CASH BUDGETING AND THE PERFORMANCE OF SMALL AND MEDIUM-SIZED ENTERPRISES (SMEs): A STUDY OF SELECTED SMEs IN UYO METROPOLIS, AKWA IBOM STATE

CASH BUDGETING AND THE PERFORMANCE OF SMALL AND MEDIUM-SIZED ENTERPRISES (SMEs): A STUDY OF SELECTED SMEs IN UYO METROPOLIS, AKWA IBOM STATE

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CHAPTER ONE

INTRODUCTION

1.1         Background to the Study

                The growth and profitability of business organisations are hinged on the efficient and effective allocation of scarce resources.  All organisation face resource allocation problems, which are solved through managerial planning, controlling and decision making.  Once management has establish a general set of objective, it will attempt to carry out these objectives in terms of day to day decision making. One basic area is on cash and cash management.

Cash is the basic vehicle that drives an organisation. One of the components of a firm’s current asset is cash. Cash is generated through sales, collection of account receivables, rendering of services, interest on investments, dividends and donations among others.  The amount of cash available for day-to-day operations of the business has significant impact on the overall performance of the business.  Managers therefore need to develop effective and efficient cash budgeting strategies capable of enhancing the attainment of organisational goals and objectives.

A budget is defined as management’s quantitative expression of plans for a forthcoming period. Budgeting entails the setting of targets, it is a technique which is widely used in business and which affects all levels of government.  A budget can also be understood to be a financial plan set up by individuals, organisations, government etc. to meet present and further needs. It is a statement of proposed income and planned expenditure.  It is an indispensable tool for an individual, household, company and government.

Merriam Webster dictionary (1995) defines budget as “an amount of money available for spending that is based on a plan for how it would be spent”. In a typical manufacturing company, there are different types of budgets. Prime among them are; the master budget, cash budget, fixed budget, production budget, sales budget. However, our concern is with cash budget.

Cash budget is a plan or estimate prepared to show the expected receipts, payment and periodic cash balance during the budget period or control period. It is a budget of estimated cash inflow and outflows incorporating both revenue and capital gains. Locke & Latham, 2009.

Horngren, 2009 has it that cash budgeting is the process of planning and controlling the use of cash.  The primary purpose of preparing a cash budgeting is to ensure that the organisation has enough but not too much cash on hand during the budget period.  Thus, cash budget indicates the effect of the budgeted activities on the flows of liquid resources.  Such budgets are usually prepared for reasonably short period.

Cash budgeting is very vital in an organization in that it helps management in understanding the company’s liquidity position. The knowledge of this, helps the financial manager to forecast and plan ahead with how idle cash can be used for investment purposes. Again, the institution of cash budgeting helps the organization know what liabilities it is to incur and assets it is to procure and put into usage to generate inflows of economic benefits over a given period of time. Companies that do not acknowledge cash budgeting as an important managerial tool, nor implement it, stand a chance of going into moribund as cash budgeting serves as the “eyes and ears” of any organization in that cash is the basic and fundamental tool used for the day-to-day running of the organization. Subsequently, we shall delve, in full, the many importance the institution of cash budgeting has in the performance of organization.

1.2         Statement of Problem

Businesses need to plan for the future. Every business organisation strives to create an enabling environment to maximize profit without endangering the long term profit and firmness of the organisation. Failure of an organization to manage its funds effectively can result in poor performance. Their business operations can be affected in terms of its ability to raise funds resulting from poor performance. Cash budgeting is an area attention must be given to. Poor cash projections or budget could lead to problems such as high overheads, waste of resources high interest, inability to know when to raise funds, lack of financial shrewdness to know is when to invest or not, poor managerial execution of cash in the organization due to financial managerial inefficiency and incompetence. To address these problems and engender good business performance in selected SMEs in Uyo, prompted this study.

1.3         Objectives of the Study          

The main objective of this study is to examine the relevance of cash budgeting in the performance of Small and Medium-Scale Enterprises. Other specific objectives are to:

   i.            Find out the determinants of cash budgeting in selected SMEs in Uyo.

 ii.            Determine the extent to which cash budgeting enhance the business performance of SMEs in Uyo.

iii.            Ascertain how poor cash budgeting affect planning, controlling and decision making in organisation.

1.4         Research Question

The following research questions are designed for the study.

   i.            What are the determinants of cash budgeting in selected SMEs in Uyo metropolis?

 ii.            To what extent does cash budgeting enhance business performance of selected SMEs in Uyo metropolis?

iii.            What are the consequences of poor cash budgeting on business operations of selected SMEs in Uyo metropolis?

1.5         Hypothesis of the Study

               The research hypothesis formulated for the study states that:                                                   

H01:        There is no significant relationship between cash budgeting and business performance in selected SMEs in Uyo metropolis.

1.6         Significance of the Study

                For every organisation, management has to make decision daily that will either make or mar the organisation.  Poor decision making about cash in the business might cripple the organisation. Hence, management must be fully equipped and knowledgeable about the cash position of the entity. Proper cash budgeting and implementation will not only propel an entity forward, it gives the organisation a compass to arriving at its destination and it also serve as a yardstick towards the performance of management.  This study, the relevance of cash budgeting on the performance of Small and Medium-Scale Enterprises, will in no small amount, be important to management, stakeholders (who would want to know how healthy their business is), financial analyst who would need financial information as regard cash for  better projections that will boost the performance of the organization in terms of investment, loan disbursement and collection, financial strength and assurance of continuity of the organization; the government for taxation purposes and projections of receipts and payments for the fiscal year; employees and research students for further exploration.

1.7         Scope and Limitation of the Study

                This study is focused on the relevance of cash budgeting on the performance of Small and Medium-Scale Enterprises in Uyo metropolis, Akwa Ibom State.

                This research work was greeted by quite a few draw backs or limitations of which some are finances and inadequate materials to fully explore this research.

1.8         Organisation of the Study

                The study is organised into the five chapters: In Chapter One is the Introduction, Statement of Problem, Research Question, Objective of the Study, Research Hypothesis, Significance of the study, Scope and Limitations of the study and Definition of Terms used in the study. Chapter Two is the Review of Related Literature.  Chapter Three is the Research Methodology. Chapter Four is the Data Presentation, Analysis and Interpretation. In Chapter Five is the findings, Conclusion and Recommendations.

1.9         Definitions of Terms Used in the Study

Budget: A budget may be defined as a plan quantified in monetary terms prepared and approved prior to a defined period of time usually shoeing planned income to be generated and/or expenditure to be incurred during that period and the capital employed to attain a give objective (Adeniji, 2009).

Budgeting: This is the process of preparing detailed short term corporate plan into action.

Cash budget: A cash budget is a statement of the firms planned inflows and outflows of cash and it is a useful tool for determining the timing of cash inflows and outflows during a given period (Lucey, 2007).

Cash inflows: This refers to funds received by a company due to sales operations, financing, or investments.  Cash inflows are used to gauge the overall financial health of a business, and a company with large and stable cash inflow can be considered to be in a good financial position.

Cash Outflows: Cash outflow is the amount of cash that a business disburses.  Cash outflow can also be seen as money paid out by an organisation as a result of its operating activities, investment activities, and financing activities.

Planning: This is a process that involves the establishment of objectives, strategies to achieve the organisational goals through a step by step determination of activities and resources necessary to achieve them. (Ayandele, 2012).

Controlling: This is the process of comparing actual performance with planned result and reporting on variation which helps expenditure to be kept within agree limit (Bessong, 2005).

Decision making: This is the conscious selection of a course of action from among available alternatives to produce a desired result.  It entails studying and evaluating two or more available alternatives leading to a final choice. (Lucey, 2007).


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