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.