Budgeting Practices and Performance in Small Healthcare Businesses Essay Example

because of its importance socially and economically, and because it is likely to be comprised of businesses that vary broadly in their budgeting practices.

Contingency-based research proposes that there is no single MCS suitable for all businesses. Instead, the suitability of a particular MCS is argued to be contingent upon characteristics of a business including its size, strategy, structure, and also management’s perceptions of the uncertainty of the environment within which the business operates. We begin by examining the relationship between a business’s budgeting practices and these four contextual factors. In so doing, we view the development of a budgeting practice as consisting of two stages, the initial decision regarding adoption and the subsequent decision regarding the extent of use.

Here, the term ‘adoption’ rejects the decision by a business to use a formal process to project its future 1044-5005/$ – see front matter. Management Accounting Research 21 (2010) 40–55 41 financial performance. Alternatively, the term ‘extent of use’ refers to both the number of different types of budgets the business uses and the frequency of their use. In our analysis, we develop arguments for, and investigate, these two stages separately.

We then turn to consider the relationship between a business’s budgeting practice and its performance. The relative of the business’s MCS with its contingency factors is argued to impact on performance, with performance increasing with the degree of (Chenhall, 2003). Thus, citrus paribus, businesses using a practice that does not, whether by “over-budgeting” or “under-budgeting”, are expected to experience weaker performance. Do we argue that not all of our sample businesses are likely to exhibit “best budgeting practice” because of the

difficulties associated with identifying and implementing best practices, and the discontinuous nature of upgrades (Luft, 1997). We examine the relation between and performance using the method proposed by Ittner and Larcker (2001) and classified as a Cartesian/Contingency approach (Gerdin and Greve, 2004). Degree of is measured as the difference between the extent of budget use and that predicted by the business’s contingency factors. This approach assumes that at any point, not all businesses will in fact have implemented their optimal practice.

To conduct our investigation, a written survey of 988 members of the Australian Association of Practice Managers (AAPM) was undertaken. In brief, wend that larger, more decentralized healthcare businesses are more likely to adopt written budgets. Further, for the subset of businesses that use written budgets, we nd that the extent of budget use is positively associated with a structure (decentralization) and strategy (cost leadership), and negatively associated with perceived environmental uncertainty (dynamism). Finally, we document a relationship between choice of budgeting practice and performance.

Here, we initially performance to be positively associated with the use of written budgets. More tests then provide evidence of a positive association between the degree of and performance. Our study makes several contributions. First, we present evidence that contingency factors do indeed provide insights into both the adoption of budgets and the extent of their use for our sample of small Australian primary healthcare businesses. Interestingly, the results suggest that size and structure capture the business’s initial decision to adopt a formal budgeting practice.

However, once a business has adopted a formal practice, strategy, structure, and perceived environmental uncertainty appear to be the primary determinants

underlying the subsequent decision regarding the extent of budget use. We also present evidence that our sample business’s budgeting practices is associated with performance. To our knowledge, there has been relatively little empirical evidence on this relationship documented in the literature to date. Second, contingency-based research has predominantly been conducted in the large business sector.

We extend this work by examining a small business setting. We argue that our setting has the advantage of allowing for an examination not only of the extent of budget use but also of the initial decision to adopt a budgeting practice. In conjunction, it also provides an opportunity to examine more closely the different underlying theoretical constructs of the size that the two most commonly used proxies, gross fees, and full-time equivalent employees, maybe capture. Finally, from a practical perspective, the healthcare sector is under continuing pressure to increase its efficiency. This study contributes by examining the contexts in which they use of budgets is associated with enhanced performance in primary healthcare. The results should be of benet to both practitioners and those who advise practitioners on MCS design.

The remainder of this paper is structured as follows:

• Section 2 presents background material;
• Section 3 describes our experimental setting;
• Section 4 presents the hypotheses,
• Section 5 the method and Section 6 the results;
• and Section 7 provides a summary and conclusions.

Background MCS have been deed as all devices and systems that businesses use “to ensure that the behaviors and decisions of their employees are consistent with the organization’s objectives and strategies” (Malmi and Brown, 2008).

We focus on a business’s decision regarding its budgeting practices. Budgets are considered an MCS because they can influence the behaviors and decisions of employees by translating a business’s objectives into plans for action, communicating the objectives, and providing a benchmark against which to assess performance.

We view budgets as both an important and appropriate focus given that they are considered to be one of the main MCS in organizations, have been found to be the earliest system adopted in startup businesses, and continue to receive significant attention in the research literature and in teaching material (Davila and Foster, 2005, 2007; Sandino, 2007). Within the MCS literature, the term ‘budgeting’ is used to refer to a broad range of topics (see Chapman et al. (2007) for a review).

In this study, we defined a budget as a forward-looking set of numbers that projects the future financial performance of a business, and which is useful for evaluating the financial viability of the business’s chosen strategy or deciding whether changes to the overall plan are required (Davila and Foster, 2005). Budgets have been identified as playing a number of roles which include making goals explicit, coding learning, facilitating coordination, promoting accountability, facilitating control, and contracting with external parties (Davila et al. 2009). Benefits of budgeting include increasing efficiency through planning and co-ordination, supporting both control and learning through the comparison of actual results with plans, and more globally “the ability to weave together all the disparate threads of an organization into a comprehensive plan that serves many purposes” (Hansen and Otley, 2003). Given these various roles and potential benefits, one might expect all businesses to

adopt a formal budgeting practice.

In fact, this view appears to underlie much of the empirical MCS research predominantly conducted in a large business setting, as it is often assumed that large businesses will already have formal MCS that can be readily examined (Chenhall, 2003). Here, the focus has typically R. King et al.

Management Accounting Research been on the adoption and performance implications of specific MCS “innovations” like activity-based costing (ABC) (Ittner et al. , 2002). However, it is argued in the MCS literature that a rational adoption decision should require an evaluation of the associated costs as well as the benefit (Davila and Foster, 2005).

Costs of a formal MCS include the easily measured out-of-pocket costs associated with implementing and operating the system (Hansen and Otley, 2003; Hansen and Van der Stede, 2004). Other costs that are not so easily measured are the possibility that budgets create rigidity thereby limiting cooperation and creative response, over-emphasize short-term cost control and top-down authority, encouraging gaming, and de-motivate employees (Hansen and Otley, 2003; Hansen and Van der Stede, 2004).

Further, arguably the benefits and costs associated with adopting a formal budgeting practice will not be the same for every business but will depend on business-specific contextual factors. Thus, ex-ante, it is not clear that the adoption of a formal budgeting practice is necessarily a rational outcome for all businesses. Our study distinguishes itself from the majority of the MCS literature by focusing on the small business setting, specifically the primary healthcare business sector. Within this sector, we argue that it is likely that for some businesses, the costs of budgeting will outweigh

the perceived benefits whereas the converse will likely be true for others. Thus, we argue that this setting provides the opportunity to gain insights into both the decision regarding the adoption of budgets as well as the subsequent decision regarding the extent of their use. We investigate the contextual factors that delineate the costs and benefits associated with budgeting from a contingency framework perspective. Our initial focus is on the contextual factors that differentiate adopters from non-adopters.

We then consider those factors that drive the decision regarding the extent of budget use and conclude with an investigation into the relationship between the fit of a business’s budgeting practice with its contextual factors and its performance. In adopting a contingency framework perspective, we acknowledge that research referring to contingency theory has been subject to the criticism that contingency is a general idea rather than a theory as “there is no a priori intuition of its own as to what the pertinent factors are and as to their likely consequences” (Spekle, 2001).

In this study, we do not consider contingency as a theory but rather as a framework for investigating identified factors for which we have a priori intuition based on other organizational, economic, and sociological theories. A further criticism of the contingency-based literature is its simplistic nature of investigating one contextual factor or MCS at a time (Fisher, 1995).

In the face of this criticism, some studies have begun investigating multiple contextual variables simultaneously (Hansen and Van der Stede, 2004; Cadez and Guilding, 2008). We also consider multiple contextual factors, specifically those identified in Chenhall’s (2003) review of the MCS literature since 1980.

This review confirms environment, technology, 3 structure and size as “the descriptors of the fundamental generic elements of context”. Strategy is also included as it emerged in the 1980s as an important factor that influences the design of MCS (Lang? eld-Smith, 1997). Finally, contingency-based research has its roots in sociology. The underlying premise of sociology is that humans are boundedly rational and satisficing (March and Simon, 1958).

Bounded rationality can impede decision-making as not all possible alternatives are known with certainty at a given point in time. One identified role of MCS is to assist managers in decision-making (Lawrence and Lorsch, 1967). However, the decision on the optimal MCS is itself restricted by bounded rationality, as well as the personal incentives of the manager. Thus, while conceptually organizations may be expected to use the optimal MCS, this is not always possible. Businesses facing the same contextual factors may therefore choose different MCS, with the differences reficted in their performance. In our study, we investigate the effect of a mismatch between the contextual variables and the extent of the use of budgets on performance.

Experimental setting

We adopt the Australian primary healthcare sector as our experimental setting for two reasons.

• First, we view it as an inherently interesting research setting in its own right, given its importance both socially and economically.
• Second, we believe it to be an ideal setting within which to conduct an investigation into budgeting because as argued below, it is a sector within which there are likely both significant incentives and disincentives to budget.

Thus, this setting provides the advantages of the controls that

arise from working within a single industry while at the same time, one within which variation in budget use can reasonably be expected.

In detail, the Australian primary healthcare sector plays a uniquely important role in terms of both the services it provides and its place in the economy. In terms of services, it represents the gateway through which patients most typically enter the health system. Initial contact with For a sample of 57 organizational units, all with budgeting practices in place, Hansen and Van der Stede (2004) undertook an exploratory study focusing on four contextual factors (strategy, structure, environment, and size) as possible antecedents to identified reasons to budget. Alternatively, for a sample of large businesses, mostly manufacturing from Slovenia, Cadez and Guilding (2008) find that superior performance results from an appropriate match between the contingent factors strategy, size, and market orientation, and strategic management accounting applications.

We initially considered technology as an additional contextual variable but decided against its inclusion given our choice of the experimental setting. Recent advances in medical technology have impacted diagnostic specialties such as pathology and radiology (specialties not included in our study) to a much greater degree than primary healthcare. With the exception of three ophthalmologists, the only specialists included in the survey were those that provide outpatient services from private rooms and like GP’s, still, largely rely on their skill and basic instruments such as the stethoscope.

From an administrative and medical records perspective, the use of technology is widespread, with computers being used in 89. 8% of all GP practices and 94. 5% of all specialist practices in 2002 (ABS, 2002).

In

this regard, Merchant (1981) suggested that a desirable extension of budgeting studies guided by contingency frameworks would be to collect data from samples chosen to magnify the variation on the dimensions of interest while controlling for the many possible interacting factors which obscure or distort the findings. R. King et al.

Management Accounting Research the health system is through a general medical practitioner (GP). For specialized care, patients are then referred to specialist medical practitioners. GPs and specialists provide this primary care from private consulting rooms and refer on to other providers for diagnostic tests.

Economically, the sector contributed 1. 71% of GDP in 2007 (AIHW, 2008).

Faced with rising costs, doctor shortages, and increasing waiting times, primary healthcare businesses are increasingly under pressure to become more efficient (Department of Health and Ageing, 2005). Here, budgeting has been identified as a management accounting tool that enhances financial performance and improves efficiency (Davila and Foster, 2007). Further, the majority of the existing management accounting research has been focussed on in-hospital care so little is known about MCS in the outpatient setting (Abernethy et al. , 2007), with the exception of a recent U. S. -based study of the relation between performance-based compensation and ownership of primary healthcare businesses (Ittner et al. 2007).

Taken together, these facts reinforce our view that the primary healthcare sector within Australia is an important and potentially fruitful setting for the conduct of MCS research generally, and research into budgeting practices more narrowly. More directly to the current investigation, we seek an experimental setting with variation in budget use, including the presence of both adopters and non-adopters. We

believe that a number of factors conspire to make the primary healthcare sector a reasonable choice, ex-ante.

First, the small business sector has been argued to have lower levels of formal planning and control (Chenhall and Langfield-Smith, 1998). As such, it might also be expected to include non-adopters.

In Australia, primary healthcare is largely provided by private businesses owned by the doctors working in the business as sole traders, in partnership, or through a company. Management of these businesses has traditionally been by the owner, although there now appears to be a trend towards the delegation of management to practice managers.

These primary healthcare businesses typically have fewer than 50 employees and would thereby most often be classified as small businesses according to the OECD definition (Holmes and Kelly, 1989).

Second, prior research also finds that rapid growth small-to-medium enterprises (SME) provide more extensive future-oriented financial reporting than matched non-growth concerns (McMahon, 2001). Arguably, small primary healthcare businesses are less likely to be rapidly growing as there is currently an undersupply of primary healthcare workers due to an aging workforce and restrictions on training places.

These limited organic growth prospects further our expectations of finding non-adopters.

Third, firms within the service sector typically do not need to account for stock, thereby eliminating one driving force behind the use of sophisticated MCS. Finally, research on small and family businesses supports the view that necessary management skills are required before planning can be initiated (Gibb and Scott, 1985). Since there is a lower likelihood that primary healthcare owners, the majority of whom are doctors, have formal training in MCS, non-adoption is

even more likely relative to other service sectors.

Conversely, there are also economic incentives to adopt budgets. As noted, primary healthcare businesses are under increasing pressure to become more efficient. The National Health Performance Committee has adopted a framework specifically designed for measuring healthcare system performance, with one of the identified components being efficiency. In response, a number of institutions and private management consultants now offer education on managing primary healthcare practices that includes training on budgeting.

In conjunction, there is the added incentive to undertake these education programs in that continuing education is a requirement of the accreditation process for GP practices. Further, only accredited practices can access Practice Incentive Payments (PIP) from the Federal Government which can represent significant additional revenue.

There is currently no Medicare funding for diagnostic services provided within the primary healthcare setting and so, these businesses do not invest in the associated technology. The specialist practices included in the study were the private rooms of orthopedic surgeons, ophthalmologists, dermatologists, gynecologists, and gastroenterologists. These specialists conduct an initial consultation and post-operative follow up from their private rooms but perform procedures in hospitals or day surgeries for which they have visitation rights, using equipment supplied by the hospital/day surgery where a fee is charged directly to the patient for its use.

Overall, the healthcare industry contributed 8. 98% of GDP in 2006–2007, with 19% of recurrent health expenditure on medical services provided by GP’s and specialists. In 2006–2007, Medicare paid $4029. million for GP services, representing an average 4. 93 items per capita (AIHW, 2008).

In contrast, international studies of formal budget use have focused on

large businesses,f inding the vast majority use annual fixed budgets (Horngren et al., 2006). Australian evidence is consistent, with 97% of large businesses found to use budgets (Chenhall and Langfield-Smith, 1998).

The exact extent to which management is being delegated to practice managers is uncertain given a lack of studies into the prevalence or role of practice managers (Department of Health and Ageing, 2005). There were 9600 private GP practices operating in Australia at the end of June 2002. Of these, 68. 5% were single practitioner practices employing 2. 9 persons on average, and only 100 employed more than 10 practitioners. At the same time, there were 9864 private specialist practices, 89. 7% of which were solo specialist practices employing an average 3. 2 persons and only 19. 2% had greater than 10 practitioners (ABS, 2002).

There has been a recognized unfavorable long-term trend since 1999 towards an increasing percentage of primary care practitioners aged 55 years or over.

In conjunction, the World Health Organisation (WHO) predicts a global workforce shortage of 4. 25 million health workers over the next decade (Cresswell, 2007).

The 2008–2009 Federal Government Budget proposal includes administered Program ‘Primary Care Policy, Innovation and Research’ which among other things, “funds initiatives to improve service delivery and help GPs access current best business practice. ” As a part of their response, the Australian Medical Association (AMA) and the AAPM have made available specifically tailored business education programs for healthcare managers.

The Royal Australian College of General Practitioners (RACGP) standards for general practice include: “Our administrative staff can describe (and there is evidence of) training undertaken in the past

3 years that is relevant to their role in our practice. ” The practice manager is specifically mentioned in the standard, as is the term practice management training. In order to access Practice Incentive Payments, GP practices must have complied with the RACGP standards. In 2007, 80% of GP practices were accredited (AIHW, 2008).

By way of context, an accredited practice with 44 R. King et al.

Management Accounting Research

However, notwithstanding, for some businesses, given their lack of size and sophistication, these incentives are unlikely to outweigh the costs of budgeting which include the initial investment in software, skills, and the added labour hours.

Hypothesis development

Overview This study investigates the relationship between factors identified from contingency-based research, the adoption and extent of use of budgets, and business performance. The specific contextual factors we consider are size, structure, strategy, and perceived environmental uncertainty (Chenhall, 2003). We argue, based on how each identified factor is expected to impact both a business’s needs for and thereby the benefits it derives from budgeting and also its ability to meet the costs of a budgeting practice, that the four contingency factors play different roles relative to the two stages of the budgeting decision. Specifically, we predict that a business’s adoption decision is primarily related to its size and to a lesser extent, its structure (decentralization).

For businesses that make the threshold adoption decision, we predict that those that are more decentralized, employ a cost leadership strategy, and for which management perceives a lower level of environmental uncertainty will use budgets to a greater extent. Quite clearly, however, the roles played by the

various factors ultimately remain an empirical question and as such, we give consideration to each when we empirically model the two stages of the budgeting decision. Finally, we predict that the match between the contextual factors and the extent of budget use will be reflected in business performance. These predictions are formalized below.

Determinants of budgeting practice

Size The construct of size has frequently been viewed as reflecting two dimensions, complexity and availability of resources, with both argued to be increasing with size (Fredrickson and Mitchell, 1984; Mintzberg, 1994). While small, single-business organizations can often be controlled with largely informal mechanisms such as direct supervision and oral communications, larger organizations require more formal controls as the increased complexity associated with a larger number of employees creates problems in social control, communication, and coordination (Lawrence and Lorsch, 1967).

Here, Davila (2005) argues, following Levitt and March (1988), that to regain efficiency in managing the organization, coordination, and control mechanisms are formalized with the objective of coding and documenting organizational learning and reducing the demand that routine activities impose on the management team’s time. Further, in terms of a business’s ability to invest in a formal budgeting practice, it is widely accepted that larger businesses are better positioned given their greater resources, financial and otherwise.

Larger businesses not only have the resources required to acquire software and skills but they can also more efficiently achieve these administrative tasks through economies of scale and the greater technical specialization of their employees (Merchant, 1981). Chenhall (2003) finds that size has been considered as a contextual variable in only a few MCS studies as most examine

relatively large businesses. Such a finding fits well with Banbury and Nahapiet’s (1979) argument that there should only be a relationship between resource availability and the introduction of formal systems in organizations of relatively small size.

Consistent with these types of arguments, small business studies reveal size as influencing the acquisition and preparation of accounting information including budgets (Holmes and Nicholls, 1989; McMahon, 2001). Further, evidence from longitudinal studies of startup businesses suggests that size influences the decision to adopt operating budgets, with larger firms adopting the budgets sooner (Davila and Foster, 2005, 2007).

They find that when the business is small, control and coordination happen through frequent informal interactions but that the efficiency of an informal system requiring direct contact with employees rapidly decreases with increasing size, thereby making it more efficient to use a formal control system. In the primary healthcare setting, we view the fixed costs associated with the adoption of a budgeting practice to be significant and thus, following the arguments of Davila and Foster (2005), propose size as a determining contingency factor underlying the adoption decision. In this sector, businesses are required to comply with substantive “red tape” that places onerous demands on their resources (Productivity Commission, 2003).

As such, it is likely that only larger businesses have both the need for and the resources to devote to budgeting. Smaller practices are unlikely to be able to divert resources away from their primary revenue-generating clinical activities. Thus, we predict a positive relationship between business size and the use of budgets. However, we also argue consistently with Banbury and Nahapiet (1979) that once a business has reached a

critical size and uses a budget, size is unlikely to play a significant further role in the determination of budgeting practice. Thus, our first hypothesis, expressed in the alternative, is H1. The adoption of written budgets by primary healthcare businesses is positively associated with business size.

Structure

The structure of a business relates to “the formal speci? cation of roles for organizational members or tasks for groups to ensure that the activities of the organization are carried out” (Chenhall, 2003). While two components, differentiation, and integration, have been identified in the literature, we focus only on differentiation because of the small size of our sample businesses. Differentiation is defied as the extent to which managers act as quasi-owners and is achieved through decentralization of authority (Lawrence and Lorsch, 1967).

A centralized busi

FTE urban GPs would receive $60,000 per annum from PIP (Medicare, 2009). R. King et al. Management Accounting Research ness structure is characterized by decision-making that is restricted to owners and upper management whereas a decentralized business delegates decision-making to lower levels of management and operational staff. Given the closer links between the ownership and control of the business, decision-making in centralized businesses should require relatively fewer MCS.

Herein, existing evidence reveals centralized businesses as having relatively few administrative controls and less sophisticated budgets while decentralized businesses have more formal controls (Bruns and Waterhouse, 1975; Merchant, 1981). We thus argue that structure has the potential to play a role in a business’s initial decision to adopt a budgeting practice, although we view its role as secondary to size since it is unlikely that the business’s ability to meet

the fixed costs associated with a budget practice will be directly related to its structure.

Further, we argue that for small healthcare businesses that have reached the threshold size and use budgets, the structure also has the potential to play a role in its subsequent decision as to the extent of use. As the business becomes more differentiated, decentralization increases and thereby so does the need for formal MCS (Lawrence and Lorsch, 1967; Merchant, 1981). Our second hypothesis, expressed in two parts and in the alternative, is then:13 H2a.

The adoption of a written budget by primary healthcare businesses is positively associated with a business structure (decentralization). H2b. The extent of written budget use by primary healthcare businesses which opt to use written budgets is positively associated with business structure (decentralisation).

Strategy

Business strategy, defined as how a business chooses to compete within its particular industry (Langfield-Smith, 1997), has been the focus of much of the research on MCS as opposed to corporate or operational strategy (Chenhall, 2003).

While there are a number of different typologies of business strategy, we use Porter’s typology which focuses on cost leadership and product differentiation strategies. Porter’s cost leaders are characterized by competitive prices, consistent quality, ease of purchase, and a relatively restricted product selection. In contrast, differentiators offer the market something perceived as unique. Different types of MCS will be suited to different strategies due to their differing information and feedback requirements. Cost leadership strategies are argued to require specifi operating goals and budgets to facilitate cost containment at an operational level (Chenhall and Morris, 1995). Alternatively, product differentiator strategies would require more

outward focussed, broad scope, MCS to collect information on competitors for planning purposes (Simons, 1987).

Since primary healthcare businesses have constraints on the total number of services they can provide such as opening hours and the number of medical practitioners, a cost leadership strategy should require that tighter cost controls be in place in order to maintain overall profitability. In contrast, a product differentiator strategy operating with higher margins under the same constraints should require fewer controls. While we do not expect the strategy to be determinative of the threshold decision to use budgets as it is unlikely to either affect the business’s ability to meet the initial fixed costs or contribute sufficiently to the business’s primary need for a budgeting practice, based on the arguments above we do expect it to impact on the desire to invest in marginal costs associated with a greater extent of budget use.

Thus, formally, our third hypothesis, expressed in the alternative, is H3. For small healthcare businesses, which opt to use written budgets, those following a cost leadership strategy will use budgets to a greater extent than those following a product differentiation strategy.

Perceived environmental uncertainty (PEU)

PEU is defined as a situation where managers perceive elements of the environment to be uncertain, with uncertainty distinguished from risk “as uncertainty defines situations in which probabilities are not attached” (Chenhall, 2003).

In a general sense, PEU is seen to be an important contextual factor in the design of MCS because increased PEU makes managerial planning and control more difficult (Lawrence and Lorsch, 1967). PEU is, however, a general term and a number of researchers

have provided more specific classifications of the environment (Waterhouse and Tiessen, 1978; Ouchi, 1979). In this study, we focus on the two most commonly researched elements of PEU, the dynamic nature of the environment (dynamism) and the level of competition (hostility).

Contingency-based research in large businesses has found that greater dynamism is associated with a need for more externally focussed, broad scope, and timely information (Chenhall and Morris, 1995). planning become more difficult in more dynamic conditions as probabilities cannot as easily be attached to future events and controls such as static budgets may quickly become outdated. Thus, greater informal communication is required for effective decision-making and formal controls are less beneficial or desirable (Chapman, 1997). Alternatively, large business research focused n hostility has found that businesses facing greater competition rely on more formal controls and emphasize budgets (Khandwalla, 1972).

Thus, in addition to confirming PEU as an important contextual factor, these findings also reveal the importance of specifying the dimension of interest (Chenhall, 2003). Consistent with the research on dynamism in large business but in contrast with that on hostility, Matthews, and Scott (1995) find for small businesses, the sophistication of planning decreases with both increased dynamism and increased hostility.

They argue from an economic perspective that for small businesses, the more uncertain

While it could be argued that it would be impractical for a small business consisting of a single medical practitioner and few administrative staff to have a decentralized structure, given the heavy demands of clinical work on the medical practitioner’s time, decentralization is possible to the extent that operational and financial decision-making is delegated to employees. This

was confirmed in discussions in the pilot study.

Management Accounting Research the environment the less likely the manager is to expend scarce resources on budgets with an unproven effect on performance. The rational manager trying to meet the fundamental goal of making a profit will weigh up the benefits against the costs associated with budgeting. Based on these arguments and findings, we propose that as with strategy, neither dimension of PEU is likely to impact the manager’s threshold decision to adopt a budget as it does not directly impact the ability to meet the costs.

However, for businesses that have already identified the need and ability to budget, both dynamism and hostility will impact the decision to incur the added marginal costs of increased budget use. Consistent with Matthews and Scott (1995) and the large organization literature, given the relatively small nature of our sample businesses and the likely resource constraints that they face, we predict a negative association between the PEU dimension of dynamism and the extent of use.

However, contrary to the large organization literature but consistent with Matthews and Scott (1995), we also predict a negative association between the PEU dimension of hostility and the extent of use. Our fourth hypothesis, expressed in the alternative, is then: H4. The extent of written budget use by primary healthcare businesses which opt to use written budgets is negatively associated with the PEU elements of dynamism and hostility.

Performance and budgets

Budgets have been recommended for planning, monitoring, and controlling business activities, with each thought to assist businesses to achieve profitability (Horngren et al. , 2006). However, the effect of

budgets on profitability has not as yet been clearly demonstrated in the literature (McMahon, 2001).

There is evidence of a positive association between the use of budgets and performance as proxied by growth in small and medium enterprises (Gorton, 1999). Even without extensive empirical evidence, planning and the use of appropriate budgets are promoted by academics, educators, and accounting practitioners as a means of enhancing financial performance (Hansen and Otley, 2003; Gorton, 1999).

Thus, we might expect that primary healthcare businesses using budgets experience better performance than those that do not. More carefully, according to ‘contingency-based research, a state of equilibrium in the relationship between the contingency factors and the type of MCS is best described by (Covaleski et al. , 2003). “Fit” occurs when the organization designs its practices in such a way that it has a positive impact on performance relative to alternative practices.

Thus, there will be no universally effective ‘extent of budget use’, as each combination of contingency factors will with different practices. The positive impact on the performance of attaining is due to the efficiencies that result from using the most suitable MCS. When there is a lesser between the extent of budget use and the contingency factors, performance will be “impaired”. Further, misfit will be associated with lower performance irrespective of whether it arises from “over-budgeting” or “under-budgeting”. Thus, our fith hypothesis, stated in the alternate form, is H5. A business’s performance is positively associated with the degree of fit between the extent of budget use and its contingency factors. The inefficiencies arise because the need for a budgeting practice is incongruent with the adopted practice.

If the business over-commits to budgeting, it is likely to have expended scarce human and financial resources without enjoying commensurate benefits. Conversely, if it under-commits, its performance will likely suffer because of control and/or coordination problems.

To illustrate, consider the various contextual factors identified above. First, regarding size, a relatively small business that uses an extensive budgeting practice will have unnecessarily expended resources implementing and operating the practice when in fact informal communication is practical and likely preferred. Conversely, a relatively large business without a formal budgeting practice will likely find both communication and coordination are problematic given the complexity associated with a larger number of employees.

In a similar fashion, a relatively centralized business with an extensive budgeting practice has likely expended resources on a level of control that is greater than required to encourage employees to make decisions that are in keeping with the organizational objectives. In terms of strategy, a cost leadership strategy requires more specific controls than a differentiation strategy. Thus, the adopted business strategy will likely be less effective if an incompatible budgeting practice is implemented to support the strategy.

Finally, high levels of PEU make it much more difficult to plan with certainty, thereby reducing the need for and advantages of budgeting. Finally, notwithstanding equilibrium-type arguments, we believe that there will be variation in the degree of in our setting given the difficulties that primary healthcare businesses likely face in identifying and implementing their best budgeting practices. Given their size and medical focus, it is likely that many of our sample businesses approach budgeting from a relatively unsophisticated perspective and/or view it as a lower priority.