Budgeting as a tool for enhancing financial management in local government authorities

Scientific Essay, 2014

41 Pages




















MMDAs as development partners to the central government need to mobilize enough revenue locally to support the central government development agenda. Inadequate financial resources can undermine the effective implementation of developmental projects in MMDAs. Budgets are important as they prudently manage scarce financial resources and at the same time serve as a means of expenditure authorization, control and evaluation base. MMDAs in Ghana, prepare budgets but deal with it in lesser extent, unlike the profit-making organizations which consider budget and budgetary controls important element in their policies. It is against this background that this study was carried out to find ways by which MMDAS especially AEDA can use budgeting and budgetary controls as management tools to prudently enhance their financial management system for local development. The case study approach was used in the study. Interviews and questionnaires were used to solicit data for the study.

The research found out among other things that MMDAs prepare budgets and control the budgets. The research data evidently prove that in the case of Ada East District Assembly, this is true. However, poor budget formulation and implementation and low revenue generation base make it difficult for MMDAs to live up to their responsibility as partners to the central government in national development. Recommendations and suggestions have accordingly been made to improve upon budgeting and budgetary controls in MMDAs and the nation as a whole.

Key Word: “Budgeting As A Tool For Enhancing Financial Management In Local Government Authorities


Central governments over the world have made human and environmental development their primary objective and have therefore used decentralization as a method of sharing development responsibilities with Para-state agencies such as the local authorities. Rodinell (1981) defines decentralization as the transfer of authority to plan, make decisions and manage public funds and functions from a higher level of government to individuals, organizations or agencies at lower level. Aryee (1999) identifies four forms of decentralization.

These are administrative, economic, political and fiscal. Local government in Ghana, especially Metropolitan, Municipal and District Assemblies (MMDAs) were established with the sole aim of generating good contacts with the citizens and to bring decision making to the level where development generally takes place. MMDAs were also created to help strengthen the democratic process and lay the basis for the upsurge of autonomous institutions of governance within the structure of the nation-state. According to Aryee and Amponsah (2003), the District Assemblies have added potential advantage such as spreading development skills throughout the society.

To ensure development, the government of Ghana in 1988 promulgated a local government law, Provisional National Defense Council (PNDC) Law 207 to establish one hundred and ten (110) local authorities. Sections 241 of the 1992 constitution and local Government Act 462 (1993) have been the basis for the adoption of the current decentralization program in Ghana. Currently, the number of MMDAs has increase to 216 with 55 as Municipal and 6 as Metropolitan Assemblies. There are massive responsibilities, spelt out in Act 462 specifying the functions and responsibilities of the District Assemblies in Ghana. The Local Government Act 462 (1993) Section 10, sub -section 3 states that the Districts Assemblies shall be responsible for the overall development of their district and preparation and submission of development plans. MMDAs are charged by the local government law with physical development responsibilities such as to:

1. Ensure legal arbitration;
2. Register birth, death marriage and divorce;
3. Give building permits to ensure proper spatial development;
4. Build schools, provide books and furniture;
5. Maintain law and order;
6. Establish and maintain parks and gardens;
7. Provide street lights;
8. Provide health, sanitation and waste management service;
9. Provide social services;
10. Provide firefighting services;
11. Provide markets;

(Local Government Act, Act 462 (1993)

MMDAs are charged by various enactments including the 1992 Constitution to ensure physical transformation of the various local areas and stimulate socio-economic activities and development so as to change civic inertia, poverty and illiteracy to enhance equity, efficiency, effectiveness and economy in their entrepreneurship. These functions of the MMDAs cannot be achieved without adequate financial resources to support them.

Inadequate financial resources can undermine the effective implementation of developmental projects in the districts. It is against this background that the new Local Government System has made provision for the financing of the districts.

Fiscal decentralization is the transfer of responsibilities, power and resources to lower level public authority to mobilize funds for development that is autonomous and fully independent from the devolving authority when narrowed down to devolution. Local authorities are given responsibilities and financial means within the national level determining the scope and quality of services to be provided and amount of funds needed to deliver these services. Kessey and Diaw (2002) called for vigorous revenue mobilization drive if the MMDAs are to perform better. They mention that the effectiveness of revenue mobilization depends on factors such as fiscal policy, revenue administration, monitoring operations and performance assessments. Unfortunately many MMDAs do not generate enough revenue. The reasons for their inability to mobilize enough revenue are numerous. To mention a few Kessey and Diaw (ibid) list corrupt practices, poor mobilization strategies, poor budget control and poor financial management as the major reasons. Prudent financial management refers to how wisely resources are mobilized and managed effectively and efficiently. Financial management is therefore an important aspect of public administration of every nation and it is one of the elements that make government effective. It involves financial forecasting, financial planning and budgeting, financial reporting and auditing. Sound financial management is one of the important complements of effective management practices which seek to enhance the socio-economic development of local authorities in Ghana. Marshall and Synder (1974) stress that in order to ensure sound financial management there should be good planning, accounting and budgetary systems.

Jackson (1958) states that without financial independence, local authorities must lead a very subdued life. Therefore funds should be mobilized from taxes levied on citizens and residents within the territories of the local authorities. Officials must spend funds in a manner governed by rules and regulations. Currently good financial management is being used by donors as a precedent for debt relief such as HIPC, GSOP and other financial assistance to developing countries.


MMDAs as development partners to the central government need to generate sufficient revenue locally to support the central government development agenda. Budgets are necessary to prudently manage scarce financial resources and at the same time serve as means of expenditure authorization, control and evaluation base. Profit making organizations consider budget and budgetary controls as important elements in their policy making.

The success of their organizations depends largely on good budget preparation and effective budgetary controls. In Ghana, MMDAs prepare budgets but the degree and extent to which budgets are prepared and formulated into performance budgets vary from each other. Even where formal budgets are prepared their nature and purposes may vary. Failure of many businesses nowadays erupt from the fact that budgets and budgetary controls which are the bedrock of any successful business organizations is weak or absent as reported by Ministry of Health, (1977) and Bradstreet, (2004). Such organizations or businesses are characterized by financial, administrative, production, managerial etc. constraints. Budgets should be prepared based on availability of resources. MMDAs should ensure that they generate enough resources to compliment central government grants which are always inadequate. They can also look elsewhere for resources to support their budgets.

It means some activities captured in the budget could not be undertaken or part touched. Ada East District Assembly prepares budget but most times the expenditure always exceeds the revenue resulting in budget deficits. It does not mean that budgets are ideal manager’s tool. This observation encourages numerous academicians to try to discover appropriate solutions for budget slacking, budget gamming, budget bias and other problems that managers had to deal with, Harper (1995). In line with this argument, the study looks at whether; MMDAs in Ghana can achieve their objectives with or without effective budget and budgetary control systems. It is to find out reasons for budget failure and deficits at Ada East District Assembly where budgetary control is cited as a cause for poor performance in development process.

The problem is that most MMDAs do not have effective financial control system due to poor budget formulation and implementation. They experience budget deficits which normally occur because:

a. There is poor data base for planning and budgeting;
b. There is poor budgetary control resulting in embezzlements, misappropriations and misapplication of funds culminating in over expenditures;
c. There is lack of ownership and responsibility when it comes to budgetary control. Poor data base for planning and budgeting also have other consequences. The consequences are that:

i) Revenues may be over-estimated to the extent that the estimated revenue is higher than the actual revenue;

ii) Expenditures may be under-estimated to the extent that the actual expenditure is higher than the estimated expenditure.

Some other rate and property rate payers may fail to fulfill their legitimate obligations in rate payment. This may also result in situations where actual revenue may be lower than the estimated revenue. Revenue deficits may also occur as a result of dishonesty of revenue collectors. While useful revenue cannot be collected, expenditures go on without adequate controls resulting in excess expenditures over-revenue. When these happen MMDAs cannot live up to their responsibility of being partners to the central government in the development effort. The citizens are also denied facilities and economic services for their business take offs.



The literature holds a large number of definitions of management control. The modern management control system originated with the influential work of Robert Anthony (1965) who drew boundaries between management control, strategic planning and operation control. He recognizes accounting language as the base for commonalities in the system. Anthony (Ibid) defines management control as the processes by which managers assure that resources are obtained and used efficiently in the accomplishment of the organization’s objectives” Garrison and Noreen (2000) suggest a different definition of management control as follows: “those steps taken by management that attempt to increase the likelihood that the objectives set down at the planning stage are attained and to ensure that all parts of the organization function in a manner consistent with organizational policies.

In this paper, the term management control is defined as those sets of organizational activities that include planning, coordination, communication, evaluation and decision-making as well as informal processes aimed at enhancing the efficient and effective use of the organizational resources towards the achievement of the organizational objectives. Budgeting is the tool used by management to facilitate those management activities. Anthony and Govindarajan (2004) identify several aspects or activities of management control namely, planning, coordinating, communication, evaluation, decision-making and influencing.

1. Planning what the organization should do. Planning could be viewed as budget preparation.
2. Coordinating the activities of several parts of the organization to assure alignments goals.
3. Communicating information such as strategy and specific performance objectives. Communication could be done formally (by means of budgets and other official documents) and informal through conversations.
4. Evaluating actual performance relative to the standard and making inferences as to how well the manager has performed.
5. Deciding what, if any action should be taken.


Over the past two decades, one word that has become the common currency in all managers’ vocabulary is “budgets”. The budget is perhaps the most chosen course of action or in action by the management and staff across all sectors. Management at all level within the public, private and the third sector have used the budget as their shield or excuse when confronted or challenged about any decision. It’s not uncommon to hear variations of the phrases “the budget doesn’t permit us to” or it’s not our budget. Frederick (2001) and he defines budget as plan that is measurable and timely. Bruns and Waterhouse (1975) also define budget as financial plans that provide the basis for directing and evaluating the performance of individuals or segments of organizations. Merchant (1981) defines budgeting system as a combination of information flows and administrative processes and procedures that are usually integral part of the short-range planning and control system of an organization.

Drury (2006) defines budget as a plan expressed in quantitative, usually monetary term covering a specific period of time usually one year in other words a budget is a systematic plan for the utilization of manpower and materials resources. In a business organization a budget represents an estimate of future costs and revenues. Lucey (1996) defines budget as a plan expressed in money terms. It is prepared and approved prior to the budget and may show income, expenditure and the capital to be employed. It may be drawn up showing incremental effects of former budgeted or actual figures, or be compiled by zero -based budgeting.

Blocher et al (2002), argue that budgets help to allocate resources, coordinate operations and provide a means for performance measurement. MMDAs like other organizations undertake various forms of policies, programs and activities covering economic, social, political etc. These activities entail financial counterpart in the form of revenue and expenditure. MMDAs document these intensions and their related financial implication in the form of a plan. Oduro (2006) mentions that such a plan backing the local authorities are intended actions and a program for the forthcoming period usually a year. It is called a budget. A budget is a document that reflects the estimates of income and expenditure of a government, local authority or a firm for a particular period of time, possibly, from 1st January to 31st December.

Some objectives are realized in the short-term and some are realized in the long- term in relation to multi-year programs that have been adopted, Erasmus and Visser (2000) state that an annual budget thus serves as an implementation tool for long-term objectives.

Public sector budget, according to Oduro (Ibid) is a prospectus referring to expected future revenue and expenditure activities of the government for the forthcoming period. It is used as an instrument to allocate public resources toward achieving some public value.

Budgets, by definition, have to be prepared in advance and for this reason, they are often referred to in terms of their being part of a feed forward system. Feedback is a term frequently heard both in accounting and ordinary use. According to Hall (1996) feed forward, on the other hand tends to be less frequently heard, yet this word incorporates the most important aspect of budgeting. It means looking at situations in advance, thinking about the impact and implications of things in advance, and attempting to take control of situations in advance.

From the definition of budgets we distinguish three key components. First, we recognize the planning aspect of budget. The plan is regarded as the statement of intent or goal of the organization. The second aspect is the measurability. This makes it possible to measure the plan. The third component is time. It gives the possibility to say if the plan is achieved.

In summary, a budget is a statement setting out the monetary, numerical or non-quantitative aspects of an organization's plans for the coming week, month or year. Budgetary control is the analysis of what happened when those plans came to be put into practice, and what the organization did or did not do to correct for any variations from these plans.


Gregory (2005) gives characteristics of a good budget. According to him, a good budget is characterizes by the following:

a. Participation – involves many people as possible in drawing up a budget;
b. Comprehensiveness- embraces the whole organization;
c. Standards – based it on established standards of performance;
d. Flexibility – allows for changing circumstances;
e. Feedback – constantly monitor performance;
f. Analysis of costs and revenues – this can be done on the basis of product line, departments or cost enters.


Gregory (ibid) identifies two main types of budget. These are traditional budget and MTEF budget. The traditional budget is a tool used by money experts to get your financial situation on track. Examples of the traditional budget are the following:

Fixed budget

Fixed budgets are often used by firms which rely on their forecasts. Hofstede (1968) writes that one discussed issue in the accounting literature is whether a budget should be fixed or variable with respect to volume or sales or other inputs. The fixed budget is therefore a budget which once made and accepted cannot be changed for whatever reason being that fixed cost are incurred and still persists irrespective of sales volume.

Flexible Budget

In the view of Garrison (2000), a flexible budget reflects the effect of changes in the budgeting environment which affect the performance of the budget, it does not confine itself to only one level of activity and actual results do not have to be compared against budgeted costs at the original activity level.

Capital Budget

Pandy (1999) defines capital budgeting as the firm’s decision to invest an entity’s current funds most efficiently in long-term activities in anticipation of an expected flow of the future benefits over a series of years.

Sales Budget

Stanton (1971) mentions that the cornerstone of successful marketing plan in a firm is the measurement and forecasting of market demand. The key figure needed is the sales forecasts because it is the basis for all budgeting and all operation in the firm. Radford and Richardson (1963) expressed their view that “effectiveness of budgetary control depends on the accuracy of sales estimates.” In profit making organizations, the sales budget is very important because it helps in determining profit for the year.

The Medium-Term Expenditure Framework (MTEF)

Gregory (ibid) mentions that a medium-term expenditure framework budget consists of a top-down estimates of aggregate resources available for public expenditure consistent with macro-economic stability; bottom-up estimate of the cost of carrying out policies, both existing and new; and a frame work that reconcile these cost with aggregate resources.

The MTEF budget is a rolling process repeated every year and aims at reducing the imbalances between what is affordable and what is demanded by line ministries. MTEF does this by bringing together policy-making, planning, and budgeting early in the budgeting cycle, with adjustments taking place through policy changes. It involves building domestic macro-economic and sector modeling capacity. Also, even if the whole of the Government’s budgeting system is working well, each sector is better if managing itself with a medium-term perspective.

A well implemented MTEF budget should:

1. Link the Government’s priorities with a budget within a sustainable spending envelope;
2. Highlight the tradeoffs between the competing objectives of the Government;
3. Links budgets with the policy choices made;
4. Improve outcomes by increasing transparency, accountability, and the predictability of funding.

The MTEF budget was introduced in Ghana in 1999. It is a three year rolling expenditure program with the first tranche covering 1999-2001 to be continued thereafter. The second phase of the program was arranged to cover the preparation of composite budgets that is in line with sectorial policy objectives of regional activities, administration and district assemblies. Source: Ghana Government Budget Statement, 1992.

Adams et al (2003), identifies five different classes of budget; activity based budgeting,

Zero-based, value based, profit planning and rolling budget and forecast.

1. Activity Based Budgeting (ABB), Activity based budgeting (ABB) is similar to activity based costing (ABC) and activity based management (ABM). ABB actually involves planning and controlling along the lines of value adding activities and processes. Resource and capital allocations decisions are consistent with ABM analysis, which involves structuring the organization’s activities and business processes so that they better meet costumers and external need. From the perspective of Wilhelmi and Kleiner (1995), ABB can be applied in all industries and in all functions, including service industries and overhead functions. It also can be used in manufacturing. It is really a management process, operating at the activity level, for continuous improvement on performance and costs.

2. Zero-Based Budgeting

The Zero based budgeting (ZBB), expenditures must be re-justified during each budgeting cycle rather than basing budgets on previous years or periods. ZBB is not build on inefficiencies and inaccuracies of previous history. The author also noted that the value of this approach depends on the stability of operating environment.

3. Value-Based Budgeting

This is a formal and systematic approach for managing the creation of shareholders value over time. All expenditure plans are evaluated as project appraisals and assessed in terms of the shareholder value they will create. This helps to link strategy and shareholder value to planning and budgeting.

4. Profit Planning Budgeting

This is about planning the future financial cash flows of profit centers (profit wheel), it gives the possibility to assess whether an organization or unit generates sufficient cash flows, creates economic value and attracts sufficient financial resources for investment. It also ensures consideration of an organization’s short and long term prospects when preparing its financial plans.

5. Rolling Budgets and Forecast

6. It appears to have the most potential as the better regular budgeting approach. It enables firms improve their forecast accuracy and overcome the traditional budgeting time lag problem.

This is by: solving the problems associated with frequent budgeting, being more responsive to changing circumstances, but requiring permanent resource to administer, and overcome problems linked to budgeting to a fixed point in time – i.e. the year end and the often dubious practices such cut-offs encouraged. Oduro (2001) on his part outlines budget types in the public sector as follows:

a. Line-item budget
b. Performance budget
c. Incremental budget
d. Zero based budget
e. Planning program budgetary system (PPBS)

Line Item Budget

This is a type of budget where expenditure is expressed considerable details with less attention being paid to the activities to be undertaken. The object of expenditure is the key to classification. This may also be called an ‘indicative budget’ if it is in a preliminary stage (pre-approval stage). It shows the nature of spending rather than its purpose

Performance Budget

This is a budgeting system which classifies items according to direct output of activity, intermediate products, activities, and purpose. It focuses on output or outcome rather than input and it is characterized by expenditure by work load or unit cost of activity, primary futures tasks and activities orientation management.


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Budgeting as a tool for enhancing financial management in local government authorities
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Dr. David Ackah (Author)Makafui R. Agboyi (Author), 2014, Budgeting as a tool for enhancing financial management in local government authorities, Munich, GRIN Verlag, https://www.grin.com/document/283897


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