ICP 813: BUDGETTING CONTROL & FINANCIAL MANAGEMENT

STRATEGIC BUDGETTING: A CASE STUDY of

A CONSTRUCTION CONSTRACTOR
COMPANY

UNIVERSITI TEKNOLOGI MARA UITM

ICP 813: BUDGETTING CONTROL & FINANCIAL MANAGEMENT

Prepared for:
Dr. Intan Rohani Endut
intan@salam.uitm.edu.my
Prepared by:
Abdullah Muslim Bin Ahmad
A Rasyid Bin Gani
Marliyana Binti Muhaiyuddin
Nor Aina Izati Binti Ayob
Date Submitted
April 2016

ICP 813: BUDGETTING CONTROL & FINANCIAL MANAGEMENT

TABLE OF CONTENTS
1.0 INTRODUCTION
1.1 Background.
1.2 Overview of Construction Industry in Malaysia
1.3 Objective of Study..
2.0 LITERATURE REVIEW
2.1 Introduction
2.2 Overview of Budgeting
2.2.1 Budgeting Principle
2.2.2 Budgeting Tools & Technique
2.3 Factors Leading to Financial Performance

2.3.1 Definition Financial Problems.

2.3.2 Factors of Financial Problems
2.4 Major Financial Decision..
2.4.1 Type of Financial Decision....
2.4.2 Financial Solution
3.0 CASE STUDY: GSSB
3.1 Introduction
3.2 Company Background.
3.2.1 Overview of GSSB.
3.2.2 Core Business of GSSB
3.3 How to develop budget for GSSB.
3.1.1 Current Financial Problem..
3.1.2 Financial Solution Towards Financial Problem ...

3.1.3 Budgeting Proposal for GSSB.

4.0 CONCLUSIONS AND RECOMMENDATION
4.1 Introduction
4.2 Company Background.
4.0 REFERENCES...

ICP 813: BUDGETTING CONTROL & FINANCIAL MANAGEMENT

1.0 INTRODUCTION
1.1 BACKGROUND
Nowadays, it can be said that most of companies are striving in a challenge environments, which
often are illustrated by uncertainties and rapid changes such elasticity of a financial conditions
especially in the construction sectors and industries. And still, budget has been the most effective
operation tool most companies use to govern their activities for achieving sustainable and stable
financial structure.
Budgeting is the heart of management tool for an organization to plan, monitor and control the
finance of the organization or project. Budgeting is a purpose to estimates the income and
expenditures for a set of period for the project or organization. In order to make a successful
budget, everyone who works for an organization or project should work together to formulate the
budget. This budget are need to be based on the objectives, action plans and must be refers to the
resources. All this are very important to develop a clear actionable budgeting and can help
organization to identify every expenses have been omitted and draws on the financial statements.

ICP 813: BUDGETTING CONTROL & FINANCIAL MANAGEMENT

1.2 OBJECTIVE OF STUDY

This paper intends to enhance our understanding of budgeting and financial management and its
relation towards construction related company in Malaysia. The paper will discuss on the
questions of what and how a selected contractor company facing, dealing, respond to financial
problems and strategizing budgeting. At the end, the writers will structures and develop a better
budgeting framework for the selected construction company so it can become a reference for
readers and other budgeting studies. The following are the overall objective of this paper:
i.

To identify and understand the concept of budgeting principle, tools and techniques
used for budgeting a project and company

ii.

To identify factors leading to financial problem and financial decisions taken for a
construction company

iii.

To develop budget for the selected construction company

1.3 OVERVIEW OF FINANCIAL PROBLEMS AMONG MALAYSIAN

CONTRACTORS
This paper intends to enhance our understanding of budgeting and financial management and its
relation towards

ICP 813: BUDGETTING CONTROL & FINANCIAL MANAGEMENT

2.0 LITERARTURE REVIEW

2.1 INTRODUCTION
2.2.1 BUDGETING PRINCIPLES
Based on research and references, different organizations have different principles. These
principles are created and used simultaneously. Therefore, there are a few common budgeting
principles that can be applied to achieve the companys objective.
-

Sustainability
Budget plans purpose is to achieve companys goal. It must carries the value of
sustainability that is the ability to be maintained at a certain rate or level (Oxford
Advanced Learners Dictionary, 2015). This means that budget to be created must have the
ability to be upheld or fit the purpose. Suttenfield (2014) recognized the actions that
should be taken to ensure sustainability of budget plan through focusing on customary
financial ratios and performance metric, observed organizations competitive position and
make consideration of opportunity costs, in addition to explicit costs. OECD (2014)
mentioned that longer-term sustainability and other fiscal risks should be identified,
assessed and managed prudently. Other ways to ensure sustainability is to evaluate
performance and make adjustments program and financial performance should be
continually evaluated, and adjustments made, to encourage progress toward achieving
goals (Government Finance Officers Associations, 1999)

Alignment
Suttenfield (2014) stated that a budget must be aligned with the vision, mission, values
and strategic goals. OECD (2014) supported this. He stated that budgets should be closely
aligned with the medium-term strategic priorities of governments. These showed that
budget must be aligned with the organizations goals and targets. The Government
Finance Officers Association (1999) in America also stated that there must be broad goals
that provide direction and serve as a basis for decision making. Therefore they should
also be aligned with goals that serve as a guideline when making a decision in preparing
budget

ICP 813: BUDGETTING CONTROL & FINANCIAL MANAGEMENT

Clarity
Various activities can be used to ensure clarity in preparing budget. Based on Suttenfield
(2014), clarity can be achieved by communicating about financial policy and budget
decisions in easily understood and remembered terms. This is because there are many
parties involved especially in big organizations whereby many activities take place.
Therefore, every party involved must be able to understand the contents of the budget in
order to conduct their task towards achieving the organizations goals. This also
supported by OECD (2014) with its report which read that budget documents and data
should be open, transparent and accessible.

2.2.2 Budgeting Tools &Technique

2.2.2.1 STATIC BUDGETTING
-

Static budgeting can be classified into traditional budgeting as stated by Steven

Brass,2012 This is the traditional method of budgeting.

Based on this projected level of output, prior to the start of the period. In other words, the
static budget is the original budget (Dennis caplan, 2010)

CHARACTERISTICS
-

A static budget is fixed for the entire period covered by the budget, with no changes
based on actual activity. Thus, even if actual sales volume changes significantly from the
expectations documented in the static budget, the amounts listed in the budget are not

changed(steven Brass 2012).

The Static budgeting commonly and suitable to use in highly predictable sale that are not
expected to change. Usually use in sales income based company such as factory, small
business.

ADVANTAGES
-

Can be use as valuation for sale performance (steven Brass,2012)

Static budget allow manager to know about the sales performance of the company in
particular year using the fixed budget. Leaders create static budgets before the year
begins, and they base budget numbers on previous trends (sale performance) as well as
actual profit and expenses from previous years. The manager can see clearly the sales

ICP 813: BUDGETTING CONTROL & FINANCIAL MANAGEMENT

performances whether it increase or decrease with only one fixed budget and they can
analyze the performance based on other justification.
-

Controlling Business Costs

A static budget does not adjust its volume during the year regardless of sales figures or
company performance. The original budget will remain the same even if your sales break
sales records. It will help your business control its costs and provides a level of certainty
for your finances. This allows you to maximize your savings and ensure your company is
spending every money as wisely as possible.

DISADVANTAGES
-

No Interest for proper budgetting (steven Brass,2012)

With the certainty of budget to be used every year, the companies tend to repeat the same
pattern of allocation and it will lead to no budget planning at all. The company will feel
comfortable and secure with the budget pattern for every year and they will find that
budgeting is not really important.

Lack of Flexibility
it is not flexible and so it cannot be changed to take advantage of changes in revenue or
expenses as the year proceeds. With a static budget, companies cannot manage the impact
of changes (Lisa Magloff ,Demand Media)

2.2.2.2 INCREMENTAL BUDGETING.

-

Most common method and based on historical information with the marginal

adjustments. (NIA,January 2010)

CHARACTERISTICS
- Combines the costs identified from the previous accounting period with the percentage
-

additions. (Brown, B. (2009) Successful Finance Surrey: Crimson)

Budgeting system that take the current year as a starting point for preparing next year

budgeting(ntuthzelo,2008)
This means that existing operations and the current budgeted allowance for existing
activities are taken as the starting point for preparing the next annual budget. It is
relatively straightforward. It is called incremental budgeting since the process is mainly

ICP 813: BUDGETTING CONTROL & FINANCIAL MANAGEMENT

concerned with the increment in operations or expenditure that will be incurred during
-

the next budget period.

Used widely in public and also private sector

ADVANTAGES
-

Easily understood
The concepts of Incremental are very straightforward and understandable, based on
previous data and make marginal changes through some discussion and negotiation
between the managerial and establish it as the budget for the next particular year.

Stable and Secure(CMI ,2015)

With the knowledge from the historical data and prediction of the condition of business
for the next year, this type of budgeting is more stable and secure. More or less the
companies will not stray too far from the predicted margin because it was planned based
on convincing data (previous data).

Immediate impact of change

The result of the budgeting can be seen fast. Whether the budget is successful or not can
be seen for next year, in only one year time, so the company will have very immediate
plans and an action to improve and develop their company in short duration.

DISADVANTAGES
-

Backward looking (steven Brass,2012)

Since, this method assumes slight change in budgetary allocations form prior period, it
assumes that method of working shall remain the same .It will focus more on previous
budget than future operational requirements and objectives. This may lead to lack of
innovation and no incentive for managers to reduce the cost.

Does not help managers identify budgetary slack;

Incremental budgeting may cause management to lead into a scenario called as budgetary
slack, whereby managers tend to build lower revenue growth and higher expense growth
so as to have favorable variances.

ICP 813: BUDGETTING CONTROL & FINANCIAL MANAGEMENT

2.2.2.3 ZERO BASE BUDGETING

-

In zero based budgets, past figures are not used as the starting point. The budgeting
process starts from scratch with the proposed activities for the year.

CHARACTERISTICS
-

Because it is start from the scratch the result is a more detailed and accurate budget, but it

takes more time and energy to prepare a budget in this way.

This technique is essential for new organizations and projects, but it is also probably the
best route to go in a dynamic organization that is proactive in taking on new challenges.
A budgeting process that allocates funding based on program efficiency and necessity
rather than budget history (Deloitte,2015)

ADVANTAGES
Resulting budget is well justified and aligned to strategy (Deloitte,2015)
This type of budgeting plan allows for an efficient allocation of resources based on need.
It can help determine where the budget is inflated and drive employees to find more cost
effective ways or strategies to improve their operations.
Reduction of useless activities
It leads to identification of opportunities and more cost-effective ways of doing things by
removing all the unproductive or redundant activities.
Improve Co-ordination and Communication (F.C Cheung)
It also improves co-ordination and communication within the department and motivates
employees by involving them in decision-making because the employees are the one that
gather all the information so communication and coordination between them and the
managerial team is very important.

ICP 813: BUDGETTING CONTROL & FINANCIAL MANAGEMENT

DISADVANTAGES
-

Costly, complex, and time consuming (Deloitte,2015)

Because this type of budget is rebuilt from scratch annually so all the data should gather
from the start and all the process should be fresh start. It also requires specialized training
or personnel to accomplish, and requires more resources in general so it will challenged
by budget cycle timing constraints take time and cost to prepare all the required data.

2.2.2.4 PERFOMANCE BASED BUDGETTING

Performance-Based Budgeting (PBB) is an effort to turn funding into results, by outlining
a general chain of cause-and-effect.(PPMRN Conference,2012)
Connect performance information with the allocation and management of resources. It is
Focusing more on result rather than money spent. It presents the major purpose for which
funds are allocated and sets measurable objectives.
Mostly used in public sector.
ADVANTAGES
- Improve expenditure prioritization (Robinson & Duncan ,2009)
The company management can decide which project or events that need to be prioritize
based on the performance or benefit that need to be achieved.
-

Encourage to spend more efficiently and effectively (Robinson & Duncan ,2009)
The management can know and decide which area that they need to spend more
efficiently so that it can be worth with the performance that they expected to achieve.

Serves as a strategic planning too (Navin,2003)

It can improve the clarity, and consistency of project designs, facilitating a common
understanding and better communication between different departments and staff in
general of the desired results of projects

DISADVANTAGES

ICP 813: BUDGETTING CONTROL & FINANCIAL MANAGEMENT

The management may have different ideas regarding what is important about the
company's work (NSCL,2016). Because of the performance expected result is too
subjective, the management might have differences ideas and opinion in prioritize their
budgeting.

ICP 813: BUDGETTING CONTROL & FINANCIAL MANAGEMENT

3.0 CASE STUDY: GREAT SUBSTANCE SDN BHB (GSSB)

3.1 COMPANY BACKGROUND
3.1.1.OVERVIEW OF GSSB
GREAT SUBSTANCE SDN BHD (GSSB) company no : 508005-X was incorporated in 2000
as a builder in construction industry. It has been active operation since its inception with the
effort of a team of well-experienced personnel. From its formation in March 2000, GSSB has
completed and its presently carrying out projects mainly for private sector. These include Civil,
Building and Infra-structural engineering projects,
COMPANY INFORMATION
REGISTERED NAME
: GREAT SUBSTANCE SDN BHD
DATE OF

(COMPANY NO: 508005-X)

: 13TH MARCH 2000

INCORPARATION
AUTHORIZED CAPITAL
PAID UP CAPITAL:
BOARD OF DIRECTORS:

: RM 1,000,000.00
: RM 750,000.00
: MR CHUAH AH SENG

ADDRESS:

MR HEW WEN CHONG

: CT-04-21, CORPORATE TOWER,
SUBANG SQUARE, JALAN SS15/4G
47500, SUBANG JAYA, SELANGOR DARUL EHSAN
TEL: 03-56370126
FAX: 03-56370129

COMPANYS LOGO

We decided to select this company because we have enough information regarding this company
and also its financial information. We also felt that this company is suitable as it is a construction
company with many years experience and also matched with the requirement of this task.

ICP 813: BUDGETTING CONTROL & FINANCIAL MANAGEMENT

3.1.2 Core business of GSSB

GSSB has built up a team of competence personnel and associate companies to undertake the
following activities.
1)
2)
3)
4)

Civil engineering Works, Building Works, Architectural Works and Construction works
Full range of Mechanical and electrical Services inclusive of :
Air Conditioning & Ventilation System
Fire Protection System
Electrical Installation
Plumbing and Sanitary System
External Infra-structural Works
Renovation & Decoration Works

3.2

GSSB BUDGET

3.2.1

CURRENT FINANCIAL SITUATION

Based on previous balance sheets of GSSB from year 2013 to 2015, the liquidity ratio, debt ratio,
and debt equity ratio had been determined through calculations formula as follows.
Formulae

2013

2014

2015

Liquidity Ratio

1.39

1.37

1.29

liability
Debt Ratio

0.69

0.71

0.75

Total liabilities/total asset

Debt Equity

2.32

2.45

2.95

Current

asset/current

Total liability/total equity

A higher liquidity ratio is better financially for a company. Many companies will try to maintain
a current ratio of at least 1. This is to ensure the value of their current assets can cover at least the
total amount of their short term expenses. Current ratio of bigger than 1 gives more comfort to
the company financially against unforeseen expenses that may incur. GSSB liquidity ratio
reduces slightly from 2013 to 2015 but still show sign that GSSB can pay its debt and fund their
ongoing operations.

ICP 813: BUDGETTING CONTROL & FINANCIAL MANAGEMENT

Lower debt ratio is more favorable than a higher ratio. A lower debt ratio shows a more stable
business because a company with lower ratio has lower total debt. Every industry has different
benchmarks for debt, but overall 0.5 is acceptable ratio. Ratio of 0.5 is less risky. Ratio of 1
show that total liabilities equals to total assets. GSSB debt ratio is slightly above 0.5 but still
under 1.0. This proves that GSSB can manage their debt without drastic financial changes.
A lower debt equity ratio shows a more financially stable business. Companies with a higher debt
equity ratio are considered more risky to creditors and investors. GSSB has a very high debt
equity ratio due to its nature of business that are capital intensive than other sectors. Companies
in construction industry easily attract equity investments than using stakeholders funding.
Overall, the companys financial situation shows that the company is well established and stable
financially even though they are involved in risky financial conditions.
3.2.2

GSSB Principles ,Tools and Technique in developing budget

Budgeting Principles
From the annual report of GSSB, shows that this company has all principles which are the
financial statement are in line with the mission of the company. As stated by Suttenfield (2014),
the budget plan must be aligned with the vision, mission, values and strategic goals. Their annual
reports are prepared in in detailed and very clear to understand. Their annual report also showed
sustainability. Their budget plan had created the ability to be upheld or fit the purpose. OECD
(2014) mentioned that longer-term sustainability and other fiscal risks should be identified,
assessed and managed prudently. Their budget also shows clarity. Based on Suttenfield (2014),
clarity can be achieved by communicating about financial policy and budget decisions in easily
understood and remembered terms.
Tools and Technique in developing budget
GSSB had used the incremental approach. The incremental cost of capital refers to the average
cost a company incurs to issue one additional unit of debt or equity. From the reading of previous
annual report shows that GSSB are mostly involved in the same type of activities and projects in
the construction industry. Therefore their pattern of expenses every year is similar. They adjust
the amount they spent based on their previous activities and projects.
3.2.3

FINANCIAL PROBLEMS FACED BY GSSB

ICP 813: BUDGETTING CONTROL & FINANCIAL MANAGEMENT

3.2.4

MAJOR FINANCIAL DECISION BY GSSB

ICP 813: BUDGETTING CONTROL & FINANCIAL MANAGEMENT

3.2.5 BUDGETING PROPOSAL

ICP 813: BUDGETTING CONTROL & FINANCIAL MANAGEMENT

4.0 CONCLUSION & RECOMMENDATION

4.1 SUMMARY OF PAPER
The purpose of the study was to identify the system of budgeting and budgetary control practice
adopted in Ernest Chemist and analyze how effective it is for the company. In addressing the
purpose of the study, the major topics on which the literature was reviewed include; nature of
budget, ethical issues and budgeting functions of budget, persons involved in budgeting,
approaches to budgeting, types of budgets and budgetary control. The instrument used in
collecting the data for the study was a self-designed questionnaire. The research reveals that, a
budget committee under the control of the budget director mostly does the preparation of
budgets. It is prepared mostly every year and it is presented to the board of directors for
approval. As a result of the frequent control measures in place, the company is able to avoid
challenges like inflation and waste.

4.1 CONCLUSIONS AND RECOMENDATION

From the findings of the study, it was concluded that the appropriate system of budgeting and
budgetary control has been adopted and used to prepare the pharmacy`s budgets. And this has
stated clearly the various levels the budget preparation has to go through. This system has also
provided guidelines for managers and supervisors to ensure that they think well ahead of time to
foster effective utilization of limited resources of the organization. Because budget preparation
plans are made ahead of time, the targets which management of the pharmacy hopes to achieve
are most often easily recognized. The preparation of budget helps in designing or clarifying the
lines of horizontal or vertical communication within the organization. The respondent also gave
his general impressions on budgetary control at Ernest Chemist; he said the budgetary control
system which is currently in use is more appropriate for the company since the system involves
comparison of actual levels of performance against budgets and reports all variances with proper
analysis to provide a basis for future courses of action. Based on this he thinks the current
budgetary control has intensively improved as compared to the past years and he hopes that it
will be better for the years to come. On the other hand, though the appropriate system is adopted
and is in use, there are still problems with its effectiveness. These problems are associated with
the ethical issues mentioned earlier, for example the lack of true integrity in the budgets. This
stands to back the statement made by Maher and Deakin (1994), which suggests that companies

ICP 813: BUDGETTING CONTROL & FINANCIAL MANAGEMENT

should provide incentives for people to report truthfully, meaning the company must reward both
for honest estimate and good performance. The true integrity of the budgets can be checked for
this purpose using the company`s existing budgetary control system. But the reality is that, many
companies put considerable pressure on employees to achieve increasingly difficult targets
without any form of incentives. The findings of the study indicate that as a result of these
problems, the cash budgets are sometimes overstated. Following the findings from the research I
recommend that the top executives should make provisions to give some form of incentives to
motivate managers and budgeting staff so that they can prepare a good budget for individual
department with adequate information which are reliable.

ICP 813: BUDGETTING CONTROL & FINANCIAL MANAGEMENT

5.0 REFERENCES
1)
2)

ZERO BASED BUDGETTING: Hero or ZERO?,Deloitte publications 2015

(Public Performance Measurement & Reporting Network )PPMRN Conference

3)

2012
Methods of Budgeting,Research and library services Northen Ireland

4)

Assembly,January 2010
National conference of state legislatives NCSL,2016
Management Accounting Concepts and Techniques,Dennis Caplan, University

7)
8)

at Albany (State University of New York)

Steven bragg, http://www.accountingtools.com/
From traditional budget planning to zero-based budgeting
(Relevant to PBE Paper II: Management Accounting and Finance)
Dr Fong Chun Cheong, Steve, School of Business, Macao Polytechnic Institute
Chartered management institute (CMI) 2015
Flexible Budgets and Overhead Analysis (McGraw-Hill Ryerson,2012)
Key Advantages & Disadvantages of Using a Static Budget ,Lisa Magloff of

9)

Demand Media
Guide to Performancebased Budgeting-CGG Collected Working Papers: 2003

5)
6)

Volume 2 ( Dr B. Navin)
10)

OECD. (2014). The principles of budgetary governance. Paris: OECD

Publishing.

11)

Suttenfield, N. (2014). Guiding Principles for Annual Budgets and Multi Year
Financial Planning. Illinois.

12)

Press, O. U. (2015). Oxford Advanced Learners Dictionary. Retrieved

http://www.oxfordlearnersdictionaries.com/