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«Journal of Finance & Economics Volume 1, Issue 3 (2013), 39-50 ISSN 2291-4951 E-ISSN 2291-496X Published by Science and Education Centre of North ...»

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Journal of Finance & Economics

Volume 1, Issue 3 (2013), 39-50

ISSN 2291-4951 E-ISSN 2291-496X

Published by Science and Education Centre of North America

Budget Target Setting and Effective Performance Measurement

in Nigerian Hospitality Industry

Dr. Okpanachi Joshua1* and Mohammed, Nma Ahmed1


Department of Economics and Management Sciences, Faculty of Arts and Social Sciences,

Nigerian Defence Academy, Kaduna, Nigeria

*Correspondence: Dr. Okpanachi Joshua, Department of Economics and Management Sciences,

Faculty of Arts and Social Sciences, Nigerian Defence Academy, Kaduna, Nigeria. Tel:

+2348023293973, +2348035557958; E-mail: okpasmg@yahoo.com. Mohammed, Nma Ahmed, Department of Economics and Management Sciences, Faculty of Arts and Social Sciences,

Nigerian Defence Academy, Kaduna, Nigeria. Tel: +2348065293366, +2348074333780; E-mail:


Abstract: This paper assessed roles budget target setting plays in effective performance measurement in Nigerian hotel industry. The survey research method was adopted for this study.

The study population consisted of all the managers, Accountants, Account and Finance, personnel and other hoteliers of hotels located in Kaduna state. The sample size consisted of fifty respondents drawn from ten selected hotels using convenient sampling method whereby only those hotels whose managements were willing to participate in the study were chosen. The primary method of data collection used for this study was the questionnaire administration. A total of fifty (50) sets of questionnaire were distributed to the respondents out of which only forty six (46) were completed and returned. The method of data analysis used was the simple percentages while the research hypotheses were tested using chi-square statistic. The paper found that the budget target setting procedure in the hotel industry in Kaduna state is not well articulated and focused whereas budget target setting is an effective tool for effective performance evaluation of individuals and units in the hospitality industry. It is, therefore, recommended that hotels management should make the necessary efforts to strengthen their budget formulation process viz- a- viz target setting to meet achievable set goals JEL Classifications: H83 Key words: budget, hospitality industry, management, performance measurement, target setting

1. Introduction Budget and Budgetary control constitute important and fundamental management and internal control systems. An enterprise could use for effective and efficient resource allocation and control.

Budgeting is not only about rolling out a financial plan containing cost and revenue targets to responsibility centers in an organization, but it is also a management tool for control, coordination, motivation, communication and efficiency management. Needles, Powers and Crosson (2002) refer to budgeting as the process of identifying, gathering, summarizing, and communicating financial and non-financial information about an organization’s future activities. They add that a budget is a plan of action that forecasts future transactions, activities, and events in financial and non-financial terms.

© Science and Education Centre of North America 39 Okpanachi Joshua & Nma Ahmed Mohammed Submitted on April 27, 2013 Budgetary process in an organization can be an ideal routine that reflects the interplay of strategic objective and resource constraints. Therefore, it is a tool for managerial decision making concerning both human and material resources allocation in an enterprise. Budgetary control entails a repetitive circle of planning and control which is normally followed by appropriate information about actual result to the management for comparing them against a budget and initiating a control action if necessary (Defranco, 1997). Budgets are central to the process of planning and control which are major activities of management in all organizations.

A budget is a means to an end and, not an end in itself because it is used to achieve an enterprise’s set objectives. It is a short term plan that depicts the focus of a long term objective of the organization. Performance measurement represents management and control systems that produce information to be shared with internal and external users. Furthermore, as it encompasses all aspects of the business management cycle, it constitutes a process for developing and deploying performance direction (Nanni Jr. et al., 1992).

Most profit-oriented business enterprises have profit maximization as their goal and this could only be realized when resources are properly planned and controlled with the required expertise and commitment. Absence of effective budgeting and budgetary control breeds the evils of disregard for procedures, loss of focus and shoddy coordination of activities and these are capable of crippling an organization. However, Lasky (1988) while emphasizing the indispensability of budgeting noted that, lack of budgeting is one of the factors that led to poor performance and bankruptcies.

Therefore, the dwindling fortunes of some organizations particularly in the hotel industry could be largely attributed to ineffective and inefficient short term planning and control system. This paper therefore, focused on budget target setting and effective performance measurement in the Nigerian hospitality industry with emphasis on Kaduna State. The following hypotheses have been formulated and tested in order to achieve the main objective of this paper.

H01: Budget target setting is not an effective tool for performance evaluation in the hotel industry in Kaduna Sate.

HA1: Budget target setting is an effective tool for performance evaluation in the hotel industry in Kaduna state.

The paper is divided into five sections. Section one is the introduction as presented above, section two is the literature review. Section three is on the research methodology. The fourth section is about discussion of results of the study and the fifth section is on conclusion and recommendations.

2. Literature Review The review of relevant literature for this study focused on the concept of budget, budgeting and budgetary control; essence of budgeting; budget administration and preparation and; budget targets and performance evaluation.

2.1 The Concept of Budget, Budgeting and Budgetary Control Budget is a future financial plan prepared in advance. Weetman (1999) and Adeniyi (2001) defined budget as a detailed plan quantified in monetary term or unit prepared usually showing planned income to be generated and / or expenditure to be incurred during that period and the capital to be employed to attain a given objective. This definition suggests that a budget is prepared in advance and based on the agreed objectives for that period of time together with the strategy planned to achieve those objectives.

In addition, a budget is a process of setting performance standard for future activities so as to exercise control (on cost, revenue, income and other financial or non-financial activities). They add

–  –  –

that a budget could be viewed as a means of obtaining accountability and control over the use of money or over all activities (Dandago & Tijjani 2005).

Budgeting broadly means the process of converting plans into budgets. The procedures used to develop a budget constitute a budgeting system. A budgetary system will be a success if the target or goals to be achieved are clearly articulated with proper assignment of authority and responsibility in addition to strong top management support.

Dandago and Tijjani (2005), view budgetary control as the establishment of quantitative and financial statement showing the effect of following a given policy objective during a specified period and then, comparing the actual results with the previous estimates. According to Hilton (1997), any control system has three basic parts: a predetermined or standard performance level, a measure of actual performance, and a comparison between stand and actual performance. Setting budgets provides target against which actual performance can be measured, thus providing a management control system. Effective control from the use of budgets only follows from the addition of the operating phase and the feedback phase supported by corrective action where necessary (Baggott, 1979).

Budgetary control therefore demands rather more than the establishment of budgets – It requires that the budgets be used. Significantly, budgetary control is a technique encompassing the entire process starting from the preparation of the budget through monitoring and reviewing culminating in corrective action. Its main purpose, therefore, is to enable management plan and carry out operation with efficiency and effectiveness in the use of resources.

2.2 Essence of Budgeting According to Hilton (1997) and Weetman (1999), budgeting system has five primary objectives.

They are planning, facilitation of communication and coordination, allocating resources, controlling profit and operation, and evaluating performance and providing incentive. There is no doubt that organizations with effective budgeting mechanisms in place derive a number of benefits from the process which consequently ensure effectiveness and efficiency in operations. Pandey (1999) enumerates some of the benefits of budgeting and budgetary control to an organization which


- It Forces Planning: Budgeting compels management to plan for the future. The budgeting process forces management to look ahead and become more effective and efficient in administering the business operation. It further instills into managers the habit of evaluating carefully, their problems and related variables before making any decision.

- Effective Coordination of Operation: It helps to coordinate, integrate and balance the efforts of various departments in the light of the overall objective of the organization. This results in goal congruence and harmony among the departments, sections or units.

- Effective Communication: It improves the quality of communication. Organizational objectives, budget goals, plan authority and responsibility and also procedures to implement plans are clearly written and communicated through budget to all the individuals (i.e.

various head of departments) in the organization. This will result to a better understanding amongst heads of departments and subordinates.

- Optimum Utilization of Resources: It helps to optimize the use of the organizations resources.

Productivity and Improvement:

- It increases morale of both superiors and subordinates alike by seeking their meaningful participation in the formulation of plans and policies.

This brings about alignment between individuals objectives and organizational goals and provide incentives to perform more efficiently and effectively.

–  –  –

- Efficiency: It also increases efficiency, permits management self-evaluation and indicates the progress in attaining the organizational goals.

2.3 Budget Administration and Preparation The organization and administration of a budget is a staff function. More so, the primary responsibility of the staff is to assist the line executive in preparing budget by providing data and technical expertise and coordinating the budget of various departments to form a master budget.

Budget Committee: A joint effort of all managers is needed to prepare a budget. All should participate in setting goals, developing plans and formulating policies. The administration of budget is delegated to a budget committee. The membership of a budget committee consists of executive from each department including sales and finance section. The major functions of a budget committee according to Henry (1969) include: to provide general guideline for preparing budget, offer technical advice, receive and review individual budget, suggest changes, reconcile budgeting activities, approve budget with or without revision and review budget report later on. The budget committee is management committee which brings together activities of the entire department in a coordinated way and also controls these activities in an effective manner.

Budget Director: The budget director is the one responsible for the overall function of the budget committee. He is responsible for drawing up detailed time table for the preparation of budget and making necessary adjustment and computation to consolidate individual budget into a master plan. Other function of the budget director, according to Dearden (1962), include: designing the necessary procedures and form, selling the idea of budgeting to all levels of management, educating the executive on the mechanism of budgeting, correcting, analyzing and coordinating data and evaluating and reporting actual performance. The budget director is usually the accountant and is expected to be unbiased and objective in his approach.

Budget Manual: The organization for budgeting and budgetary control should be documented in a budget manual. A budget manual is written set of instructions and relevant information that serves as a rule-book and reference for the implementation of a budget programme.

It tells what to do, how to do it, when to do it and who to do it. It is to express objectives, goal procedures, organizational structure and authority and responsibility in writing. These matters and many more are stated in budget manual.

The budget committee, budget director and the budget manual are the entire essential requirement for ensuring effective budget administration. A budget is normally prepared periodically. The normal time for the preparation of budget is annually but budget can be prepared quarterly, monthly or even weekly depending on the need and complexity of the organization.

Budget preparation process depends largely on the nature of the business for which the budget is to be prepared. In a large organization, due to the complex nature of the business activities, the budget process is more formalized. In the budget preparation, all functions and activities of the

organization are carefully interwoven. Scott (1970) enumerates budgeting procedure to include:

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