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Budgetary Process and Organizational

Performance of Apparel Industry in Sri Lanka
ARTICLE AUGUST 2012

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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 3(4): 354-360
Scholarlink Research Institute Journals, 2012 (ISSN: 2141-7024)
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Journal
of Emerging Trends in Economics and Management Sciences (JETEMS) 3(4):354-360 (ISSN:2141-7024)

Budgetary Process and Organizational Performance of Apparel

Industry in Sri Lanka
1

L.M.D. Silva and 2Ariyarathna Jayamaha

1

University of Kelaniya, Sri Lanka.

Department of Accountancy, University of Kelaniya, Sri Lanka.
Corresponding Author: L.M.D. Silva
___________________________________________________________________________
2

Abstract
The budgetary process has been a part of management control system of the organization. This process
encourages managers to plan, consider the stakeholders involved, provides information for improved decision
making, increases and enhances communication and coordination among departments, and for evaluation. This
paper seeks to evaluate budgetary process of apparel industry in Sri Lanka (BPA) and see whether budgetary
process has significant impact on performance of such industry. The budgetary process of apparel industry was
assessed by using variables such as planning, coordination, control, communication and evaluation. The
performance of apparel industry in Sri Lanka was examined by using Return on Assets. Based on the data
extracted from apparel industrys financial statements, correlation coefficients and regression analysis showed
that budgetary process have significant associations with the organizational performance of apparel industry in
Sri Lanka. This confirms that efficient apparel companies maintain sound budgetary process which contributes
to higher levels of organizational performance.
_________________________________________________________________________________________
Keywords: budgetary process; organizational performance; apparel industry.
_________________________________________________________________________________________
INTRODUCTION
performance of the organization. Over time, several
Accounting is the process of identifying, measuring,
studies provide critical evaluations of different
accumulating, analyzing, preparation, interpreting
aspects of this contingency literature on budgeting
and communicating information that helps managers
and organizational performance (Omolehinwa, 1989;
fulfills organizational objectives (Horngren, Sundem
Abdulla, 1998; Hartmann & Moers, 1999; Raili,
and Stratton, 2001). An important component of the
2000; Otley, 2001; Welmilla, 2001;Hartmann &
accounting system is the management accounting
Moers, 2003; Hansen, Otley& Van der Stede,
system which makes information available to
2003;Gustafsson&Parsson, 2010; Caleb, 2011;
managers, assisting them in decisions such as
Collins; 2011). According to Hansen and Van der
planning, organizing, and control and coordinating
Stede (2004), there are four potential reasons for
activities within their authority. An important
budgeting in organizations, operational planning,
component of the management accounting system in
performance evaluation, communication of goals, and
organization is the budgeting system which is
strategy formation. The budget arises in different
essential part of above activities involve the
circumstances and that performance is associated
budgetary process (Seaman, Landry Jr, Williams,
with different budgeting characteristics.
2011).
LITERATURE REVIEW
Budget, a short term finance planning tool of
Apparel Industry
management, is used to focus attention on
Apparel industry becomes Sri Lankas largest export
companys finance and overall operations of an
industry since 1986(Dheerasena, 2009).In 1992 under
organization. Budget highlights potential problems
garment factory programme, the garment industry
and advantages early, allowing management to take
had become the largest foreign exchange earner in the
steps to avoid these problems or use the advantages
country overtaking the tea industry. Apparel industry
wisely a budget is a tool that helps managers in both
in Sri Lanka provides better contribution to the Sri
their planning and control. Budget can be used as a
Lanka economy (Central bank 2010). Central bank
benchmark as a control system, that allows managers
(2010) further reports that the GDP contribution of
to compare actual performance with estimated or
Apparel industry in Sri Lanka for 2009 is Rs. 376
desired performance. Hence, the budget widely used
million and 2010 is Rs. 395 million. The apparel
as a managerial technique tool in an organization
industry is identified as a buyer driven value chain
(Horngren, Sundem and Stratton, 2001). Many
that contains three types of lead firms: retailers,
researchers highlight that effective contribution of
marketers and branded manufacturers (Dias, 2009).
budgetary process such helps to improve the overall
The apparel industry of Sri Lanka which producing
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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 3(4):354-360 (ISSN:2141-7024)
high quality readymade garments and the main
exporters are USA and Europe. The apparel sector
generates nearly 45% of the countrys export
earnings. The sector provides direct employment to
over 350,000 people and extends its benefits to over a
million and keeps the rural economies alive (Chow
2011). Sri Lankan apparel industry is the major
export income earner and contributes to the live hood
for over 1.2 million people (Perera, 2009). The
growth of Sri Lankan garment industry as a
manufacturing sub-sector has been remarkable in
terms of its contribution to GDP, exports, foreign
exchange earnings and employment generation
(Thilakaratne, 2006).

2008, p. 9), budgeting is not a substitute for effective

decision making. The managers planning tool,
budgeting is also one of the most effective tools of
communication and integration. GFOA (1998, p. 4)
states that, The mission of the budget process is to
help decision makers make informed choices for the
provision of services and capital assets and to
promote stakeholder participation in the Decision
process.
According to Dugdale and Lyne 2010, budgets tend
to become more important for control, not for
planning. Conversely, budgets become less important
for control but more important for planning in a more
uncertain environment. In addition, budgeting has
been integrated with non-financial measures in
general and the balanced scorecard in particular. The
accounting system of the operation provides
information on what has happened in the past and
helps mangers to keep track of whether or not they
are meeting their current budgets. Budgets are
therefore an expectation of what a manager agrees is
achievable within the immediate future and are
mostly expressed in financial terms (The Institute of
working future, 2011, p.3-5).According to Marginson
and Sharma (2011), the budgetary practices and
procedures encountered may be unique to that
organization. They mention that insights into the
connections
and
interdependencies
between
budgeting and strategizing in day today activities
within an organization. It appears that many aspects
of the budgetary process, particularly budget
implementation and budgetary control in general,
may differ from accepted view as firms design
strategic objectives from budgetary information
whilst simultaneously engaging in budgeting
activities as strategies are developed. In these
circumstances budgets may be used as a reflection of
the performance of those responsible for specific
areas of the operation. The budget process must be
undertaken with the full cooperation of managers
who understand the budgeting process. Budgets
should produce figures that represent expected
performance under current operational conditions
(The Institute of Working Future, 2011, p.3-5).

The most Sri Lankan apparel industries feel

comfortable having their own system and the very
little data maintained. It is the problems that are
created due to unplanned buildings and system and
large amounts of labour, staff and equipment used
probably to duplicate or triplicate the same function
many times. There should be proper system for
distribution and faster purchasing patterns at the
lowest cost and fastest rotate times to fulfill orders
(Masakorala, 2010). Therefore, apparel industry in
Sri Lanka needs to have a better management control
systems to set of organizational activities to face the
global challenge and sustain the apparel industry in
Sri Lanka. Further, needs to decision making as well
as enhancing the efficient and effective use of the
organizational resources towards the achievement of
the organizational objectives as well as counties
objective.
Budgetary Process
Hilton, (1997cited in Abdullah, 1998, p.1) defines
budget 'as a detailed plan, expressed in quantitative
terms, that specifies how resources will be acquired
and used during a specified period of time'. The
budget is prepared for the primary purposes of
planning, facilitating communication, coordination,
allocating resources, control profits and operations,
evaluating performance and providing incentives.
According to Gustafsson and Parsson (2010), the
budget has in the past had a control function,
however today there are several objectives and
purposes of the budget and the purposes vary among
organizations. Budgeting in this regard is viewed as
enabling the different functions of management
control further, state that the budget represents their
numbers and their benchmarks against which their
performance is measured (Herath and Indrani, 2007).

Budgetary Process and Organization performance

Omolehinwa (1989) defined a budget as a plan of
dominant individuals in an organization expressed in
monetary terms and indicate how the available
resources may be utilized, to achieve whatever the
dominant individuals agreed to be the organizations
priorities. Abdullah (1998) mentions that Budgeting
processing interaction with superior has significant
relationship to performance goals of the cost centre
managers of the institute. According to Hoper and
Fisher (2003, p.4), Budgeting is not so much as a
financial plan but as the performance management
process that leads to and executes that plan. So
budget is entire performance management process.

The budget process itself that identifying and

understanding the motivational factors. Budget
process enhance individual performance to achieve
budget goals which granted by the organization
through organization planning process. Those goals
must be practical within the budget process (Otley,
1978).According to McBain (1999 cited in Akintoye,
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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 3(4):354-360 (ISSN:2141-7024)
This process is about agreeing upon and coordinating
targets, rewards, action plans, and resources for the
year ahead, and then measuring and Control
performance against that agreement.

organization. The following hypotheses are

formulated.
H1: There is a sound budgetary process in Sri Lankan
apparel Industry.
H2:There is a positive relationship between
budgetary
process
and
organizational
performance.

According to Cieslack and Kalling (2007), the

inability of rational annual budgetary control to new
management control system is required due to new
operating conditions for companies caused by the
pressure of global competition and constantly
changing environment. The rolling budget is allowing
assessment of the strategy and resource allocation,
coordination and communication learning and
strategy creation, performance evaluation and
motivation, mainly through reward systems based on
budgeting. The wider control framework embraces
informal controls and other formal controls.

METHODOLOGY
Five point Likert Scale is used to measure budgetary
process of the company. Evaluate budgetary process
by using descriptive statistical method (use mean
value of budgetary process as measurement
technique). In this study, ROA is used to measure the
performances of the company for past three years as a
performance indicator. Return on assets is a financial
ratio which allows the observer to make some
determination of the organizations financial
performance relative to the assets which are at the
firms disposal (Richard, Alan and Stwaart, 2004).

According to John and Ngoasong (2008), the

practices of integrating strategic management and
budgeting which enables it to be competitive and
increase organizational performance. Budget
facilitates the creating and sustaining of competitive
advantage in the following management functions:
forecasting and planning; communication and
coordination; motivational device; evaluation and
control; and decision making. Qi (2010) mentions
that the selected budgetary planning, budgetary
control,
budgetary sophistication,
budgetary
participation, budget goal clarity and budget goal
difficulty as variables are impact of the budgetary
process and organizational performance of SMEs in
China.
Drury (2004, p.170) states budgetary planning and
control are typically more complex in the business
firm. There should be five main functions for budget,
system of authorization, means of forecasting and
planning,
channel
of
communication
and
coordination, motivational device, and means of
performance evaluation and control, as well as of
providing a basis for decision making. Blumentritt
(2006) note the budgeting provides information on
funding and accountability. If apply properly, both
processes improve an organizations ability to create
and sustain superior performance. The budgeting and
strategic management might be put in practice
properly and has the best impact on firm
performance. Raili (2000) argues that budget related
behaviors of managers are very important for the
organizational performance. Therefore, by reviewing
above literature in this research were selected five
independent variables to measure the budgetary
process. Five independent variables are budgetary
planning, coordination, Control, communication and
evaluation to measure budgetary process of Sri
Lankan Apparel Industry. Therefore, a question arises
with respect to the identification whether the Sri
Lanka apparel industry follow sound budgetary
process and is there any impact of performance of the

Sample and Data

In this research 50 companies are selected based on
convenient judgment sampling method from
513companies in Sri Lankan apparel industry.
228managers were completed the questionnaire.
Primary and secondary data were used for this study.
Primary data received from the questionnaire and
interviews through financial controllers, accountants,
financial managers, financial directors, production
managers, marketing managers and HR managers.
Secondary data were collected from financial
statement, publications, such as books, research
papers, articles, published case studies and websites.
EMPIRICAL RESULTS
Budgetary Process
Descriptive statistical method was used to analyze the
respondents data to evaluate the budgetary processes
of the selected companies. Table 1 illustrates the
descriptive statistics of budgetary process with five
variables. \
Table 1: Descriptive Statistics of Budgeting Process
Category
N

Minimum

Maximum

Mean

Std.
Deviation

Variance

Budgetary
Planning

50

2.92

4.75

4.09

.51621

.266

Budgetary
Coordination

50

2.25

5.00

4.01

.63593

.404

Budgetary Control

50

3.00

5.00

4.06

.56872

.323

Budgetary
Communication

50

2.30

4.87

4.01

.55815

.312

Budgetary
Evaluation

50

1.67

5.00

3.50

.68344

.467

Budgetary Process

50

2.94

4.61

3.9342

.45064

.203

As shown in Table 1, the minimum and maximum

value range were used to classify different levels of
the budget planning, budgetary coordination,
budgetary control, budgetary communication,
356

Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 3(4):354-360 (ISSN:2141-7024)
budgetary evaluation and budgetary process. Figure 1
illustrates the level of budgetary process and five
variables.

level of budgetary communication and 38% of

companies in medium level and high level of
budgetary evaluation. The overall 46% (23/50) of
companies are in high level of budgetary process and
30% (15/50) of companies are in medium level of
budgetary process. The mean value of the budgetary
process like budgetary planning, budgetary
coordination, budgetary control, and budgetary
communication performed more than 80% and
budgetary evaluation performed 68%. Considering
the overall budgetary process is more than 78%
performed. Therefore, there is a marginally sound
budgetary process in Sri Lankan apparel industry.
Therefore, H1 is accepted.
)
Organizational Performance
The purpose of this section is to evaluate Sri Lankan
apparel Industry financial performance for the last 3
years. Return on assets (ROA)was used as a financial
indicator. Table 2 shows the analysis.

Figure 1: Variables Contribution for Budgetary

Process
As shown in Figure 1, all the companies have been
reported average 82% of budgetary planning, 80% of
budgetary coordination, 81% of budgetary control,
81% of budgetary communication and 68% of
budgetary evaluation. Consequently, budgetary
evaluation level is low compared with other
variables. Therefore, budgetary process of the apparel
industries wasaffected from the low performance of
budgetary evaluation. However, overall budgetary
process of selected sample was marginally sound.

Table 2: Descriptive Statistics of Organizational

Performance

Based on above analysis in this section describe the

test of hypothesis. The following hypothesis is tested
here:
H1: There is a sound budgetary process in Sri Lankan
apparel Industry.

Organizational
Performance

Minimum Maximum Mean

Std. Deviation

ROA- 2007/2008

50

.50%

27.50%

8.43%

8.53197

ROA- 2008/2009

50

.50%

28.98%

8.06%

9.24861

ROA- 2009/2010

50

.50%

27.50%

8.47%

8.80400

Return on Assets

50

.50%

27.50%

8.32%

8.67618

The descriptive results show the stages of the

organizational performance in Sri Lankan apparel
industry. The rank of the organizational performance
in Sri Lankan apparel industry is summarized as
follows: The mean value of the overall 3 years of
organizational performance (ROA) in Sri Lankan
apparel industry is 8.32%. The mean value of the
ROA in year 2007/2008 is 8.43%, year 2008/2009 is
8.06% and year 2009/2010 is 8.47%. The minimum
ROA is 0.5% and Maximum is 27.50%. The mean
value of average for 3 years ROA is 8.32%.
According to the research, 8.32% is the better rate to
compare with 10% of industry ROA in India.
(Selvarasu, et al., 2010).

According to the descriptive results, show clearly the

level of the budgeting process in Sri Lankan apparel
industry. All variables related to the budgeting
process are classified into low, medium, or high
level, derived from the Likert Scales (1-5) in the
questionnaire. The extent of the budgeting process in
Sri Lankan apparel industry is summarized as
follows: The mean value of the overall budgeting
process in Sri Lankan apparel industry is 3.93. All
sub-variables under the budgeting process, the mean
value of the budgetary planning is 4.09, budgeting
coordination is 4.01, budgeting control is 4.06, the
budgeting communication is 4.01 and budgeting
evaluation is 3.50, their mean value relatively low
compared with other variables of budgetary process.
The mean value of budgetary process is 3.93 and that
value slightly low with range of high level (0.13) for
the other four variables except budgetary evaluation.
However, Sri Lankan apparel industry in marginally
high level budgetary process when compare with
mean value of the budgetary process. 54% of the
companies are in high level of budgetary planning.
46% of companies are in high level of budgetary
coordination. 38% of companies are in high level of
budgetary control. 50% of companies are in high

Budgetary
Process
and
Organizational
Performance
The purpose of this section is to discuss whether
there is any relationship between budgetary process
and organizational performance. The analysis of
collected data to find out the relationship between
budgetary process and organizational performance, in
this section correlation coefficient and multiple
regression analysis used as a statistical method. Table
3 illustrates the correlation between budgetary
process and organizational performance and
Appendix One shows the relationship between
organizational performance and each variables.
357

Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 3(4):354-360 (ISSN:2141-7024)
Table 3: Correlation between Budgetary Process and Organizational Performance
ROA

Spearman's rho
Sig. (2-tailed)

Planning
.732**
.000

Coordination
.809**
.000

Control
.715**
.000

Communication
.823**
.000

Evaluation
.341*
0.016

Budgetary Process
.866**
.000

50

50

50

50

50

50

*. Correlation is significant at the 0.05 level (2tailed). **. Correlation is significant at the 0.01 level
(2-tailed).

organization is budgetary planning. Organization

performance is also influenced by another budgetary
practice namely budgetary control. The last variable
that predicts the performance of an organization is
budgetary evaluation. Budgetary evaluation did not
much influence the organizational performance
compare with other variables. Overall all five
variables were showed strong positive correlation
with
organizational
performance.
Therefore,
budgetary process is an important factor to predict the
organizational performance, as it has shown in R
square of 77.4%. That means budgetary process
predicts 77.4% of organizational performance of
apparel industry in Sri Lanka. This analysis was
clearly explained that there is a positive relationship
with budgetary process and organizational
performance. The higher the budgetary process,
higher the organizational performance. Therefore, H2
is accepted.

As shown in Table 3, The Significant level (p-value)

of these test, not exceeds alpha (p<0.05and p<.01), it
is statistically significant. Almost all of the variables
indicated high correlations except budgetary
evaluation. In regard to the organizational
performance (ROA) is high degree of positively
significant correlated with budgetary planning (r =
0.732, p= .000), budgetary coordination (r = 0.809,
p= .000), budgetary control (r = 0.715, p= .000),
budgetary communication (r = 0.823, p=.000) and
low degree of positively significant correlated with
budgetary evaluation (r = 0.341, p= .016). Further,
overall correlation coefficient results show that the
organizational performance is positively significant
correlated with budgetary process of the company (r
= 0.866, p= .000).
Based on the above analysis and explanations, in this
section describe the test of hypothesis. The following
hypothesis is tested here:

CONCLUSION
There are small, medium and large - sized companies
in Sri Lankan apparel industry. A majority of the
companies are private limited companies. Sri Lankan
Apparel industry makes up a significant portion of
GDP and employment. Apparel industry is the second
largest industry in Sri Lanka. Sri Lanka depends on a
strong global economy for investment and expansion
of its export base. This study examined how
budgeting process impacts on the performance of
apparel industry in Sri Lanka. It was also; found that
there is a marginally sound budgetary process in Sri
Lankan apparel industry. Apparel industry
performances were better for the last 3 years.
Budgetary process and organizational performance
have shown strongly positive relationship. Selection
techniques and regression analysis were employed in
investigating the relationship between the budgetary
process and organizational performance of apparel
industry in Sri Lanka. Individual organizations
budgetary process of apparel industry in Sri Lanka
was evaluated. An optimal analytical model shows an
overall association between budgetary processes with
organizational performance. The positive sign
suggests that there is a positive relationship between
budgetary process and organizational performance in
the apparel industry in Sri Lanka.

H2: There is a positive relationship between

budgetary process and organizational performance.
Table 4: Regression Model for Budgetary Process
and Organizational Performance

Model

.880a .774

R Square Adjusted R Square Std. Error of the Estimate

.748

.77001

a. Predictors: (Constant), Mean Score - Evaluation,

Coordination, Control, Communication, Planning
Based on the analysis of Table 4, a regression
analysis, predicting organizational performances
from budgetary process of the organization is
statistically significant. R square, 77.4% means the
budgetary process strongly effect to the
organizational performance and budgetary process of
the company explained 77.4% of organizational
performance in Sri Lankan apparel industry.
According to the Table 3, the budgetary
communication
is
higher
correlation with
organizational performance than other factors. In this
research budgetary communication plays an
important role by improving the organizational
performance of the apparel industry. Organization
performance is also influenced by another budgetary
practice namely budgetary coordination. The next
factor that contributes to the performance of an

The findings of this study suggest that companies in

apparel industry who plan to improve their financial
performance should give more priority to develop the
formality of the budgetary planning, budgetary
coordination,
budgetary
control,
budgetary
communication and budgetary evaluation. Further,
provide guidance to help accounting and finance
358

Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 3(4):354-360 (ISSN:2141-7024)
professionals increases their knowledge to targeted
practices of budgetary process of apparel industry in
Sri Lanka that specifically support private sector
organizations.

Dugdale, D. and Lyne, S., 2010. Budgeting Practice

and Organizational Structure [online] London: CIMA
Publishing. Research Executive Summary Available
at<http://www.cimaglobal.com/Documents/Thought_
leadership_docs/Budgeting%20and%20planning/cid_
ressum_budgeting_practice_organisational_structure
_may2010.pdf> [Accessed 21 November 2011]

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APPENDIX
Correlation Matrix
Planning
Coordination

Planning
1

Coordination

Controlling

.759**
.565**

1
.636**

**

**

Communication

Evaluation

Budgetary Process

Controlling
.722

.717

.746**

.255

.228

.273

.240

.808**

.834**

.819**

.848**

.531**

.732**

.809**

.715**

.823**

.341*

.866**

Communication
Evaluation
Budgetary Process
Return on Assets

**. Correlation is significant at the 0.01 level (2-tailed).*. Correlation is significant at the 0.05 level (2-tailed).

N=50
360