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THE IMPACT OF BUDGETING ON THE PERFORMANCE OF SMALL AND MEDIUM SCALE ENTERPRISES (SMES)

 

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

In virtually all fields of human endeavour budgeting is the most commonly performed routine.  Most members of households have at some time developed a financial plan to guide them in allocating their resources over a specific period; usually the plan reflects spending priorities and on how money is to be spent in the family. An enterprise, especially small and medium scale enterprises, uses budgeting as a means of coordinating the various activities and functions of an enterprise with the aim of realizing the enterprise objective(s),  To that extent budgeting can be seen to be tool for enhancing the performance of the enterprise.  Managers make budget in order to achieve the goals and objectives of an organization.

Budgeting according to Lucey (2002) is a quantitative statement for a defined of time, showing planned revenues, expenses, asset, liabilities and cash flow.  A budget provides a focus for the organisation, aids the co-ordination of activities and facilitates control.  Planning is achieved by means of a fixed master budget, whereas control is generally exercised through the comparison of actual costs with a flexible budget.

Budgeting is universal and can be applied in both public and private sectors like Small and Medium Scale Entrepreneur (SMEs), since it has the sole aim of achieving organizational goals.  Budgeting can contribute to the performance of SMEs; SMEs have a vital role to play in promoting the social and economic well-being of the nation, hence indigenous entrepreneurship is likely to be much more important in small scale business than in giant firms (Aruwa, 2005).

Link (1999) affirms to the fact that most developed countries strength is built around small scale industries.  The growth of Asian countries for instance, was induced by well-developed small and medium scale enterprises.  Thus, small and medium industry could be seen as industries which tend to reduce frustration and hardship, which subsequently take care of the well-being of the individuals and society at large. SMEs according to National Association of Small and Medium Enterprises (NASME) are enterprises with maximum asset base N200m (excluding land and working capital) and number of employees not less than 10 and not more man 300.   The goal of this study is not to only determine the impact of budgeting on the performance of small and medium enterprises and how its appraisal can affect the operational performance of SMEs but also to explore ways it can be made effective.

1.2 STATEMENT OF THE PROBLEM

Finance occupies a pivotal position in the life of an organization, and for SMEs it is even of more importance.  However, making fund available to SMEs is not sufficient to make SMEs effective and efficient, but the judicious use of allocated funds. The questions are:

Does effective budgeting have impact on the performance of SMEs? Should budget preparation be encourage in SMEs?

1.3  OBJECTIVE OF THE STUDY

This study is principally to examine the impact of budgeting on the performance of small and medium scale enterprises. The budget implemented by the management of an organization reflects the effectiveness of management in achieving the organization objectives.  Thus the objectives of this research are:

To ascertain whether or not budgeting has effect on the performance of small and medium scale enterprises. To determine whether or not small and medium scale enterprises should use budgeting to measure their performance

1.4  RESEARCH QUESTIONS

Do budgeting system improve the performance and effectiveness of SMEs?

Do SMEs have impact on the economic growth? Are government policies having positive impact on the effectiveness of budgeting in SMEs? Is budgeting practicable in SMEs? Do SMEs have a well formulated budget decision policies and sound implementation framework?

1.5  RESEARCH HYPOTHESIS

The following hypothesis was formulated and tested:

Null Hypothesis (HO): An effective budget preparation does not enhance performance of small and medium enterprises.

Alternative Hypothesis (HA): An effective budget preparation enhances the performance of small and medium enterprises.

1.6 SIGNIFICANCE OF THE STUDY

This study is about the impact of budgeting on the performance of SMEs.  Removing barriers to budgeting isone of the easiest ways to improve budgeting.  Removing these barriers starts with an understanding of budgeting.

The study will help SMEs entrepreneurs think about their own budget and the way it is executed in their day to day activities. To researchers, the study will serve as a reference material for future research as well as contribute to existing body of literature on the impact of budgeting on the performance of small and mediumscale enterprises.

1.7 SCOPE AND LIMITATION OF THE STUDY

The research focuses largely on budgeting with a view to ascertain the impact on the performance of SMEs.  The research concentrated on the Nigeria SMEs environment, and in so doing, we sampled four firms:

Tambata processing industry Debby cosmetics industry

iii. Umoh Nigeria limited

Salami Nigeria enterprise

The period under study will cover the period of four (4) years (2010 – 2014), for which data will be empirically analysed. We believe that the selected number of firms and the time frame of the research will not reduce the value of our findings.

1.8 ORGANIZATION OF THE STUDY

This study is organized into five (5) chapters.  These includes, chapter one, this discusses background of the study, statement of the problem, objective of the study, research questions, research hypothesis, significance of the study, scope and limitation of the study and definition of terms. Chapter two deals with literature review and chapter three talks about research methodology, research design, population, sampling techniques and analysis while chapter four discusses  of result,  data presentation,discussion and findings.  Finally, chapter five give summary, conclusion, and recommendations.

1.9 DEFINITION OF TERMS

Enterprises: It is used as an alternative for firm or company. This is termed as any form of business with the sole aim of making profit or rendering services. Small and Medium Enterprises (SMEs): These are enterprises with maximum asset baseof 200m (excluding land and working capital) and number of employees not less than 10 and not more than 300 (Nigeria Association of Small and Medium Scale Enterprises (NASME)). Industry: It is a group of firms that are of the same line of business. Budget: A budget is a financial or qualitative statement prepared and approved prior to a defined period of time for the purpose of attaining a given objective. Budgetary Control: This is the establishment of budget relating the responsibilities of executive to the requirement of a policy, and the continuous comparison of actual with budget results. Also means compelling event to conform to plan. Performance: The ability to operate efficiently, react quickly.

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