ABSTRACT

This study intended to examine the effects of budgeting on financial performance of manufacturing firms in Kinondoni district Dar es Salaam Tanzania. A descriptive research design was adopted. A sample of 75 respondents from selected manufacturing firms was employed.

Purposive sampling was used to select seventy five (75) respondents (managerial staffs) from selected manufacturing firms. Self-administered questionnaire composed of closed ended questions, open-ended questions and five point likert scale questions were used to collect data from seventy five (75) respondents. Data were analyzed descriptively using SPSS version 20.

The findings indicated that more formalized budgeting planning leads to higher sales revenues. Secondly; the results revealed that formalized budgetary control leads to a higher growth of profit of a firm.

It was also found that the formal budgeting planning and the formal budgetary control show different patterns in terms of their effect on financial performance.  The formal budgeting planning has a stronger impact on the growth of sales of manufacturing firms, compared to the formal budgetary control. However; its impact on the growth of profit becomes very weak compared to formal budgetary control.

It was recommended that manufacturing firms need to establish a strong link between the planning and control processes and the budget process. Companies need to adopt a medium term plan to define priorities for their daily tasks.

CHAPTER ONE

1.0 INTRODUCTION

1.1  Background to the Study

The subject of Financial Performance (FP) has received significant attention from scholars in various areas of business and strategic management. Financial performance has implications on an organization’s health and ultimately its survival (Onduso, 2013). Financial performance is referred to as the degree to which financial objectives are being or have been accomplished. Extensive literature regarding the firm’s objectives, places much emphasis on the maximization of shareholder’s wealth.

Managers are thus concerned about maximizing shareholder’s wealth as it connotes future prospects, reflects steady growth, and provides a risk shield. In order to achieve this, Naser and Mokhtar (2014), argue that high performance reflects management effectiveness and efficiency in making use of company’s resources

Generally, firms operate using several resources including financial, human, capital and others. Financial resource is one of the key elements in achieving organizational objectives and goals (Drury, 2008). However, in order to achieve the objectives the budget has to be prepared effectively and adhered to. According to Hongreen (2007) a budget is 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 (Lazaridis, 2014). 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 involve 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 to as budgets (Drury, 2008).

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 resources 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, 2008).

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 (2010) 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 (2010) 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.

Therefore the aim of this research work is to examine the effects of budgeting process in manufacturing firms in Dar es Salaam Tanzania.

1.2     Statement of the Research Problem