CitationDownload as .RIS
Emerald Group Publishing Limited
Copyright © 2004, Emerald Group Publishing Limited
New study offers insight into corporate planning in the Middle East
Performance against budget targets is a key indicator of organizational control and planning and there is a wealth of literature on budget practices. To date, studies have focused on large manufacturers, listed companies and Western practices. A new study of 54 companies in Bahrain redresses this imbalance and gives a clear picture of emergent business practices.
Background and benchmarks
The study began by surveying the literature to establish benchmarks for the Bahrain companies. The researchers decided to focus on the following areas:
planning of budget;
perception of budget importance;
purposes of budget;
implementation of budget;
participation by managers in deciding budget targets;
variance as a performance measure; and
practices in listed and non-listed companies.
A total of 146 companies were interested in participating in the survey and were sent a questionnaire which had been trialled with companies not included in the sample. A total of 54 usable questionnaires were returned: 35 from listed companies and 19 from non-listed companies. The companies were in the following industry sectors: banking, investment, insurance, services, industrial and hotel and tourism. Approximately half the listed companies were in investment or services sectors and hardly any in industrial. Approximately half of the non-listed companies were in the industrial sector and hardly any in hotel and tourism.
The questionnaires provided data across 16 key areas in the budget cycle starting with whether companies make long-range plans and ending with reasons for failure to achieve budget targets.
Budgeting in Bahrain – planning, preparation, purpose, and participation
With only a few exceptions, all companies made long-range plans of between three to five or more years. Approximately half the listed companies made five-year plans and approximately half the non-listed companies made three-year plans. All 54 companies prepared operating budgets but hardly any prepared rolling budgets. Nearly all the companies require their staff to plan budgets according to guidelines.
There were significant differences in the purposes of budgets. Listed companies ranked improving profitability highest and forecasting lowest but this was reversed for non-listed companies. This is perhaps because listed companies have to be accountable to shareholders who expect profitability to maximize their dividends.
Significant differences were also observed in budget planning participation. A total of 60 percent of listed companies reported high levels of managerial participation but only 36 percent of non-listed companies did. Public accountability is probably a factor here for listed companies. In contrast, most non-listed companies tend to be family-owned and may therefore prefer secrecy. However, as more and more companies seek listing on the Bahrain Stock Exchange (BSE) this is bound to change.
Budgeting in Bahrain – design, timelines, and communication
These three areas have a significant impact on the effectiveness of budget implementation and overall strategy. Just over three-quarters of all the companies had a budget committee composed of senior managers. Companies without a committee had a budget officer who worked closely with the CEO. Across all companies surveyed, 43 percent prepared fixed budgets and 39 percent prepared variable budgets; and 42 percent of listed companies prepared variable budgets.
Budgets are most effective over short reporting cycles which assist control for and performance measurement of managers and departments. Most of the listed companies reported quarterly and so did many of the non-listed although 42 percent favor six monthly reporting. This difference is again driven by public accountability as listed companies have to follow the International Accounting Standard for Interim Reporting. Just over half of all companies measured budget performance by department and a third of non-listed companies also used divisional reporting.
Budgets determine profit targets and effective communication is required if all staff are to contribute to meeting those targets. Two-thirds of companies reported that budget allocation was secret although they had plenty of information made available when planning operating budgets. There was general agreement that while budget communications were treated cautiously they were generally well received. However, there were significant differences in views of senior management's leadership of budget implementation. In listed companies there were high levels of satisfaction but in non-listed companies high levels of criticism.
Budgeting in Bahrain – control and performance
Budget leadership is connected with who evaluates variances. In the listed companies, department heads working with the budget committee did this. In non-listed companies, it was the preserve of senior management. Nearly all listed companies prepared monthly or quarterly variance reports in contrast to three-quarters of non-listed companies.
The way that companies used variance reports revealed that Bahrain managers tended to follow Japanese models more closely than US ones. Budgets were used to measure managers' departmental performance, identify problems and, as a result, improve the budgets for the next period. There was less emphasis on using variances to allow managers greater control.
Companies were asked to rank four reasons for failure to achieve budget targets: inability in our department, poor planning, unrealistic standards and uncertainty. The first two were ranked highest across listed and non-listed companies. The authors of the study argue that this reflects a disparity between the high level of business training available in Bahrain and low levels of uptake by companies.
In the beginning
The Bahrain study makes a valuable contribution to budget literature by focusing on the differences between listed and non-listed companies; concentrating on companies selling services as opposed to manufactured products; and surveying practices in a developing country.
However, the study goes beyond academic relevance and gives a fascinating insight into an economy at a moment of transition. As oil production leads to more foreign direct investment (FDI), local companies will expand and take on board the advanced management accounting common in the West. The wide range of attitudes and practices in areas such as participation, communication and variance reporting highlights what needs to be in place to ensure the success of advanced practices like activity-based costing and a focus on customer profitability.
Adapted from "Corporate budget planning, control and performance evaluation in Bahrain" by P.L. Joshi, Jawahar Al-Mudhaki and Wayne G. Bremser, Managerial Auditing Journal, Vol. 18 No. 9, pp. 737-80. The article reports on a survey of the budgeting practices of 54 medium and large companies in Bahrain. The results of the survey are measured against existing literature on budgeting that is usefully summarized at the beginning of the article. The results are presented in narrative form and in 16 detailed tables. The tables are well organized and easy for non-experts to interpret. The article is clearly written and easy to follow. It gives a clear picture of differences between listed and non-companies. It will also be of interest to those wishing to establish operations in the Middle East; and to those already working in the region who wish to establish benchmarks and performance measures for their budgeting practices. However, although the article often refers to large and medium companies, it does not provide details of sample companies' turnover which would have been useful.
ReferenceJoshi, P.L., Al-Mudhaki, J. and Bremser, W.G. (2003), "Corporate budget planning, control and performance evaluation in Bahrain", Managerial Auditing Journal, Vol. 18 No. 9, pp. 737-50, ISSN: 0268-6902.