Das, Morris, Ramchandran and

Kosly (2004) argue that there are strong structural underpinnings to the inadequate flow of funds to the
SME sector.

Narayanan (1964) in his thesis discusses the financial problems faced by the industries in general and
recommends the setting up of an industrial development bank at the state level for mitigating the
problems.

Indeijith Singh & Gupta (1997) state that the expansion of the bank credit is not only desirable but also
essential for the economic development of Jammu and Kashmir.

Commercial banks have to take up this task of credit expansion on a challenging basis and should exploit
the tremendous potentiality by establishing personal contact with small industrialists.
 CHAPTER – III

RESEARCH METHODOLOGY
 CHAPTER – III

RESEARCH DESIGN AND METHODOLOGY

Research methodology deals with , the procedure adopted to carry out the study

According to Green and Tull , “A Research Design is the specification of methods and
procedures acquiring the information needed . It is the overall operations pattern or
framework of the project that stipulates which information is to be collected from
which sources by what procedures”.

Type of Research

Descriptive Research:

Descriptive research includes surveys and fact finding, the major purpose of the
research is description of the state of affairs as it exists at present .The researcher has
no control over the variables. For this study, descriptive research is been carried out.

Data collection :

The task of data collection begins after the research problem has been defined and
research design has been chalked out.

Type of Data :

 Primary data
 Secondary data

Primary data :

Primary data are collected fresh and for the first time and thus happens to be original in
character. The data is collected for the first time through fields survey. Such data are
collected with specified set of objectives to assess the current status of the variable
studied. Primary data used for this project is collected through questionnaire.
Secondary data :

Secondary data are those which have already been collected by someone else and
which have already passed through statistical process. This study makes extensive use
of secondary data. References for this survey were collected from websites and books.

Sampling :

Selection of some part of an aggregate or totality on the basis of which judgment or

inference about the aggregate or totality is made.

Sampling plan:

This is the stage where the planning is done about the sample unit , sample size and
sampling procedure

Sample unit:

Sample unit is the Small business proprietor of Coimbatore city

Sampling Procedure:

Convenience sampling is the sampling procedure used in this survey. This refers to
selecting a sample study based on the convenience. The researcher may make use of
any convenient base to select the required number of samples. This procedure is one
type of non-probability sampling technique
Sample Size:

The sample size is 100 which includes most frequent SMES proprietor around
Coimbatore city.

Statistical tools:

By statistics , we mean aggregate of facts to market extend by multiplicity of cause

,numerically expressed enumerated or established according to reasonable standards of
accuracy , collected in a systematic manner for a predetermined and place in relation to
each other.

In study , the percentage analysis , pie chart , bar diagram , chi-squre test , weighted
average are being used as statistical tools.

Percentage method:

In this, the portion of an individual observation in a distribution is described. The most

convention for describing the portion of an individual score in distribution of score is
the percentage method.

Percentage N = 100 x ( Cumulative fi / n )

Weighted Mean:

The weighted mean enables us to calculate an average that takes into account the
importance of each value to the overall total. The term ‘weight’ stsnds for the relative
importance of the different items.

XW = ∑ W x / ∑ W

XW = Symbol for the weighted mean

W = Weighted assigned to each observation

∑WX= Sum of the weight of each element times that element

∑W = Sum of all the weights

Chi – Square Test:

Chi – square test is applied in statistics to test the goodness of fit to verify the
distribution of observed data with assumed theoretical distribution. There fore, it is a
measure to study whether two characters are dependent or independent.

Assumptions:

The two sets of data must be based on same sample size

There must be two observed sets of data or expected set of data in rows and columns

Each cell in the data contains an observed or expected count five or larger.

X = ∑ ( O – E ) ^2/E
Application of chi – square test

To test the Goodness of fit

If the calculated value is less than the tabulated value at a certain level of significance ,
the fit is considered to be good and hence the hypothesis is accepted. But when the
calculated value is greater than the tabulated value then it is not a good fit.

Test of Independence of two Attributes

The test enables to explain whether two attributes are associated or not. In this null
hypothesis means the two attributes are not associated.
 CHAPTER – V
FINDINGS AND SUGGESTIONS
 CHAPTER – V

This chapter shows the summary, conclusion and recommendations of the

study. The study objective was to determine the effect of budgeting process on
the financial performance of top 100 small and medium firms in Coimbatore .
The chapter also show the recommendations for policy and practice as well as
suggestions for further research.

5.1 FINDINGS

 The study sought to determine how the budgeting process affects the
financial performance of the SME firms in Coimbatore
 The study employed descriptive techniques such as standard deviations
and means to analyze data.
 The findings were presented in figures and tables. In order to establish
the relationship between budgeting processes (Budget Planning, Budget
Control, Budget Coordination, Budget Communication and Budgetary
Evaluation Process) and financial performance of SMEs
 5.2 RECOMMENDATIONS

 The researcher established that budgeting processes (Budget Planning,

Budget Control, Budget Coordination, Budget Communication and
Budgetary Evaluation Process) has a positive effect which is significant to
the financial performance of the SME firms in Coimbatore.

 The researcher recommends that SMEs that have not adopted budgeting
process should do so in order to enjoy the benefits that accrue.

 The study found out those budgeting processes only accounts for 48.8% of the top
100 SME firms financial performance.

 The management of these firms are therefore being advised to stay alert and identify
the other factors that affect their financial performance as this will enable them to
identify new threats and opportunities in the ever dynamic business environment.
 5.3 CONCLUSION

In regard to the effect of budget planning on the financial performance of SME firms in
Coimbatore , the researcher concludes that budget planning has a positive effect that is
statistically significant to the financial performance of the SME firms in coimbatore.

Concerning the effect of budget control on the financial performance of the SME firms in
coimbatore, the researcher established that budget control has a positive effect which is
statistically significant to the financial performance of the SME firms in Coimbatore.
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ANNEXURE
 RESEARCH QUESTIONNAIRE

1. Gender:

Male ( ) Female ( )

2. Your age bracket

20-25 years ( ) 26-30 years ( ) 31-35 years ( ) 36-40years( )

Above 40 years ( )

3. How long have you been working with the organization?

1-5 years ( ) 6-10 years ( ) 11-15 years ( ) 16-20 years ( ) above 20 years ( )

4. Does your organization have a well structured budgeting process?

Yes ( ) No ( )

To what extent has your organization practiced the following budgeting processes? Tick
as appropriate using the following Likert scale of 1-5 where: 1= No Extent; 2= Little
Extent; 3= Moderate Extent; 4= Great Extent; 5=Very Great Extent.

Budgeting Process Respondents Ratings

A Budget Planning

Line managers budget for their individual departments which are

5 then combined to form the master budget (1) (2) (3) (4) (5)

The top management communicate the budget plans to those

6 preparing the budget plan (1) (2) (3) (4) (5)

Past data is used as a starting point to develop budget plans (1) (2) (3) (4) (5)
7
The budget plan specify the allowances and variance that should
(1) (2) (3) (4) (5)
be made to the various parameters
8
9 The budget plan stipulates the steps that should be taken in the
budgeting process (1) (2) (3) (4) (5)
B Budget Control
Budgeting control enables the managers to align the actual
10 results to the plan (1) (2) (3) (4) (5)

Budgeting control helps link the firm strategic planning and

11 operational control (1) (2) (3) (4) (5)

Budget operational control in the firm involves evaluating

the actual cost expenses against the plan and taking the (1) (2) (3) (4) (5)
12
corrective measures necessary

The budgets control starts from the lowest levels upwards

13 (1) (2) (3) (4) (5)

Budget control helps in understanding budget variance which

14 help in dismissing some aspects and concentrate on (1) (2) (3) (4) (5)

C Budget Coordination

The firm ensures budgeting process participation by

employees enhance the success of budgeting (1) (2) (3) (4) (5)
15

The organization emphasizes on exchanging and sharing

information among all levels of management (1) (2) (3) (4) (5)

16
The firm makes use of computers to assist in the coordination
17 (1) (2) (3) (4) (5)
of the budgeting process.