6.5.1 Financial strength of an institution and accuracy
Hypothesis H2 - There is a significant negative association between the financial strength of an institution and perceived budgeting accuracy.
Statistically testing the association between budgeting accuracy and the percentage surplus or deficit on income in 2013-14 as a proxy for financial strength may provide evidence to confirm the hypothesis. Although it is recognised that a more sophisticated set of key performance indicators
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to measure financial strength could be used, annual surpluses are an important aspect (McConnell & Johnes, 2017). Pearson’s correlation coefficient in Table 6.3 shows there is a negative correlation between budgeting accuracy (r = -0.334; p = 0.002) and the institution’s percentage surplus or deficit. Spearman’s correlation coefficient also indicates a negative correlation (r = - 0.337; p = 0.002). However, as the correlation coefficient is low there is not a strong relationship. Bryman and Cramer (2011) suggest that as a rule of thumb a result of 0.20 to 0.39 would be considered low (Using the surplus or deficit generated in the previous year 2012-13 also showed a correlation at r = -0.308; p = 0.005).
Institutions with a cautious approach do appear on average to have higher surpluses than those which are more optimistic. The opportunity to build in contingencies, provisions and slack into the budget leads to unspent resources. Interviews with respondents provide further confirmation that surpluses are often higher than originally forecast for those taking a cautious approach, as would be expected. For those with a less caution approach, interviewees explained that intervention was necessary: “Senior managers are optimistic. The risks of this need to be managed so that the institution isn’t too optimistic” (OU5) and “the VC will no longer tolerate a long-term structural deficit” (OU21).
The negative association between financial strength in terms of higher surpluses and the degree of accuracy seems to be valid in terms of testing Pearson’s correlation coefficient. The variable of university surplus does not appear in the multiple regression model (Table 6.4), but is included as a minor negative predictor in a revised model if a logarithm transformation is performed on the data to address potential skewness as discussed at the end of section 6.2.3. H2 is tentatively accepted. Comments by interviewees and from financial health reports issued by HEFCE indicate that the cautious approach taken by universities tends to result in higher than forecast surpluses. However, the potential for declining surpluses in the future may change the association between budgeting accuracy and the surpluses achieved.
Taking a cautious approach is only partially explained by perceptions of the impact of the new fee regime, with 35% of respondents claiming that budget setting had become less accurate for this reason (scale points 1-4) on Question C4. However, Table 6.2 does not show a correlation between budgeting accuracy and the impact of new fee regime (r = -0.105; p = 0.343).
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Respondents views on the budgeting and forecasting process (Question E17) might assist in explaining why those taking a cautious approach tend to have higher surpluses. Therefore, an analysis of the statements below was prepared to identify which were the common responses for institutions with higher than average surpluses. The mean surplus as a percentage of income for respondents was 3.9%, with an upper quartile of 6.0%. A value of 7.0% or above was therefore viewed as a reasonable approximation of those with higher than average surpluses.
Table 6.5 Views of high surplus institutions (7% or greater of income) Mode
Forecasting is more an art than a science Neutral/Agree
At this institution, forecasting is just part of the budgeting process, rather
than a broader performance management tool Neutral/Agree
Reliability of the institution’s forecast is compromised because
operational functions are not sufficiently involved Neutral/Disagree A greater understanding of how the various parts of the organisation
operate would improve the forecasting undertaken Agree Forecasting accuracy has deteriorated in recent years Disagree It is difficult to set accurate forecasts because of the unpredictability of
factors influencing the institution’s activities Agree
Forecasts quickly become obsolete or outdated Agree
Inaccurate forecasting has adversely affected the institution Disagree Governing body takes an interest in the accuracy of budgeting and
financial forecasting Agree
The combination of fears that forecasts quickly became obsolete, a greater understanding of the organisation was needed, the forecasting process was more difficult and the governing body showed an interest in accuracy may encourage institutions to take a cautious approach resulting in higher surpluses.
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6.5.2 Low surpluses or deficits and the exertion of controls
Hypothesis H3 - There is a significant positive association between institutions with low surpluses or even deficits, perceived budgeting accuracy and the exertion of greater budgetary controls [in order to avoid a far worse position than originally planned].
Some interviewees explained that “the budget process starts as a bottom up approach which then becomes top-down as areas ask for more budget than is affordable and requests have to be reduced” (OU4). Statistically testing the association between budgeting accuracy and the approach taken to budgeting using a Likert scale of 1 (bottom-up) to 10 (top-down), with the middle indicating a combination, failed to find a correlation in Table 6.2 (r = 0.193; p = 0.079). Therefore, a top-down approach (i.e. where greater control is exerted over the budgeting process) does not seem to be more prevalent in institutions which are either cautious, accurate or optimistic in their budget setting. Furthermore, Table 6.3 shows there is no association between the budgeting approach and the percentage surpluses generated in 2013-14 (r = -0.017; p = 0.881). Further, 77% of institutions sub-divided their budget into monthly control periods (Question B2), thus demonstrating regular monitoring by the majority.
An analysis of the difficulty of obtaining new resources outside of the normal budget process to support unforeseen opportunities using a Likert scale of 1 (very difficult) to 10 (very easy) did not show an association with budgeting accuracy (r = 0.179; p = 0.103) in Table 6.2.
Therefore H3 is rejected as neither tighter controls through a top-down approach or restrictions on new resources appear to be associated with budgetary accuracy, and there is no significant relationship between a top-down approach and the surpluses generated
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