Ineffective cost budgeting process at phuc dat land joint stock company

UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business --- INEFFECTIVE COST BUDGETING PROCESS AT PHUC DAT LAND JOINT STOCK COMPANY MASTER OF BUSINESS ADMINISTRATION

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business

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INEFFECTIVE COST BUDGETING PROCESS AT PHUC DAT LAND JOINT

STOCK COMPANY

MASTER OF BUSINESS ADMINISTRATION

Ho Chi Minh City - 2017.

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business

-

INEFFECTIVE COST BUDGETING PROCESS AT PHUC DAT LAND JOINT

STOCK COMPANY

MASTER OF BUSINESS ADMINISTRATION

SUPERVISOR: TRAN PHUONG THAO

Ho Chi Minh City - 2017

SUPERVISOR’S REPORT ON THE FINAL THESIS SUBMITTED

FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION

Final thesis title:

Student name:

Supervisor name:

1 General comments: Remarks on the student’s attitude:

Remarks on the assignment’s academic quality:

2 Overall assessment: Meet requirement for submitting; Not meet requirement for submitting 3 Other remarks: - Did the student follow the report schedule? Yes No Other

- The Turnitin plagiarism percentage:



Supervisor’s signature

ACKNOWLEDGEMENTS

I would like to acknowledge all who supported me during my studies without whom

my thesis could not be completed in a proper way

I would especially like to thank my supervisor – Professor Tran Phuong Thao for all her advice and guidance, without her help I could not have my thesis done in the right way

I also would like to show my dedication to my colleagues at work for their continuous support I also send my sincere thankfulness to my parents and friends for their care, support and encouragement

TABLE OF CONTENTS

ACKNOWLEDGEMENTS

LIST OF FIGURES

LIST OF TABLES

EXECUTIVE SUMMARY 1

1 PROBLEM CONTEXT 2

1.1 Background of Phuc Dat Land Joint Stock Company 2

1.2 Symptoms of the problem 3

1.2.1 Significant gaps between actual and budgeted expenses 3

1.2.2 Late completion of Budgeting in 2017 4

2 PROBLEMS IDENTIFICATION 5

2.1 Situation analysis 5

2.2 Potential problems 9

3 CENTRAL PROBLEM VALIDATION 13

3.1 Identification of the Central problem 13

3.2 Central problem definition 16

3.3 The importance of the problem 19

4 CAUSE VALIDATION 19

5 ALTERNATIVE SOLUTIONS AND ACTION PLANS 25

5.1 The first solution: Build a clear process and schedule for exchange information among departments 25

5.2 The second solution: Training for manager and assistant manager levels 31

6 CONCLUSION 33

7 SUPPORTING INFORMATION 34

7.1 Summary of Methodology conducted 34

7.2 Interview guide 37

7.3 Transcripts 39

7.4 Transcript summary 49

7.5 Cost comparison Reports in 2015 and 2016 52

7.6 Questionnaires 54

8 REFERENCES 56

EXECUTIVE SUMMARY

As the economy dramatically grows up, companies are competing fiercely to survive and contribute to that development Generating revenue is always an important issue in business plans that every entrepreneur pays much attention to aim at maximizing profits However, nowadays, cost management also plays an important role in the business and budget has become a necessary activity of any organization for the purpose of well-controlled expenses to maximize its benefits Without a proper budget, a business can hardly keep track of how much it has earned and how much it has spent to meet its shareholders’ expectations related

to profits and the organization’s goals

This thesis aims to explore the causes of significant variance between budget and actual financial results in 2015, 2016 and the late completion of budget in 2017 at Phuc Dat Land Joint Stock Company (“the Company”) In-depth interviews were conducted to generate the understandings from highly responsible positions about budgeting at the Company and figure out the central problem related to Budgeting The findings of this study revealed that ineffective cost budgeting process tends to play a significant issue in the matter of budget engagement and leads to the difficulties in finalizing budget on target timeline The findings are discussed in details in the research along with some recommendations for the company and management to improve the budgeting process and cost management ability to get better results which directly affects departments’ performances evaluation and the whole company’s in general

LIST OF FIGURES

Figure 1: Phuc Dat Land Joint Stock Company structure 2

Figure 2: Initial Cause – effect Map 12

Figure 3: Final Cause-effect Map 21

Figure 4: Meeting schedule for Budget preparation at Phuc Dat Land 29

Figure 5: Respondents information: Gender, Working years, Level, Department classification at Phuc Dat Land 36

LIST OF TABLES Table 1: Phuc Dat Land Actual and Budget Cost in 2015 3

Table 2: Phuc Dat Land Actual and Budget Cost in 2016 3

Table 3: Cost structure in Budget of Phuc Dat Land Joint Stock Company 5

Table 4: Significant differences in % between Actual and Budget data 6

Table 5: Level of factors affect budgeting process at Phuc Dat Land 23

Table 6: Estimate cost for budget skill training organized by Smarttrain center for Managers and Assistant Managers at Phuc Dat Land 32

Table 7: Summary information of respondents of first In-depth interviews 39

Table 8: Summary information of respondents of second In-depth interviews 44

Table 9: Phuc Dat Land Actual and Budget Cost in 2015 52

Table 10: Phuc Dat Land Actual and Budget Cost in 2016 53

1 PROBLEM CONTEXT

1.1 Background of Phuc Dat Land Joint Stock Company

Established in 2013, Phuc Dat Land Joint Stock Company is a company operating in real estate industry, major in leasing office building in Ho Chi Minh City It belongs to Son Kim Group which is one of the most successful corporations in this industry The Company mains business is leasing Empress Tower Building at 138-142 Hai Ba Trung, District 1, Ho Chi Minh city with 17 floors and its revenue is nearly 170 billion VND per year

As the company operates under the control of Son Kim Group, it has to follow the performance management from Head office (“HO”) with approved Budget and KPI set by BOD This is also agreed by the Investors from EXS Capital – an investment fund from Hong Kong who has invested for most of Son Kim Group projects including Empress Tower Building

The operation of the Company does not fluctuate much as the stable number of lessees However, cost through years have been changed due to the demand of maintenance and renew the building to increase the quality of its service

There are four main departments in which are under controlled of BOD The company’s structure is drawn as following chart:

Figure 1: Phuc Dat Land Joint Stock Company structure

(Source: Human Resources Department of Phuc Dat Land)

Board of Directors

Accounting

department

Property management

Operation control

Internal Security

Sales &

marketing department

Leasing Marketing

Technical department

Human resources

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1.2 Symptoms of the problem

1.2.1 Significant gaps between actual and budgeted expenses

P&L comparison between Actual and Budgeted Revenue, Operating expenses and EBITDA reports of Phuc Dat Land in 2015 and 2016 are showed as below (shortened version showed) which reflected the operation results of the Company

in these two years It was not a bright picture as there were many issues need improving

Table 1: Phuc Dat Land Actual and Budget P&L in 2015 (Unit: VND)

(Source: Phuc Dat Land Profit and Loss 2015 report)

Table 2: Phuc Dat Land Actual and Budget P&L in 2016 (Unit: VND)

(Source: Phuc Dat Land Profit and Loss 2016 report)

It indicated that there was significant difference between actual and budgeted in operating expenses Operating expenses includes COGS, Selling and G&A expenses which are presented above in the format of management accounting reports of the Company Revenue did not fluctuate much as there were very little differences between actual and budgeted amounts (around 1%) due to the stable income sources coming from loyalty customers who have signed leasing

contracts for over 5 years Revenue stayed stable but cost differed from what had been budgeted a lot led to the fact that actual EBITDA in both years were much lower than Budget

1.2.2 Late completion of Budgeting in 2017

According to Budgeting schedule sent out by Finance Department from Son Kim Group, 2017 Budget must be finalized at the end of 2016 to prepare business plan for up-coming year However, the Company did not meet that compulsory deadline

Budget for 2017 has not been finalized until the end of June 2017 after many revised versions This information was obtained from Ms Vy Oanh – Chief accountant (CA):

‘Budget of 2017 was revised many times Targets sent out by the BOD were presented in many versions I even did not remember which the last one was until it was updated into the company’s system for final records And after about 8 months, the final budget was approved by the BOD on June, 2017.’ This information was confirmed by Mr Dung Tran - Head of Finance and Accounting Department of Son Kim Group

‘2017 is the third year Son Kim Group applying Budget in Management Control and Performance evaluation Therefore, there were still some deficiencies in the experiences and processes that led to the fact that it took months to complete the Budget This came from objective and subjective factors that we tried to deal with but still behind schedule.’

Actually, budgets of 2015 and 2016 were also behind the schedule In 2015, this was the first year the company applied Budgeting in management activity that it took around ten months to get used to the model and to build up a complete budget In 2016, the situation was improved but still under expectation that it

 Variance analysis in Cost budgeting

Concentrating on operating expenses, we need to understand the cost structure of the Company first Each department of the Company is a cost center which is responsible for expenses allocated by their characteristics activities The Cost structure of the Company is presented as following:

% in total Operating

Cost

1 Personnel and related expenses Human resources 8% 9%

2 Repair and maintenance Technical department 19% 18%

3 Building management Property Management 67% 66%

4 Marketing & Commission Sales & Marketing 1% 1.5%

5 Other operating expenses Accounting department 5% 5.5%

Table 3: Cost structure in Budget of Phuc Dat Land Joint Stock Company

(Source: Accounting Department of Phuc Dat Land)

This table shows the percentage of expenses under control of each department in the total budgeted cost of the Company in two years 2015 and 2016 The building management expenses accounts for the highest portion in total cost followed by Repair and maintenance expenses belongs to Technical department while Marketing and Commission fee stays lowest Cost portion of each type of expenses remained stable among years according to the company’s perdurable operation

This cost structure helps author in clarifying the problem related to significant differences in cost between actual and budgeted amounts and the control of expenses of Phuc Dat Land by reviewing in detail each type of expense and looking for the most fluctuated ones

At Phuc Dat Land, revenue and costs are budgeted for every fiscal year which is known as KPI of the Company in Son Kim Group Based on this, the Company performance will be evaluated at the end of the year Each department is allocated to be responsible for each type of revenue or expense and the criteria to evaluate their performance is the actual result compared to budgeted amount Therefore, the effectiveness of each department in revenue push-up or cost controlling will affect the whole company KPI result at the year-end

Variance in costs is a big issue of the company currently From the Cost

comparison reports show in section 7.5, author has summarized some significant

variances between actual and budgeted expenses in below table:

Table 4: Significant differences in % between Actual and Budget data

(Source: Phuc Dat Land Profit and Loss 2015, 2016 Budget report)

The most differences came from the expenses under control of Technical department such as Technical materials, Repair and maintenance or Renovation The differences between actual and budgeted costs have been improved in 2016 compared to 2015; however, over 20% actual expenses much higher than budgeted were unacceptable for the company performance evaluation in Son Kim Group For example, actual Renovation expense in 2015 was 70% much higher than budgeted amount while in 2016 this gap was reduced but still remained high

at 54% Technical Materials or Repair and maintenance costs in 2015 were over 35% actual higher than budgeted and also were reduced in 2016 but this year recorded the percentage of over 20% Other remarkable items came from costs under control of Property management; however, they had been improved significantly in 2016 such as Cleaning fee (down from 24% in 2015 to 6% in 2016) or Security expenses (down from 38% actual lower than budgeted to 12%

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much higher in two years) Many meetings were organized to find out the reasons and gather ideas in dealing with this issue but it is still a big question to management team of the Company

 An investigation in Cost budgeting

It is important to figure out the reasons for the significant differences between budget and actual costs at Phuc Dat Land Joint Stock Company and the late completion of fiscal year 2017 Budgeting as mentioned above After examining many relevant literatures, the potential antecedents that are believed to provide the most understanding are Head of accounting department and Head of functional departments

Two in-depth interviews with responsible persons including Chief accountant (CA) and Manager of Technical department were conducted to generate an overview on Budgeting at Phuc Dat Land

Per interview Ms Vy Oanh – CA, there are some main points identified related

to problems of budgeting at the company She explained why there were so many differences in expenses allocated for each department

According to her, even costs under control of Building management take the largest part in total cost of the company but it seemed to have fewer variance between actual and budgeted amounts This was due to the stable of the Leasing building that some expenses such as asset rental, security expenses, cleaning expenses, customers’ relationship and other operation expenses for the building stayed stable and nearly the same as budget which was built based on services

contracts with suppliers The Technical department takes responsible for the

second largest part in the cost structure of the company However, there were many unplanned events happened during the year such as power system failure, major repair of several floors or replacement of some old equipment that caused more cost in their approved budget Besides, some targets set by BOD were much different from initial budget prepared by departments that they had to adjust but did not totally match with their activities They had communicated this

problem with BOD, however, due to the analysis from business plan for the whole group that the limitation was set

When being asked about budgeting process, she indicated that there was no clear process in Budgeting They usually did it based on their own experience Head office sent out the timelines and deadlines for Budget to each subsidiary that they need to follow Heads of department did not ask for actual data from previous years from Accounting department for next year budgeting but based on their current status It appeared weak interaction among departments during the Budgeting period Ms Vy Oanh – Chief Accountant shared that:

‘I think it’s also due to the whole process that there’s no clear steps identified

We just prepare Budget base on our experience rather than complying with any cycle or guidance And as consequence, departments fail to connect with each other for sharing information in the process of building budget.’

Budget of 2017 took long time to be finalized due to the change of KPI set by Group and sent out to the Company as 2017 is an important year calling for investment for many new real estate projects of Son Kim Group Besides, the timeline had been changed continuously that it was hard for the company to catch

up with

After that, an interview with Mr Bao Dang – Head of Technical department which had most problems in actual and budget figures was conducted to validate and update more information for the study The matter of communication with accounting department was raised He responded that every quarter, accounting department sent out actual figures to his department so that he could cross check with his records and explain the variance to BOD Therefore, based on these reports and his department’s action plan, he made budgeting for the up-coming fiscal year However, if there’s any change in number, he would not be noticed

by accounting department

Another discussed issue was the Targets from BOD According to Mr Bao Dang, targets set by BOD on some items were too low that he could not adjust and

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control expenses within the limitation such as technical materials which were purchased every quarter for maintenance purpose In addition, unplanned events happened out of his department control due to the late communication from Building management department about problems at Lessee’s areas for timely repair to reduce the cost due to larger issues

The budgeting process took much time and required detail information for forecasting to ensure the accuracy At Phuc Dat Land, 2015 was the first year budget had been applied and most of Departments leaders had little experience in this field He was not familiar with accounting data and there was no official training for the budgeting preparation for him to understand the whole process and the tools for collecting proper data Besides, there’s no clear procedure and communication between related departments that he felt it difficult to complete the budget at appointed time

Referring to the cost control, during the operation, he kept track for expense by

an excel file with detailed budget by cost center allocated for his department When reviewing the file at the end of each month, any abnormal issues would be raised to his employees to find out the reasons and alert for the expenditure spending However, he was not noticed for the abnormal issues due to unplanned events that out of his department control due to late communication with other

departments

2.2 Potential problems

From the interviews with person who is responsible for budgeting in Phuc Dat Land and the one who is in charge of finalizing the budget to submit to BOD, some key points were identified to draw a picture of potential problems related to cost budgeting issues at the Company Main ideas are summarized in the

transcripts summary in section 7.4 Based on these key points from the first two

in-depth interviews and author’s observation, potentials problems related to the significant different between actual and budgeted expenses and the late completion of 2017 Budget are identified as following:

 Unrealistic goals set for the budget: two interviewees (Ms Vy Oanh – CA

and Mr Bao Dang – Head of Technical Department) agreed that some targets set by BOD were much different from initial budget prepared by departments that they had to adjust their cost with limited resources This caused the inaccuracy in operation planning and was the reason leading to the significant differences between actual and budgeted expenses At Phuc Dat Land, budget

is prepared based on a mixed manner by combining bottom-up approach and top-down approach In this method, targets are still set by BOD and sent out to each department to adjust to match with their activities but all were under controlled of BOD’s goals.They also mentioned that 2017 was an important year of Son Kim Group to call for investment as there were many new real estate projects which accounted for a huge capital to build up; therefore, BOD had revised KPI, which was built based on Budget for each company, many times to ensure the whole Group performance plan must be as good as possible to present to strategic investors As a consequence, it took longer time

to revise the budget and the schedule had been changed accordingly

 Ineffective cost budgeting process: those points mentioning about unplanned

events happened, no clear steps, budgeting experience or little connection among departments are gathered in one general problem called as ineffective budgeting process as they are related to the whole budgeting cycle The two interviewees were all not clear of the cost budgeting process at the Company They agreed that there were unclear timeline for budgeting (as mentioned above that had been changed many times) and so a few tools for collecting data that managers lacking of experience in budgeting could not complete the proper budget without forecasting future events due to no clear guidance from Head office Finance team was released They were just noticed about the deadlines for submitting their budget Besides, communication between related departments was an obstacle to the budget preparation and performance control The Manager from Technical department emphasized that there was poor connection between his department and others due to the busy time that it was hard for them to gather or conduct meetings together on

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Budgeting season Budgeting process is a big issue to deal with in order to make an effective budget for the Company

 Weakness in expenses spending control: Cost is controlled daily and

reported monthly by deputy manager to Head of department However, alert for significant issues before reviewing the control files was not raised until abnormal issues rose that managers reviewed their budget to check the variance between actual and budget to find out reasons and ways to adjust or explain to Management level Problem in cost control may lead to the ineffectiveness of expenses spending control and inevitably lead to the variance in budgeted and actual amount

From all the points summarized above, the initial MAP for Cost Budgeting problem at Phuc Dat Land is developed with three main potential problems and some potential causes leading to these problems as following:

Figure 2: Initial Cause - Effect Map

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3.1 Identification of the Central problem

In order to validate those potential problems identified in 2.2 and find out the central problem led to the significant variance between budget and actual figures

at Phuc Dat Land, another in-depth interview with Mr Dung Tran - Head of Finance department from Son Kim group was conducted

Per discussing with Mr Dung Tran, author noted that budget set by BOD sent out to Phuc Dat Land was based on previous year data and development business plan for next fiscal year Meetings were conducted between Finance Team and Phuc Dat Land’s head of departments to discuss about the final budget However,

as the target set by BOD but also under pressure of investors, the final budget would be affected accordingly Revenue would be higher than budgeted amount sent out by Sales & Marketing department and some expense items would be lower than original amount sent out by other Head of departments Operations teams had to control their actual cost well to minimize the expenses incur and meet the targets Besides, budget was set to evaluate the company’s performance; they aimed to set a little bit higher revenue or lower expenses to make sure employees try their best to acquire the highest results with available resources This was built by setting revenue with maximum leasing capacity and cutting down some redundant expenses which were not used in prior years This is applied for whole group, not only Phuc Dat Land, therefore, author did not investigate more in this potential problem

However, when talking about the timeline for budgeting and guideline from HO for the budget preparation to each project, he just mentioned the general procedure There was no detail plan from HO for budgeting The timeline was sent out but revised many times and delayed due to changes from BOD Managers at each company had to prepare the budget themselves and send out to accounting department for summarizing and finalizing He understands the difficulties for them in budgeting process but due to the requirements from BOD

that there was not much better among years In 2015, the process took ten months

to finalize the budget and seven months for 2016 In 2017, the situation had not been improved much as it even took more than seven months to complete

When being asked about the significant differences between budget and actual Profit and lost reports in 2015, 2016, he showed out that the total revenue or total cost was not much that variance (and actually they were just around 1% for total revenue – and 7 to 8% for expenses), only detail accounts appeared that matter BOD had required head of departments to explain for those differences and the matter was notified to appear from the detail cost budget controlled by each department Most of explanations for those differences were due to the weakness

in planning that many unplanned events happened out of departments’ control that caused more expenses spending The problem came from detail items must

be investigated more in order to find out whether the budgeting issue came from this field

After gathering information provided by Mr Dung Tran and from the first two in-depth interviews in the Potential problems identification part, another interview with Mr Quang Pham – Head of Property management was conducted Property management department is responsible for over 65% of total expenses However, his department did not stand for many significant differences in budgeted and actual expenses thanks to the stable of operation in leasing business During the first part of this thesis, author has mentioned a lot about cost budgeting process; hence, couple of questions related to this issue had been raised to this Manager Mr Quang Pham shared that he was not noticed about any procedure before preparing budget Only the timeline was sent out to all managers but changed many times due to the revised KPI sent out by BOD for each department to adjust their budget He also indicated that sometime he did not understand all the requirements from BOD such as which items should be adjusted, which items should be cut down that he failed to adjust his department budget according to BOD change in targets and had to revise many times Hence, his department’s budget was sent out and received back for revising constantly

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Besides, the interaction with other related departments such as Technical department did not happen due to the busy period for each department to complete their budgets and other operation tasks He mentioned that only one or two meetings were conducted for the Budgeting announcement and Budgeting finalization During the budgeting period, no meeting was hold for exchanging information or providing sufficient ideas to complete budget at expectation level Then most of his forecasting was made based on the services contracts signed with suppliers and reports from staff Budget was made based on managers’ experience rather than collecting information from external and internal factors Therefore, if there was any change in the cost from suppliers, budget would be adjusted or lead to the variance between actual cost and budget cost He also admitted that as budgeting has just been applied from 2015, most of managers have little experience in this area but no training or guidance from HO Finance team was provided

About the cost management, expenses are followed up by an excel file with detailed budget by cost center allocated for his department When reviewing the file submitted by his assistant manager at the end of each month combining with Management reports sent out from accounting department, any abnormal issues would be raised to his employees to find out the reasons and alert for the expenditure spending This helps him to control his department budgeted costs versa actual in order to keep track on their spending and meet the KPI allocated Therefore, expenses are still controlled in acceptable area

Main ideas from these two interviews are summarized in section 7.4 Combining

information from interviews with manager levels at Phuc Dat Land and author’s observation, the significant difference between budget and actual cost came from the ineffective cost budgeting process This happened from the beginning that requirements from BOD had not been fully understood The process was conducted without clear steps and allocated tasks for each department or responsible person to gather them in the cost budgeting process so that they could build up a strong connection among departments by exchanging data for

forecasting future events related to their operations Moreover, unclear timeline for the process was an obstacle for managers to complete their budget with high quality results

It is essential to build up a proper cost budgeting process to drive both company’s goals and fiscal accountability for coming to a good budget

3.2 Central problem definition

Elizabeth Hamilton Foley (3) stated that:

‘The budget process is the way an organization goes about building its budget

A good budgeting process engages those who are responsible for adhering to the budget and implementing the organization's objectives in creating the budget Both finance committee and senior staff participation is built into the process and a timeline is established leaving adequate time for research, review, feedback, revisions, etc before the budget is ready for presentation to the full board.’

According to Jacqueline Birt (1), the budgeting process involves seven steps:

 Evaluating past performance

 Assessing and incorporating expectations

 Preparing estimates based on communication with and feedback from managers

 Preparing budgeted reports

 Monitoring actual performance

 Making adjustment as required by changing circumstances (p382)

Elizabeth Hamilton Foley (3) also indicated that “The annual budgeting process

should be documented, with tasks, responsibility assignments and deadlines clearly stated.” He also argued that the step of communicating with managers

who are affected by the budgets should occur as they are mostly knowledgeable about their divisions or departments based on which budget will be prepared

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Besides, in the budget processes, monitoring actual performance accounts for an important role to keep track with approved budget and also to evaluate the operation of the organization toward strategic objectives

In general, the Budgeting process can be described as the process of preparing budget, keeping track of actual performance and review the operation of the company base on those results

Despite its valuable to the company’s strategic planning and performance management, budgeting process still has some potential problems Shastri Karen and Stout David E (5) had listed a punch of potential problems caused during the

budgeting process and summarized by focusing on “unrealistic goals,

management accountability, lack of or constrained resources, and the political climate surrounding the firm.” These can be represented by some expressions

such as:

 Unrealistic goals set for the budget

 Lack of accountability by some managers

 Changing costs during the budget period

 Lack of resources in terms of time, staff, and a system to create the budget

 Initial budget time is too time-consuming

 Lack of communication and information sharing across firm

Bogiages, Greg (6)mentioned the rotation of technology in budgeting as it takes months to collect data from multiple sources by multiple departments within the organization These huge resources of data can lead to the greater risk of human error when executing accountability work which would affect the accuracy of outcomes

Some signs of ineffective budgeting process have been identified by Steven Bragg and E James Burton (7) as following:

Firstly, management pays less attention to the budget This means that there is little or no review on Budget that the control is poor and little corrective action would be taken

Secondly, lack of complete participation by all levels of management within the firm leads to the fact that each department just care about their budget and deliver little consideration on other departments’ which should be in a whole set to meet the target of the company

Thirdly, uncorrected large variances between planned performance and budget objectives indicates some weakness in budgeting such as poor estimates, poor feedback and lack of timely, corrective action, ineffective management policies concerning budget maintenance

Fourthly, managers who actively prepare the budgets does not involve in the business process Without a working knowledge of the dynamics of the operations of the business, it is difficult to maintain a working knowledge of current operational status to build up an appropriate budget The amount or frequency of contact with operating departments is usually directly related to the stability of processes

Lastly, supervisors or first-line managers do not know how their budgets were determined or what is contained within their budgets In such cases, department managers do not know how performance is being evaluated, how well they are performing to expectations, where they may be doing well, and where they are experiencing unplanned difficulties

An effective budgeting process helps create the budget which fits into the company’s strategic and long-run planning process It is measured by the objectives satisfaction for ensuring communication, co-ordination and control within an organization As identified in ACCA approved content (8), each general objective is described into specific comment including: ensure the achievement of the organization’s objectives, compel planning, communicate ideas and plans among managers, co-ordinate activities from different departments, provide a framework for responsibility accounting, establish a

system of control and motivate employees to improve their performance

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3.3 The importance of the problem

Budgeting process plays an important role in the management planning and control even there are some arguments about its limitations and problems If the budgeting process is not implemented effectively from the start with clear objectives and timelines through the planning sections to the actual performance control, it would cause the organization some potential problems same as what happened at Phuc Dat Land

Per discussing with Ms Vy Oanh – Chief Accountant, they have thought of the problem related to budgeting process before but due to the limitation in time and human resources that they have not found a solution to that This led to the failure in expenditure budget compared to actual performance and the late completion of Budgeting at the Company

As a consequence, in 2015 and 2016 even the target on revenue was met, the performance valuation of the Company in Son Kim Group was not highly appreciated due to the poor performance on expenditure control that EBITDA was not meet strategic targets It was affected on employees’ assessment result for KPI at yearend as Son Kim Group assesses employee not only on their own working performance but also on the subsidiary companies’ It would not be more optimistic if the situation would not be improved properly

Besides, during the expenses spending control, there were some difficulties in predicting the cash flow as the budget was not prepared closely to the Company’s operation reality In this case, it would cause little cash for unplanned events or redundant fund for un-coming ones

As mentioned in section 3.2, ineffective cost budgeting process is caused by many factors mostly from the internal environment such as: unclear objectives from management, timeline confusing, poor sharing information across the firm, lack of resources for preparing budget, managers lack of budgeting skills,

ineffective management policies regarding to budget control or incomplete participation of all departments in budgeting process

In the research conducted by Felix Olurankinse (9) related to poor budgetary performance, it showed some other causes to the ineffective budgeting process:

 Not all stake holders involve in the process

 Lack of budget review after preparation

 Expenditures and revenues are imposed by management during the draft estimate defense

 Expenditures are raised without any resources to budgetary provisions

From the result from in-depth interviews with managers at Phuc Dat Land, author has identified some potential causes related to budgeting problem at the Company which is displayed in the following cause-effect map

Based on those causes identified in the Map, a survey was conducted to indicate the most influent causes that led to the ineffective cost budgeting process at Phuc Dat Land so that properly recommendations would be raised

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Figure 3: Final Cause-effect Map

The survey was conducted on ten chosen respondents They are from different departments of the Company at the Senior level and management level who are highly involved in the budgeting process Most chosen respondents have been working for Son Kim Land group and Phuc Dat Land as well from 1 to 3 years which accounted for 70% of total respondents

The result from the survey shows that most of managers, assistant to managers and senior staff are involved in Budgeting process at the Company However, when being asked about the clear objective awareness before making budget, the result indicated that not all objectives were totally clear to responsible people Half of respondents admitted that they are not really clear of the objectives set by management team for next year budget Normally the target sent out was only the EBITDA to meet This is applied for the whole group

When being asked about the budgeting process at Phuc Dat Land, 60% respondents from assistant manager and below said that they were noticed about the timeline, procedure getting approval from BOD after finalizing their department budget and monitoring actual performance The rest showed little knowledge on steps for preparing Budget as they just complete budget reports based on their managers’ instruction However, for manager level, responding the question related to guidelines for budgeting preparation, most of them agreed that there was no official guidance on the budgeting manner except for the Budget model file sent out by Finance and Accounting team from Head office for them to follow There was no training days for budgeting preparation, introduction of tools for data processing or collection for planning Besides, as the budgeting process has just been applied 2 years, they were lack of experience and accountability but there was very little training on these that they felt hard to complete in the right way, instead, they just focused the target on EBITDA rather than other factors

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At Phuc Dat Land, each department is in charge of their own budget Therefore, the data in the budgeting preparation process was indicated from the survey to get from previous year data, from staff and sometimes exchange information with other departments but not usually The frequency connection among departments during the budgeting process was low This was proven by the result that 7 per 9 respondents agreed that departments did not connect closely to each other in the Budgeting process from the preparation period to performance one

The ACCA approved content on Performance Management (8) defines that:

‘The activities of different departments or sub-units of the organization need to

be co-ordinated to ensure maximum integration of effort towards common goals This concept of coordination implies, for example, that the purchasing department should base its budget on production requirements and that the production budget should in turn be based on sales expectations in order to achieve the company’s best targets.’ (p222)

The connection among departments not only supports each department in preparing appropriate budget for their own but also contributes to minimize the differences between actual performance results with the plan The following table shows the evaluation of respondents on level of important causes lead to the ineffectiveness of budgeting process at Phuc Dat Land:

Level of influence (from the most important to the least)

answer

Unclear timeline 1 1 2 3 2 9 Poor interaction among departments 5 2 2 - - 9 Lack of data for budgeting - - 1 3 5 9 Lack of budgeting training 3 4 2 - - 9 Managers lack of accountability - 2 2 3 2 9

Table 5: Level of factors affect budgeting process at Phuc Dat Land

It is clear that the poor interaction among departments plays an important role in the quality the budgeting process of the Company This matches with the above findings about the importance of the co-ordination during the budgeting process Training courses were mentioned as the second influent cause to the success of the process follow by the lack of accountability and unclear timeline

Along with this result, improvement actions were raised A manager from Property management expressed the idea that:

‘An immediate action should be taken to improve the budgeting process at PDL

is building a suitable training for all manager and assistant manager levels so that

we understand clearly steps of preparing budget and improve the accountability

to deal with figures more accuracy.’

Another respondent focused on the exchange data among related departments, she indicated that:

‘Temporarily not mention about the tools and timeline given by management level, the accuracy of data collection is the most important thing in building budget Therefore, improving the way data collected and exchange information among departments is the most important thing to be done It helps each department not only focus on their own budget but also connect with others to create a complete connective budget for the better performance result.’

From above points of view, it can be seen that Phuc Dat Land needs to focus on how to improve the contact from department to department and the training provided to enhance the effectiveness of budgeting process which will leads to the

better performance result in Son Kim Land Group

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According to author’s analysis in section 4, it can be seen that the main causes of ineffective cost budgeting process at Phuc Dat Land are the poor interaction among departments during the budgeting preparation and the lack of experience in budgeting process which was caused by few training for manager level at the Company Therefore, this part would focus on giving solutions to solve these causes Solutions are given for each cause along with the analysis of benefits and costs Then action plan would be recommended

5.1 The first solution: Build a clear process and schedule for exchange information among departments

Budgeting process includes many steps; in each step detailed work should be identified for responsible departments or persons As figure out in the central problem identification, the budgeting’s objectives are not fully understood by lower levels Besides, unclear timeline for the budgeting process also drove to low quality

of budget Therefore, the first thing to do before starting the budgeting process at the Company is declaring objectives of the organization to the people involved in the process Once objectives are clear enough, action plan for completing those objectives would be more accuracy Moreover, each department would understand their responsibilities and performance measurements related to the whole company targets and focus more detail on their budget to serve that purpose Secondly, timeline should be set strictly along with the process for departments to follow It means that in each step of budgeting process, submitted time or deadline should be identified and reminded frequently to ensure the progress will not last for too long

or get out of control

After two actions mentioned above, we go into detail about the communication among departments This is affected by the coordination identified by the