Impacts of budgeting on performance of small and medium enterprises in Vietnam

ific chapters as follows: Introduction Chapter 1– Research overview Chapter 2 –Theoretical basis, hypotheses and research model Chapter 3 –Methodology Chapter 4 –Research findings Chapter 5 – Discussion and recommendations 5 CHAPTER 1 RESEARCH OVERVIEW The thesis approached the research overview of domestic and international studies based on primary aspects of budget. Concurrently, the author carried out detailed analysis on the measurement of business performance and research methods in each specific section. 1.1. Research on impacts of budget goal clarity Research on impacts of budget goal clarity on firm performance and managerial performance is one of the most popular research directions. The diversity in the measurement of performance is the foundation which creates the differences between previous researches. In addition to studies on direct influence of budget goal clarity on performance (Kenis, 1979), there are also many studies focusing on indirect impacts through using slack budget (Yuen, 2004). Linear regression was widely used in previous studies to determine the correlation between budget goal clarity with performance. However, this method does not clearly identify the correlation between budget goal clarity and other latent variables that also have influence on performance. 1.2. Research on impacts of budget goal difficulty The relationship between degree of budget goal difficulty and performance was clearly emphasized in many previous studies. However, the inconsistency in research findings is the premise for future studies to inherit and develop. Budget goal difficulty could positively affect work motivation and increase performance (Qi (2010), Hirst (1990) hay Martin (2015)). However, it could also create working pressure and negatively affect performance Kenis (1979). Also, impacts of the expansion of measurement scales on performance are the basis of new developments for future studies (Martin (2015), Jamil (2015)). 1.3. Research on impacts of budgeting feedback Budgeting feedback is one of many aspects reflecting the controlling role of budget and its certain impacts on firm performance as stated in various previous studies. Nevertheless, previous researches have yet have the 6 uniformity in patterns of impacts, degree of influence and forms of influence on performance. Hirst and Lowy (1990) discovered the direct and negative impacts of this factor on budgeting objectives and its indirect and positive influence on degree of budget goal difficulty. Additionally, previous studies mainly used budgetary performance to measure performance instead of expanding on other scales. Moreover, the application of linear regression also limits results achieved from other above-mentioned studies. 1.4. Research on impacts of scope and frequency of budgeting According to Wijewardena and De Zoysa (2001, 2004), when the company has a higher frequency of using the budgeting and applying it to more departments, it will increase the company's business performance. In Vietnam, Pham Ngoc Toan (2010) also made recommendations on the relationship between the scope of budgeting and performance in the interaction with firm size. It can be seen that research on the effects of budget on business performance in terms of frequency and scope is suitable for SMEs. Concurrently, the differences in research context, measurement scale of business performance and methods of analysis create the diversity in results in previous studies. 1.5. Research on impacts of budget sophistication Research on budget sophistication on performance is relatively popular. Many previous studies exploited this relationship in capital budgeting such as Pike (1984, 1988, 1989), Farragher (2001), Verbeeten (2006). Concurrently, some authors conducted research on impacts of budget sophistication on performance such as Merchant (1981) and Qi (2010). However, differences in the research context, methods of calculation and analysis resulted in the inconsistency in research results. 1.6. Research on impacts of budget participation. Some previous studies by Kenis (1979), Brownell and Innes (1986) discovered that the higher degree of budget participation increases the firm performance. On the other hand, Young (1985) and Lu (2011) showed the opposite relationship with the existence of slack budget. Furthermore, the trend and degree of the relationship between budget participation and performance is 7 heavily affected by intermediary factors such as the importance of evaluation commitments Dunk (1993). Therefore, studies on impacts of budget participation and firm performance are still being carried out extensively. 1.7. The role of the enterprise's characteristics in the relationship between budget and performance. Characteristics of a company, typically the size and form of ownership also affect the relationship between budget and performance. Qi (2010) and Jamil (2015) emphasized the controlling role of a firm's characteristics in the research model studying impacts of budget on performance. In Vietnam, Pham Ngoc Toan (2002) also suggested that companies should select the methods to organize budget in accordance with the business scale. Therefore, an enterprise's characteristics in general and firm size in particular have always been an important control variable in research models related to the impacts of budget on SMEs' performance. 1.8. Research gaps and research directions implemented in the thesis 1.8.1. Research gaps Firstly, many studies on the relationship between budget and firm performance have been conducted in the world, especially in developed countries such as the US and European nations. Recently, some similar research have been carried out in China and India, but there has been no such studies on this topics implemented in Vietnam. Secondly, many previous studies focused heavily on exploiting the impacts of various aspects of budgeting on performance. However, in some aspects such as budget participation, these studies did not have the consistency in research approach as well as research findings. Some authors such as Kenis (1979) claimed that the deeper budget participation is the higher firm performance. Meanwhile, authors like Young (1985) argued that managers who participate too deeply in budgeting will increase the slack budget and thereby reduce the performance. Thirdly, previous studies usually used the data related managerial performance or results from the application of budgeting objectives and the financial aspect of business performance were deeply concentrated (Kotane, 2015). 8 Research overview also shows that there has not been a study that focuses simultaneously on impacts of budget on business performance in terms of financial, non-financial aspects and managerial performance. Fourthly, managerial performance is often used in studies on the impact of budgeting on business performance; However, there has not been a research can clarify the relationship between the two forms of performance. Finally, the use of multivariate regression analysis is the limitation of previous studies in examining the impacts of budget on performance with the participation of controlling, mediating and moderating variables in the research model. By using SEM, the thesis explains the controlling, moderating role of a company's characteristics, the mediating role of managerial performance in the relationship between budget and business performance. 1.8.2. Research directions implemented in the thesis Based on the research gaps identified from the process of reviewing related works on the relationship between budgets and business performance, the thesis will focus on these directions as follows (1) The thesis studies the impacts of budget on performance of SMEs in Vietnam as this is a completely new research context that has not been done in any previous studies. The differences in economic conditions and cultural environment in Vietnam will offer new discoveries for the thesis. (2) The study expands the measurement scale for business performance in both financial and non-financial aspects. Concurrently, the author clarifies the mediating role of managerial performance in the research model related to the impacts of budget on performance. (3) The thesis also inherits the approach by Qi (2010) when studying the controlling role of firm size in the research model. However, the research uses the classification according to the capital size instead of the revenue size like previous studies used to implement. (4) By using SEM, the thesis tests the moderating role of firm size in the relationship between each characteristic of budget and performance of SMEs in Vietnam. 9 CHAPTER 2 THEORETICAL BASIS, HYPOTHESES AND RESEARCH MODEL This chapter presents general theories related to budget and measurement of business performance. Additionally, the author also explains the relationship between and budget and performance based on three theories including agency theory, contingency theory, goal setting theory of motivation Locke (1990). Based on the combination of these fundamental theories and research overview presented in Chapter 1, the study also develops the research model and various research hypotheses. 2.1. Issues related to budget Budget, also known as the budget, is always considered a primary tool used in corporate governance. Nevertheless, the definition of budget is very diverse, with each one being different depending on the author's approach. Some popular approaches are functional approach (Argyris, 1953), systematic approach (Drury, 2000) or process approach (Horngren, 1977). In addition, in budget, a wide range of administrative functions is used including planning, activity coordination, and communication, and control, evaluation of results and creation of work motivation for employees. In studies on the impacts of budgeting on performance, the functions of budgeting are often demonstrated in a number of primary aspects which include budget goal clarity, budget goal difficulty, budgeting feedbacks, the sophistication of budgeting, budget participation, scope and frequency of budgeting. 2.2. Issues related to performance The diversity of studies on the influence of budget on performance not only originates from the approach to the specific aspects of budgeting but also from different methods of performance's measurement. In this section, the thesis presents some popular scales of performance used in previous studies: (1) Managerial performance, (2) Financial performance, (3) Non-financial performance and (4) budgetary performance. Managerial performance is an indicator that reflects the application of 10 managerial corporate governance (Mahoney, 1965). In fact, managerial performance is very popular in research related to budget in enterprises due to the similarity between the measurement indicators with basic functions of the budgeting. Financial performance is the company's business performance reflected through the firm's performance of financial indicators (Murphy et al., 1996). In the relationship between budget and performance, financial performance was also used in some recent studies such as Yusuf (2005), Qi (2010), Abdirisaq (2013). and Jamil (2015). However, this approach has not been extensively exploited. Regarding studies on the influence of budget on performance, non- financial performance is also widely used with a number of indicators such as job satisfaction, work positivity or work motivation Kenis (1979). However, the above indicators are not the most common ones used in non-financial performance. Therefore, the thesis will inherit and expand this scale in the correlation with budget. Budgetary performance is the measurement of performance based on the frequency in which managers achieve assigned budget indicators (Kenis, 1979). However, the budget implementation is not used in the thesis as its indicators do not reflect in detailed the business performance in the same way other results are presented in above sections. 2.3. Theories used in the thesis To explain the impacts of budget on activities by SMEs in Vietnam, the thesis applied three primary theories including Agency theory, Contingency theory and Motivation theory - Goal setting theory by Locke. Specifically, agency theory is the theoretical basis to explain the influencing of budget participation on performance. The motivation theory by Locke (1990) explains the effects of the characteristics of the budget goals and budget feedbacks on the business performance. Finally, the contingency theory is the foundation for the author to supplement the performance scales, evaluate the controlling role of firm size and the mediating role of the managerial performance in the research model. 11 2.4. Research hypotheses Based on the research overview, the theoretical basis of budgeting and performance and the theories, the author offers seven main research hypotheses, in which hypothesis H1, H2, H3, H4, H5, H6 are specified into sub-hypotheses corresponding to the managerial performance, financial and non-financial performance of SMEs in Vietnam. Table 2.3: Research hypotheses Hypotheses Contents Origin H1 Budget goal clarity positively affects the performance of SMEs in Vietnam Kenis (1979) H2 Budget goal difficulty positively affects the performance of SMEs in Vietnam Kenis (1979) H3 Budgeting feedbacks positively affects the performance of SMEs in Vietnam Kenis (1979) H4 The scope and frequency of budgeting positively affect the performance of SMEs in Vietnam Wijewardena and De Zoysa (2001) H5 The budget sophistication positively affects the performance of SMEs in Vietnam Merchant (1981) H6 Budget participation negatively affects the performance of SMEs in Vietnam Young (1985) and Lu (2011) H7 Budgeting indirectly affects the business performance of SMEs in Vietnam through managerial performance Mihaela (2010) Source: The author 2.5. Research model Based on research hypotheses summarized in Table 2.3, the author proposed the research model as follows: 12 Source: The author Diagram 2.3: Research model In which - BC (Budget goal Clarity): Clear budget objectives - BD (Budget goal Difficulty): Budget objectives' degree of difficulty - BF (Budgetary Feedback): Budgeting feedbacks - FB (Scope and Frequency of Budget): The scope and usage frequency of budgeting - BS (Budget Sophistication): Budgeting sophistication - PB (Participation Budget): Budget participation - MP (Managerial Performance): Managerial performance - FP (Financial Performance): Financial performance - NFP (Non-Financial Performance): Non-Financial performance - Groupquymo: Firm size Groupquymo BC BD BF FB BS PB FP MP NFP 13 CHAPTER 3 METHODOLOGY On the basis of research hypotheses and the research model proposed in Chapter 2, Chapter 3 will present in detail the research process and methodology. Specifically, the chapter includes Research Process, Qualitative Research and Quantitative Research. 3.1. Research process The research process can be divided into four primary stages including theoretical review, establishment of the draft scale, preliminary research and official research. Source: The author Diagram 3.1: Research process 3.2. Qualitative research The research methods used in the thesis is a combination of quantitative and qualitative research. Specifically, qualitative research was carried out the Research overview and theoretical basis Identify: Research scope, variables, research hypotheses and research model Draft scale and questionnaire Nghiên cứu định tính Qualitative research Preliminary quantification (n = 100) Cronbach's alpha Final scale and questionnaire Cronbach's alpha EFA, CFA Structural equation modeling (SEM) Structural equation modeling 14 stage of building the draft scale and questionnaire. The results of qualitative research are the premise for quantitative research in the last two stages which are preliminary research and official research. Specifically, qualitative research was implemented by the author with two phases containing (1) Evaluation of budget and its impacts on performance of SMEs in Vietnam, (2) Establishment of the draft scale and questionnaire. 3.3. Preliminary quantitative research Based on the results of qualitative research, preliminary quantitative research was conducted to assess the reliability of the draft scale system before proposing the official scale and questionnaire. The preliminary quantitative research was conducted from April 2019 to May 2019 with a temporary questionnaire for the sample of 122 directors and chief accountants in SMEs in Vietnam. There were 100 eligible questionnaires being included in the analysis of the scale's reliability using Cronbach's Alpha coefficient. 3.4. Official quantitative research 3.4.1. Sampling Based on the context of SMEs in Vietnam, the sampling was required to be based on specific regulations for this group of enterprises according to Decree No. 56/2009/ND-CP dated June 40, 2009 and Decree 49/2018/ND-CP. Specifically, the sampling method used by the author is convenient sampling through the Vietnam Association of Small and Medium Enterprises (VINASME), the Tax and Treasury Departments of the districts in Hanoi and Ho Chi Minh City. And to ensure the compliance with the analytical procedures, the minimum sample size for the official quantitative research was 220 observations. 3.4.2. Data processing After collecting, classifying and selecting eligible questionnaires, the author encoded, updated and processed the data using SPSS 25.0 software integrated with Amos 21.0 according to these following steps: (1) Descriptive statistics, (2) Evaluation of the reliability of the scale, (3) Exploratory factor analysis (EFA), (4) Confirmatory factor analysis (CFA) and (5) Testing of the model and the research hypotheses using Structural equation modeling (SEM) 15 In which, the scale of variables in the model was built on the basis of adjusted inheritance from previous studies. For example, after conducting the qualitative research, five indicators were omitted in the financial performance scale compared to the draft scale. Table 3.3: Draft scale system No Variables No of indicators Basis for the establishment of the scale 1 Budget goal clarity 3 Kenis (1979) 2 Budget goal difficulty 5 Kenis (1979) 3 The sophistication of budgeting 3 Qi (2010) 4 Budgeting feedbacks 3 Kenis (1979) 5 The scope and frequency of budgeting 4 Wijewardena and De Zoysa (2001) 6 Budget participation 6 Milani (1975) 7 Managerial performance 8 Mahoney (1963) 8 Financial performance 8 Wijewardena and Dezoysa (2001), Agbenyo (2018) 9 Non-financial performance 3 Kenis (1979), Fagbemi (2013), Kotane (2015) 10 Firm size 1 Author developed based on research by Qi (2010) Source: The author To facilitate the data synthesis, the variables were also encoded according to the abbreviated English version in the diagram 2.3 - Research model. 16 CHAPTER 4 RESEARCH FINDINGS Chapter 4 presents the research findings obtained from the research process and detailed descriptions of each stage and each research method. Specifically, the chapter consists of (1) Results of qualitative research in stage 1, (2) Results of qualitative research in stage 2, (3) Results of preliminary quantitative research and (4) Official quantitative research results. 4.1. Qualitative research results . Results of qualitative research in stage 1 showed that all surveyed subjects claimed that budget is an important management tool and it affects the business performance. Respondents also stated that primary aspects of budgeting outlined in the research model positively influence on SMEs' business performance with the exception of “Budget participation". Results of qualitative research in stage 2 were able to resolve problems occurring when converting the language from the scale in the original research as five indicators of financial performance were removed of financial results to simplify the questionnaire and limit the phenomenon of refusing to reply. 4.2. Quantitative research results Preliminary quantitative research results discovered that all the variables ensure the reliability of the scale except the observed index FB4 (the scope of using budget variance) which was excluded from the variable named "the scope and frequency of budgeting”. Official quantitative results were demonstrated with the following basic contents including descriptive statistics, evaluation of the reliability of the scale, exploratory factor analysis (EFA), confirmatory factor analysis (CFA) and testing of the model and the research hypotheses using structural equation modeling (SEM) Descriptive statistics The author sent out 812 questionnaires, collected 427 questionnaires and only 266 were used for the study, which equaled to a rate of 33%. Specifically, 64% of eligible responses came from micro-business managers 17 (capital size <10 billio n V N D) . D escriptiv e statistics disco v e red th at m icro firm s te nd to h av e a lo w er m ean of d ep end ent v ariables th an firm s w ith o v er V N D 10 billio n in capitals . T able 4 .2b : M ea n of th e v a riables cla ssified a cco rding to firm size G ro up of enterp rises w ith capital u nd er 10 billio n V N D FP M P N FP BC BS B D B F PB FB 2 ,959 3 ,574 3 ,324 3 ,600 3 ,929 3 ,912 3 ,553 3 ,456 3 ,512 G ro up of enterp rises w ith capital o v er 10 billio n V N D FP M P N FP BC BS B D B F PB FB 3 ,333 3 ,680 3 ,500 3 ,720 3 ,990 3 ,960 3 ,688 3 ,688 3 ,630 S o u rce: Th e a uth o r E valu atio n of th e scale 's reliability Th e results obtain ed fro m th e an aly sis of C ro nb ach 's A lph a co efficients w ere sim ilar to th e results of p relim in ary q u antitativ e research . Th e FB4 indicato r w as still ex clud ed fro m th e ind ep end ent v ariable n am ed Th e scop e and u sag e freq u en cy of b udg eting (FB) b ecau se th e total v ariable co rrelatio n co efficient w as o nly 0 .191 <0 .3 , w hich w as th e allo w ed m inim u m v alu e (N u n n ally and B u rn stein , 1994) . E xplo rato ry fa cto r a n alysis (EFA) Th e EFA p ro cess w as p erfo rm ed w ith th e m eth od of extracting th e facto r "P rin cip al A xis F acto ring " and th e rotatio n "P ro m a x " . Th e "P rin cip al A xis F acto ring " allo w s th e auth o r to extract th e m axim u m p ercentag e of v arian ce of th e initial ob serv ed v ariables co m p ared w ith oth er m eth od s (N g uy en D inh Th o , 2011) . Th e results of all tw o applicatio n s of EFA illu strated th at th e v ariables d o co n v erg e acco rding to nin e facto rs as stated in th e p rop o sed research m od el . Sp ecifically , PB5 of th e v ariable "B udg et p articip atio n " and M P8 of th e v ariable "M an ag erial p erfo rm an ce " w ere ex clud ed d u e to th e lo ad facto r b eing lo w er th an 0 ,5 . 18 C o nfirm ato ry fa cto r a n alysis (C FA) C FA w as u sed to ev alu ate th e suitability of th e critical m od el w ith collected d ata . Th e results sh o w ed th at th e m od el en su res th e d eg ree of suitability as w ell as th e reliability , th e co n v erg en ce v alu e and th e discrim in ant v alu e of th e scale . Th e C FA results also h elp th e th esis sp ecify th e ob serv ed v ariables rep resenting eac