CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Business budgeting is known to be the basic and most essential process that permits businesses to meet up to their goals in course of action. In a business organization, there exist several goals which the business seeks to achieve. These goals include effective control and evaluation, planning, communication and motivation Lucey (2004). According to Kariuki (2010), budgeting is a process of planning the financial operations of a business.

Budgeting assist the managers to determine in advance the various elements of cost in the production process. The budgeting process in a manufacturing company should be considered as a financial welfare in policy making. For instance, budgeting indicates how money is distributed by the management to the different departments within the organization. This helps the management in planning and forecasting so as to do away with unnecessary expenditure.

According to Larson (1999), application of control tools can greatly impact the performance of a company. Budgeting as a tool of financial management regularly prepares performance plans and budgets request that describes the performance goals, measures of output in various activities levels aimed at achieving business objectives.

John (1996) states that it was during the 1960s that companies began to use budgets to dictate what people needed to do. In the early 70s, the performance improvement of manufacturing companies was focused on meeting financial targets rather than effectiveness. Companies then faced problems during the early 80s and 90s when they were not willing to spend money on innovations in other to stay with the rigid budgets. They paid little or no concern on how their customers were being treated; only meeting sales targets became essential.

Budgets are known to have an important role to transmit the expectation of the top management to lower levels. According to Bremser (1988) budgets are used to communicate top management’s expectations to managers and employees. According to Lucey (1993), it is a quantitative expression of plan of action prepared in advance of the period to which it relates, expressed in money terms approved prior to the period.

Lucey (1993) further urges that performance is influenced by many factors which includes planning and coordination, clarification of authority and responsibility, effective communication and both internal and external, control of resources available, both human and non-human and motivation of both the lower and middle management.

If the actual numbers delivered through the financial year turn to be close to the budget, this actually demonstrates that the organization’s management understand its business and has been successfully driving it in the direction they had planned. On the other hand, if it happens to be that the organizations result diverges wide from her budgets, this sends out an alert of ineffective management. For this reason, budget based control means managers evaluate the performance according to the budgetary goals.

1.2 Statement of the Problem

Many manufacturing companies turn to have an undesirable result at the end of their activity or financial year. According to statistics from the National Institute of for Cameroon in 2009, the performance of this sector has been declining in recent years largely because of decline in the number of firms as well as the continuous decline in output Fonchamnyo DC (2016). Many at times, tracing the root cause of this adverse result in their activity possess a challenge. This is because in a manufacturing firm where effective management is absent, issues of theft, waste, excessive use of material or stock out occurs on regular basis and could possibly lead to the poor performance of the business. When the management fails to plan, such circumstances are sure to arise. Many business firms therefore recognize the need to have a developed and comprehensive budgetary system in other to minimize budget variances, cost and maximize profitability.

Also, some management though after planning fails to monitor the planned activities if they are going according to budgets. Budgeting in a business has benefits and consequences that go beyond the organizations management and have more to do with financial dimensions in general. Budgeting forces firms management to do better forecasting than vague generalizations about the future, this brings about the need for participative Budgeting but however, top management most at times assume the duty of setting the budget themselves without taking into consideration the opinion of various departments. Budgeting motivates managers and employees by providing useful yardsticks for evaluating performance. Over the years, companies have undertaken various attempts aimed at improving its budgetary process with the objectives of imposing greater fiscal discipline on management agencies of manufacturing companies. Motivation therefore plays an important role in the realization of the budgeted activity. Managers fail to understand that workers need to be motivated especially extrinsically to be able to work more and meet up to the expected budgeted needs.

Budgeting and financial performance are key financial process in the manufacturing sector. How to improve firm’s financial performance is an issue that concerns every manager in every manufacturing businesses.

The high level of technology and process systems required by fast growing manufacturing industries in Douala typically involve large financial investments. The initial purchases of machinery necessary for production as well as the eventual replacement or upgrades of these machinery, means that manufacturing companies have to engage in continuous investments which if they don’t plan for, will impose a great difficulty in the course of action. Manufacturing companies therefore need to consider comprehensive and adequate budgets to realize substantial financial performance. Mangers therefore must continuously ensure that the control aspects of planning, monitoring, Participative budgeting and motivation are incorporated in to their plan of actions. There is a saying that failing to plan is planning to fail. It is therefore on the basis of this saying that the researcher picked interest in analyzing the effects of budgeting control on the financial performance of manufacturing companies in Douala.

1.3 Research Questions

1.3.1 Main Research Question

What are the effects of Budgeting Management on the financial performance of Manufacturing Companies?

1.3.2 Specific Research Questions

1. a) To what extent does budget Control affects the Profitability of Manufacturing

Companies?

1. b) What are the effects of budget planning on the Profitability of Manufacturing Companies?
2. c) What are the effects of budget monitoring on profitability of Manufacturing Companies?

1.4 Objectives of the Study

1.4.1 Main Objective

To analyze the effects of Budgeting Management on the financial performance of Manufacturing Companies.

1.4.2 Specific Objectives

1. To establish the extent to which budget Control affects  the Profitability of

Manufacturing Companies.

1. To evaluate the effects of budget Planning on the Profitability of Manufacturing

Companies.

1. To analyze the effects of Budget Monitoring on the Profitability of

Manufacturing Companies.