BUDGETING AS A TOOL FOR EFFECTIVE MANAGERIAL DECISION IN AN ORGANIZATION:
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CHAPTER OF THE INTRODUCTION
1.1 Background of Study
The background of study looks at the historical background of budgeting and its effectiveness in solving management problems. It brings about the origin of budgeting from years back to the present date. The historical background of budgeting would be /examined under the various subheadings:
Early Practices of Budgeting
The practice of budgeting has existed for ages, in ancient times, individuals and societies engaged in processes of planning their economic activities, evaluating their annual performance, and revising when necessary. Through observation and experimentation, agrarian peoples discovered, invented, and standardized various practices to increase the quality and quantity of their yield. The desire for excess supplies to sell for profit and storage as wealth led people to make plans to maximize their income by budgeting a certain amount of money and energy for stabilizing farming conditions.
These efforts brought the discovery and the use of crop rotation, fertilizers, fences scarecrows, and irrigation. While having few devices against vagaries of wealth, ancient people used their profits and hard labour to protect their field by deploying armies, building walls, planting remote locations, and paying tributes to powerful neighbours. The fact that modern budgeting generally consists of 12 months it may reflect this agrarian origin.
Today, since the budget is a valuable tool for planning and control of finances, it definitely affects nearly every type of organization. In the management of a company’s finances, the relationship between spending expenses and profitability is weighed against this company’s success and failures. Since business strives for profitability through the efficient and economic use of resources and labour, they require financial road maps to show how they will allocate their resources to achieve their business objectives. In order words, companies require prudent drawn-up plans to accomplish their goals.
As small organizations begins, managers constantly monitor existing operations of their organization to find out if they would achieve their desired level of profit and as the organization continues to grow and operates, historical records tend to accumulate which adds up the manager’s personal observation to help them answer a certain operating question like, what is the amount of sale or purchase and what is the amount of cost incurred to attain the desired level of profit to compare current year performance with past performance. A budget is a comprehensive, formal plan that estimates the probable expenditures and income for an organization over a specific period.
The consideration of budgeting in an organization setting
Budgeting allows companies to control their expenditures and allocate resources to maximize profit; a budget reflects a clear understanding of past results and a keen sense of expected future changes. Even though past results can not be a perfect predictor, they flag important events and benchmarks.
The use of budgets by those concerned has forced entrepreneurs to qualify their dreams and directly face the uncertainty of their ventures. In addition, the majority of past efforts have emphasized the fact that budgets were extremely useful in controlling finances and assist businessmen and management to fulfill their function of planning, coordination and controlling the activities of their various business types.
Budget are usually prepared to serve three important aspects of any business and those aspects include; decision making, planning and control, and motivation of workers. Seizer in 1989 explained that’s long-term planning could be a systematic and formalized process purposely for directing and controlling future operations towards desired objectives for a period exceeding one year. Meanwhile, short-term planning on the other hand must accept the environment of today, human and financial resources presently available to the organization.
Consideration on the Relevance of Budgeting in Management
By budgeting, a business can assess its ability to forecast occurrences. Changes may not always be foreseeable but a business that is more successful at forecasting can have significant advantages over its competitors. Production or sale may not always turn out exactly the way we expected, but if we think well and successfully forecast then we are likely to have more control over changes in the future than if we only react to events. Though budgets may be expensive to prepare it is advisable and can be used in almost all organizations.
1.2 Statement of Problem
The statement of problem examines problems faced by organizations in preparing and implementing an effective budget in order to arrive at a sound decision for the organization.
After understanding the role of budgeting in the decision-making process in management it is sad to notice that budgeting is not probably taken into account or consideration in some management and is not manage correctly in such a situation. It is very sad to know that during the process of decision-making, management will be misled due to the company. It is sad to discover that some companies don’t prepare because it is very timely and costly. In cases where budgeting exists the method used might be insufficiently applied as in using past results only to plan for a product and neglecting to investigate the variances appropriately. To make things worse, some companies do not have any feasible accounting system which can supply managers with readable, efficient, and timely information. In such a situation, management decisions based on that information will be a disaster that is misleading them and affecting of the companies.
1.3 Justification of Study
There are several reasons why this particular study was carried out. These may be summarized in the following points:
Decision-making can only be made from information and most particular budgeting information. So we will have to examine the importance of budgeting information in the management decision-making process.
Budgeting as a tool for the management decision-making process reduces the risk of a wrong decisions in the future and business failure.
Budgeting is also very important if profits are to be maximized
Budgeting is the key to meet management objectives through the participation of employees and the decentralization or delegation or authorities to the employees to take part in the budgeting process of the company.
Allocation of the organization resources.
Forecasting organization goals
1.4 Research Questions
The following questions are relevant base on the incidental problems to this study and would henceforth guide the study as it progresses to the end.
Who are those responsible for the preparation of the budget?
Who prepares and approves the budget?
How useful are the budgets in the decision-making process?
Who is in charge of the budget executions?
Who makes amendments to the budget?
What is the method used for the preparation of the budgets?
What are the problems encountered in the budget implementation?
1.5 Objective of the Study
The objective of study tries to look at the main reason for using budgeting effective management decision.
1.5.1 Main Objective
The main objective of this study is to find if budgeting serves as a tool for effective managerial decision-making in organizations.
1.5.2 Specific objectives
To investigate how effectively budgets are being prepared and by whom in an organization.
To evaluate the methods used by organizations in preparing budgets and how amendments are made in the budget process.
To investigate the factors that limit or the problems faced in the budgeting process by organizations.
To examine the budget procedures and how it is being properly managed.
To examine the importance of budgeting to the decision-making process.