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CHAPTER ONE

INTRODUCTION

Background of the Problem

Generally, organizations operate using several resources including financial, human, capital and others. Financial resource is one of the key elements in achieving organizational objectives and goals. However, in order to achieve the objectives budget has to be prepared effectively and adhered to. A budget may be described, as a quantitative expression of a plans and the process of converting plans into budget is known as budgeting. Budget is one of the most widely used tools for planning and controlling business organization. The budgeting process may be quite formal in a large institution with committees set up to perform the tasks. On the other hand in a very small firm the owner may write down the budget on a piece of paper or just budget in his head about the items he can remember easily. A properly managed budget can promote sustainable profits in many business organizations. The actions that follows managerial decisions normally involved several aspects of business, such as the marketing, production, purchasing and finance functions, and it is important that the management should coordinate these various interrelated aspect of decision-making. If the management fails to do this, there is danger that managers may each make decisions that they believe are in the best interests of that organization when, in fact, together they are not; for example, the marketing department may introduce a promotional campaign that is designed to increase sales demand to a level beyond that which the production department can handle. The various activities within a company should be coordinated by the preparation of plans of actions for future periods. These detailed plans are usually referred as budgets (Drury, 2004). Budget is among the major tools for implementation of the objectives and policies of the organizations. In other words, budget provides the basis for decision making in the organization. Budgeting plays importance not only to organizations but also to individuals on how to spend in relation to the income available. Further, budgets play other managerial roles such as planning, controlling, communication and motivation. A well formulated budgeted system enables the organization to reach its goals more successful (Drury, 2004). The rapid changes in today’s business environment render a rigid approach to budgetary control obsolete. It is no longer helpful to compare actual results to that forecasted anything up to 15 Months previously (Pandey, 2002). He argues that amongst the requirements of a more appropriate system, would be the building in of accountability to explain the differences between actual and planned performance. This demands a more immediate time frame of information reporting. Thus, there is a need to integrate strategic management and budgeting. These authors conceptualized that to be effective, budgets must be aligned with the Organization’s strategies, appropriate strategic planning, and performance management processes introduced, and must involve processes that are value based, consequential and Continuous. The work of (Arora, 2000) could be viewed as further contributions to the above stand point as he recognizes the need for organizations to integrate strategic management and budgeting. What seems rather unfortunate according to (Arora, 2000) is the fact that most organizations still treat the budgeting and strategic management processes separately and also, a significant portion of small and medium-sized enterprises do not engage in strategic planning (Arora, 2000). Hence, the reason for this research work is to evaluate the effectiveness of budgeting process in achieving organizational goal at TEMESA.

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