OPTIMISING MANAGERIAL FINANCIAL DECISIONS IN TERTIARY EDUCATIONAL INSTITUTIONS VIA OBJECTIVE BUDGETARY PROCESSES

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Author: Dr Ishola Rufus AKINTOYE

OPTIMISING MANAGERIAL FINANCIAL DECISIONS IN TERTIARY EDUCATIONAL INSTITUTIONS VIA OBJECTIVE BUDGETARY PROCESSES

BY Dr Ishola Rufus AKINTOYE Senior Lecturer, Department of Accounting, Ogun State University, (Now Olabisi Onabanjo), Ago-Iwoye, Ogun State-Nigeria. Tel: 08035369293, 08034545085 E-Mail Address: irakintoye@Yahoo.com

Dr Ishola Rufus Akintoye is a Chartered Accountant, Fellow of both the Institute of Chartered Accountants of Nigeria and Chartered Institute of Taxation. He is also a member of Nigerian Institute of Management, Life-member of the Nigerian Economic Society in addition to holding a Masters of Business Administration(MBA),Master of Science(MSc) in Finance and a Doctoral Degree in Management(Financial Management Option).

Abstract

The budgetary processes in Nigeria have been inflicted with a number of problem. Principally, subjectivity, sub-optimization and de-motivation which are clearly identifiable to date(Agwakhide,1995). Unfortunately, the academic environments of Universities, Polytechnics and Colleges of education are no exception to these problems. As a result of the foregoing, this paper seeks to determine the objectivity of financial decisions through holistic and comprehensive budgetary processes in tertiary educational institutions in Nigeria.

The Panel Data Regression Analysis is adopted to estimate the regression analysis. The result shows that students population and number of interfaculty students impacted positively on the budget allocation while the number of academic staff, administrative staff and cost of training a student which are also essential to managerial decision optimization in tertiary educational institutions are not considered at all. With the subjectivity identified in the result analysed, we hereby recommend a holistic scientific model in order to enhance an objective budgetary processes which we hope will result in an optimal financial decisions in tertiary educational institutions in Nigeria.

INTRODUCTION

Decision making is an important aspect of managerial roles in organizations. Hundreds of decisions are made on daily basis at all levels in organizations. Without cultivating and maintaining effective managerial decision making skills no organization is likely to survive for a long time, hence irrespective of the objectives of an organization, decision making is a must element for the survival and stability of any organization (Wheeler and Ganis, 1980). Finance, according to Van Horne (1977) and Pandey (1999) has to do with a firm securing the needed capital and employing same in activities (relating to the firm) that are capable of generating returns. In financial decisions, the concept of rationality is assumed. It is generally agreed that the financial goals of the firm should be the maximization of economic welfare of owners through profit maximization (Adam Smith, 1937 pp 423). Similarly, budgeting systems and decision making are ubiquitous, long considered necessary tools in managing organizations as the budgeting process frequently consumes a great deal of management time in negotiations, planning and target setting. Such systems are inter-alia intended to co-ordinate the activities of units and motivate managers (Ariyo, 1996). They are used in simple organizations and in vast and complex enterprises. Budget is a fundamental tool for planning and controls in the hands of managers. It allows financial decision optimization to be predetermined. A budget clearly demonstrate the vision and mission of the business enterprise, with goals and objectives clearly spelt out by same (Briers & Hirst, 1990). The use of budget and budgetary controls in the implementation of planned actions transverse every facet of human organizations. In both public and private sectors of the economy, budgeting processes has transformed to an unavoidable annual exercise during which goals and targets are set for the course of action in the immediate next one year. Hence it has become a short term planning tool for management of financial resources of an entity so as to achieve its overall goals and objectives. The application of the art of budgeting is recognized in the management of government owned tertiary educational institutions in Nigeria. Budgetary processes in these institutions are classified in to two stages. The first involves, the compilation of the annual estimates when call circular(s) is received from their supervisory authority. This approval precipitates the second stage which is the preparation of the operational budget, usually referred to as the WORKING BUDGET. Thus, the preparation of the working budget is the final stage where the management of each institution allocates funds to each must based on approved budget estimates from their respective supervisory ministries (Oluwatusin, 2006).

The innovation of this study is the evaluation of budgetary processes and its impact in the optimization of financial decisions in improving the conditions of tertiary educational institutions in Nigeria. The remaining part of this study shall be divided into 4 sections to discuss the Theoretical Framework, Methodology, Interpretation of Data Analysis, Conclusion and Recommendation.

2.THEORETICAL FRAMEWORK

Financial Decision Optimization

Theoretically Henry Markowitz(1952 ), Shape (1964), Litner (1965), Mossin (1966), Modigliani & Miller (1969), all developed and contributed to the theory of financial decision optimization. The first four in their theory considered financial assets and opined that if a portfolio of financial assets will be said to be optimized, every asset must be given a fair representation in the portfolio in term of weight and returns. Modigliani & Miller (1969) in their own consideration of Capital Structure optimization in financing decision considered optimization as a combination of both debt and equity and opined that the capital structure is optimized where Kd=Ke. In their own studies, Dietz(1942) and Walts (1946) hinged theory of managerial decision optimization on application of firms entire resources, material, man, money and machine to achieve the enterprise objective. This is directly related to budgeting. Briers and Hirst (1990) optimization can be predetermined via budgeting from the above theoretical considerations, it will be seen that whether in financial, capital or human assets the concept of optimization is centred on consideration of all essential performance variables.

Concept of Budget and Budgetary Processes The recognition of the importance of budget and budgetary processes in the management of organizational finances has been an incontrovertible issue discussed in the world today. According to Hyperion (1998) budgeting lies at the heart of business management. In their extensive research on state enterprises in Czech Republic, Hungary and Poland, Frydman et al, (1999) associated budget with financial discipline which they viewed as the most important prerequisite for efficient corporate performance. "Gauray and Nishant, (2001) suggested that a budget is a plan expressed in a quantitative, usually monetary term covering a specific period of time, usually one year. Also in their studies Dietz (1942) and Walts (1946) hinged the theory of managerial decision optimization on application of firms' entire resources, material, men, money and machine to achieve the enterprise objectives. This is directly related to budgeting. Briers and Hirst (1990) submitted that optimization can be predetermined through budgeting.

On the other hand, budgeting processes has to do with the procedures involved in the preparation of a budget. The budget process is a part of a larger system that involves setting objectives, considering alternative programmes, incorporating programmes into the long range plan and implementing the long range plan through budgeting process (Drury 1995). In a more elaborate view, Lucey (1998) explained that the full budgetary process comprises budgetary planning and budgetary control. Insights into how public institutions adopt techniques into the management of academic programme was extensively covered by Ray (2001). It is discovered that whether in financial, capital or human assets the concept of optimization is centred on consideration of all essential performance variables. On budgeting as a tool for managerial efficiency, Obadan (2000), Olaniyan (1998), Olalokun (1995), Taiwo (1993) and Egwakhide (1995) all summarized the challenges of Nigeria budgeting system in: - Expenditure rather than performance based - Prejudices and arms trusting - Political indignation/patronage Omolehinwa (2001) in his own study raised questions as to whether budgeting system in Nigeria are actual guide to managerial behaviour and if budgeting has ever assisted in solving any economic problems. He concluded that very little has been achieved. Past studies similar to our research work have different theoretical setbacks which necessitated this study. At the Universities level, Caiden (1980) opined that budgeting principles as old as they are and as useful as it stands, have not found a place in the Universities. He then called for improvement by both practitioners and academics but did not provide any basis. Soyibo (1982), in his study, considered allocation of resources in Nigeria universities decision optimization, using academic staff by application of goal programming model to arrive at his 30% - 40% - 30% rank distribution among Lecturers, Senior Lecturers and Professors, however that study is limited and it failed.

The main problem necessitating this research is that the budgetary processes in Nigeria tertiary institutions have frequently been out of alignment, partly because of the unscientific way in which budgetary planning is done and allocations made. This problem also underlies the study carried out by Liverpool, Eseyin and Opara (2002). The evolution of a scientific model has been advocated as presenting an attractive option which reduces substantially the dependence of funding decisions and allocations on political considerations and allows for fair, equitable, and transparent disbursement of funds. The foregoing has led to the need to adopt a scientific approach to budgeting processes in order to achieve an optimal financial decisions in tertiary educational institutions, Nigeria as it were.

Financial management decisions according to various financial management scholars include:

1) Investment/Long term asset mix decision

2) Financing/Capital mix decision

3) Dividend/Profit allocation decision

4) Liquidity/Short term asset mix decision (Pandey 1999, Van Horne 1995, Samuel & Wilkes 1998, Olowe 1995).

However, Akintoye(2004) added a fifth financial management decision called "mark up/profit decision, arguing from the accounting theory of margin and mark up that it is impossible to allocate in form of dividend without deciding on the margin of profit expected from which retention policy arises. Profit maximization has been criticized over the years (Anthony 1960: 126-134) for its failure to provide an operationally feasible measure for ranking alternative courses of actions in terms of efficiency.

Behavioural Studies of Budgeting

Some studies on behavioural budgeting were conducted in the USA. In Europe, good behavioural analysis of budgeting was opined by Tovey (1963) and Zobrist (1965) both however are only based on the available literature on subjectivity, judgement and experience (Argyris, 1952; Simeon et al, 1954; Stedry, 1960; Stedry and Kay 1964).

The controllership foundation of USA sponsored the study of Argyris (1952) from the methodological viewpoint, Argyris study was a field study, using open ended interviews of line and staff supervisors in four middle size manufacturing organizations. Its purpose was to explore the sociopsychological implications of budgeting. Simeon et al study of 1954 sponsored by the U.S. Controllership foundation was again a field of study using open ended interviews of line and staff managers, this time manufacturing sales and other functions in seven different companies were involved. The research goal was however limited as it was aimed at investigating the result of centralization, on the other hand it was broader as it tried to weigh all aspects of the problem, human and "technical" in terms of the overall effectiveness of the organization. The study produced a clear picture of the role of the accounting staff in budget and cost control systems. It led to a number of practical recommendations, both about the people and about the system.

Stedry's study results of 1960 were published in an award winning doctoral dissertation "Budget Control and Cost Behaviour". From a point of view of method, his approach was a laboratory experiment using university students as subjects, preceded and followed by extensive mathematical model building. His main research goal was to investigate the effect of BUDGET level on peoples' performance (Stedry, 1960 pp 153). The results of his experiment and the additional theory led Stedry to the conclusion that, in budgeting practice, performance can be improved by choosing levels attained to the motivation structures of the individual managers, he therefore stressed the importance of the difference between budgets for planning and for measuring purposes as earlier discussed. Stedry's study pioneered the linkage of psychological theory and budgeting practices. Though not conclusive; he covers only one small area of the budget process and the results of his laboratory experiment are not directly valid for the field.

3) METHODOLOGY

This study employed the analytical survey method defining both dependent and independent variables as sourced by the researcher to be analysed using the appropriate statistical tools and drawing inferentials (Akingunola, 2005) this analysis enables us to either accept our null hypotheses Ho: Revealing no relationship between our decision variables and budgeted figures, OR accepting our alternative hypotheses Hi: Demonstrating strong relationship between decision variables and budgetary figures.

Essentially, this research aims at evolving a scientific approach to budgeting in tertiary educational institutions which could be adapted to any public or private environment in the budgetary processes. Panel Data Regression Model will be used to capture the cross sectional data and time series analysis (4 Federal, 4 State, 2 Private Universities, 5 year budget statements, however, it is necessary to make use of a model capable of accepting many decision variables at a time either in a univariate or multifarious objectives environment. A high co-efficient of determination will indicate objectivity because it will tell us that our hypothetical variables indeed play crucial factors in the budgetary process, otherwise our budgetary process is void of objectivity.

The Panel Data Regression Model rather than simple or multiple has the advantage of providing more informative data, more variability, less collinearity among variables, more degree of freedom and efficiency.

Panel Data Regression Model.

Yit = β1 + β2 X2it + β3 X3it + Uit ………………………..(1)

Where i stands for the ith cross sectional unit t for the th time period Uit for the error term β1 β2, β3 are fixed.

In interpreting the result of the Panel Data the coefficient and statistical significance of individual variables are considered. The slope coefficients are expected to have positive signs and R2 are expected to be above average. Durbin-Watson statistical test under normal condition is expected to have a value of between 1.9 and 2.2.A low Durbin-Watson value could be due to specification errors. Therefore, despite the usefulness and simplicity of pooled regression the true picture of the relationship between dependent and independent variables may be distorted. We can minimize or solve these problems by considering the fixed effect of the model by introducing Dummy variables and the Random Effect which incorporates the error components. To further confirm our result, we administered questionnares at the Bursary and budgeting units of all selected Universities. It was discovered that respondents went beyond just admitting that there was never any time when scientific budgeting process was evolved but that God fatherrism, political inclination and other subjective factors affect budget figures.

The population in this study consists of all Nigerian universities that are at least 5 years old. The essence of time is to allow for behavior monitoring overtime (Olawale, 2003) Sample size includes 5 years budget statements of 10 universities (4 federal, 4 state, and 2 private) of specific note on the budget statement would be: 1) Allocation to faculties and departments for the respective budget years. 2) Student population in faculties and departments for the respective budget years. 3) No of administrative staff in the faculties and departments. 4) Training costs of students for the respective budget years from secondary literature. 5) Average no of graduates produced. 6) Population no of inter-faculty students.

The study is however limited as it did not consider the likely reduction in budgeting time as a result of our new model which is a possibility but not our focus. Furthermore, scientific research has been very difficult in Nigeria as a result inadequate data, hence this work is limited by these difficulties which necessitated random sampling techniques.

4) INTERPRETATION OF RESULTS

We used Panel Data Regression Analysis because of its ability to capture time series and cross sectional data together. The E-view computer software was used to compute the Panel Data Regression Analysis.

The date analysed contained 5 year budget statements from 5 faculties of 10 universities resulting in total of 250. The ten universities were selected randomly by balloting from the 3 strata of Federal, State and Private Universities subject to existence for a minimum of 5 years. For confidentiality as demanded by data sources, we simply code the universities as:

Ui … Un i.e. 1-10 and faculties as Fi … Fn i.e. 1-5.

In interpreting our data, we computed the regression analysis using budgeted figures as dependent variables and our research variables as independent. We then computed the faculty by faculty regression analysis between:

- No of Academic staff Vs yearly budget statements for 5 years - No of Admin/Non-academic staff Vs yearly budget statements for 5 years - Student population Vs yearly budget statements for 5 years - No of Interfaculty students Vs yearly budget statements for 5 years - Unit cost of training a student Vs yearly budget statements for 5 years

From scientific findings (Grand et al, 2005) the panel data analysis is the most useful tool for time series and cross sectional data in conducing a pooled regression analysis. However, the generally acceptable range of Durbin-Watson d-test on Panel data analysis is a range of 1.9 and 2.2. A low Durbin-Watson value could result from specification errors or auto-correlation in the data.

Going by the result of this analysis, it is evident that students population and no of inter faculty students impacted positively on the budget allocation, although statistically insignificant at 5% and t-statistics of 2.066781 and 2.558605 respectively . The no of academic staff, admin staff and cost of training a student impacted negatively (-0.85, -0.58, -0.25) on the budget allocation.

The R2 and adjusted R2 accounted for 76% and 71% of the variations in the budget expenditure respectively, while the Durbin-Watson d-test of 1.9725523 is a measure of "goodness of fit" of this model.

5) CONCLUSION & RECOMMENDATION

From our findings, it was discovered that up to date, only one variable i.e. student population is consistently applied in the budgetary processes in tertiary educational institutions in Nigeria, without recourse to other performance based factors as enumerated in our research problem. In addition, it was also discovered that beyond just non-scientific budgeting process, God fatherrism, political inclination and other subjective factors affect budget figures.

We therefore conclude that the budgetary processes in tertiary educational institutions in Nigeria especially Universities do not consider the performance based variables like no of academic staff, no of admin staff and cost of raining students, resulting in sub-optimization rather than optimization of stated goals and objectives.

We hereby recommend a scientific and holistic financial management model in the budgetary process which we believe will serve as a modified tool to existing ones, and also aid an optimal financial decisions in tertiary educational institutions in Nigeria.

The model is an adaptation from the expected rate of return Markotwitz Portfolio Model of 1952 in financial management n E(Rp) = ΣRiPi i = 1

The above can be interpreted as;

E (R) = Expected Rate of Return Σ = Summation n = No of Assets or Securities Ri = The asset/security in question Pi = Probability of the Asset/Security's occurrence

Borrowing from the model above to the Budgetary system, the equations is in the form;

Ebf =Ebd1+Ebd2+…………….Ebdn (1)

Ebd = Ebsp + Ebas Ebaa + Ebtc + Ebis (2)

Where: Ebf = Expected budget for a faculty Ebd = Expected budget for a department Ebsp = Expected budget in respect of student population Ebas = Expected budget in respect of the no of academic Ebaa = Expected budget in respect to the no of admin staff Ebtc = Expected budget in relation to the training cost/student Ebis = Expected budget in relation to no of inter-faculty students Ebdi= Expected budget of a dept i = n Σ EWviX RB i = 1 Where = EWvi = Expected weight of each decision variable from 1 … n Ebfi = Expected budget of a faculty i = n Σ EbdiX RB i = 1 Ebu = Expected budget of the entire University = n Σ Ebfi i = 1 RB = Recurrent Budget

References

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