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Chapter One

Chapter One

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Published by: John H. Temu on Jun 06, 2012
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CHAPTER ONE 1.0 INTRODUCTION 1.

1 Background of the study Financial management of non-profit organisations (NPO’s) is similar to financial management in the commercial sector in many aspects however, certain key differences shift the focus of a non-profit organisation financial manager. A profit making enterprise focuses on profitability and maximizing shareholder value. A non profit organization’s primary goal is not to increase shareholder value rather it’s to provide some socially desirable need on an ongoing basis. A non-profit organisation generally lacks the financial flexibility of a commercial enterprise because it depends on resource providers that are not engaging in an exchange transaction. The resources provided are directed towards providing goods or services to a client other than the actual resource provider. Thus the non-profit organisation must demonstrate it’s stewardship of donated resources for a specific purpose, must be used for that purpose. That purpose is either specified by the donor or implied in the non-profit organisation’s stated mission. The management and reporting activities of a non-profit organisation must emphasize stewardship for these donated resources. The staff must be able to demonstrate that the money was used as directed by the donors. The shift to an emphasis in external financial reports on donor restriction has made the use of fund accounting systems even more critical. (Anthony, et all, 1994) Budgeting and cash management are two areas of financial management that are extremely important exercises for non-profit organizations. The organization must pay close attention to whether it has enough cash reserves to continue to provide services to its clientele. Cash flow can be extremely challenging to predict, because an organization relies on revenue from resource providers that do not expect to receive the service provided. In fact, an increase in demand for a non profit organisation’s services can lead to a management crisis. It is difficult to forecast contribution revenue in a reliable manner from year to year. For that reason, the control of expenses is an area of increased emphasis. Budgeting therefore becomes a critical activity for a non profit organisation. (Anthony, et all, 1994)

One difficulty encountered in non-profit organizations is that precise objectives are difficult to define in a quantifiable way. experiences and techniques so that together they can build a stronger and more caring community.(www.e. (Blazek. Ideally it also identifies any financial problems that could arise in the coming year.Budgets are the organization’s operating plan for a fiscal period. • To educate the community about the causes and effects of orphans and street children in a region. 30/1/2012) Accomplishments of these objectives depend on fund which collected by the organization. Jody 1996) Since non-profit organisations have different goals to fulfill. 2004) Profile of Mkombozi Centre . the board’s and staff’s decisions regarding how the organization will fulfill its stated purpose. In most situations outputs cannot be measured in monetary terms.org. in monetary terms. The staff then allocates resources to ensure that those programs are delivered. these organisation have different objectives and in case of non-profit organisation which provides services for children care centres have the following goals. • To provide protection and development services to orphans and street children in region through the residential care centre and education program at centre. and actual accomplishments are even more difficult to measure. The effect of this is that budgets in non-profit organization tend to be mainly concerned with the input of resources (i. By ‘outputs’ we mean the quality and amount of the services rendered. (Drury. expenditure ).mkombozi. • To equip orphans and street children with life skills and vocational training for self-reliance. The budget charts a direction for allocating and maximizing the use of resources. In addition. They express. • To Network with other like-minded organizations and individuals to exchange ideas. community based mechanisms that address child vulnerability and referrals to other service providers within a region. the budget should provide indicators for gauging staff performance and give staff goals to reach and steps to achieve them. The board and staff decide what programs will be undertaken for the upcoming fiscal year. Failure to compute an effective budget will also cause failure to meet the organization’s objectives.

Mkombozi (meaning “liberator” or “emancipator” ) is the child-focused agency in Tanzania’s Kilimanjaro and Arusha regions. Mkombozi operated as residential care facility for the children who had previously been living on the streets. (www. using education. Friends of Mkombozi (UK) and Friends of Mkombozi (US). this care centre accommodated both short and longer term stays for children. research. mind.org. Mkombozi activities have been funded by different donors among of those are Every child (UK).org. 30/1/2012) For the past 14 years up to 2011.mkombozi. 30/1/2012) . body and spirit(www. Initially. advocacy and outreach to help vulnerable children and youth to grow in mind.mkombozi.

1. For example. A budget is used as a means of allocating resources into various departments within an organization. . 1. 1994) Despite the importance of budget as a road map of achieving objectives in any organization still some non-profit organizations do impose budget in an organization. et all. housing and social services departments of nonprofit organizations will propose specific activities and related costs for the coming year. Budgets are prepared by managers focusing overall objectives of the organization without involving individual units within an organization. i. To find out how Mkombozi Centre for street children addresses the challenges faced in preparation its annual budget. Most probably a budget prepared thus may not be owned by the individual units and as such implementation may not be optimal. (Anthony. (Drury. These budgets are co ordinate by the accounting department into an overall budget proposal.1 General Objective.3.1. the education. To assess the preparation of effective budget in achieving organizational objectives in nonprofit organizations. health.2 Specific Objectives. This study aims to look upon on how effectively budgets are being prepared by NPOs to achieve the organizational objectives taking in Mkombozi centre for street children as a case study. To find out the steps being followed by Mkombozi Centre for street children in preparation its annual budget. The key financial objective of non-profit organization is to raise the maximum possible amount each year and operate under minimum cost and to spend some amount each on specified projects.2 Statement of the Problem The budgeting process in a non-profit organization normally begins with the managers of various activities calculating the expected costs of maintaining current ongoing activities and then adding to those costs any further developments of the services that are considered desirable. 2004) Non-profit organizations are provided with limited funds hence other several services and objectives cannot easily be attained.3 Research Objectives 1.3. ii.

1.5 Significance of the study Budget in non-profit organisation plays a vital role in achieving their objectives since it acts as a road map in achieving organisational objectives. This study will help non-profit organisational to make precious decision in allocation of funds by using budget and due to the pressing and increasing need to design means to improve the budgetary system in the non. and with less said on the non profit organizations. In recent years. Which feedback mechanism used by Mkombozi centre for street children in budgetary control? 1. .To find out how prepared budget is being monitored to achieve the organisational objectives of Mkombozi Centre for street children.4 Research questions i. fighting malaria and AIDS and other problems facing people in Tanzania. have been financed by a number of donors. To asses the feedback mechanism in budgetary control used by Mkombozi Centre for street children. which are run by the non profit organizations. and they focus on improving the social welfare of this country. Many researchers highly focused on the budgetary system of the profit oriented organizations. which depend so much on the effectiveness of budget in proper allocation of donor funds. How does Mkombozi Centre for street children in monitor its annual budget so as to achieve the desirable objectives of the organization? iv. Projects on poverty alleviation. many international organizations such as IMF (International Monetary Fund’s) have been funding various projects in Tanzania.iii. iv. but there have been complaints on the constant lack of correspondence between the funds released and the services which are ultimately offered. How does Mkombozi Centre for street children in address the challenges faced in preparation of its annual budget? iii.profit organizations. What are the steps being followed by Mkombozi Centre for street children in preparation of its annual budget? ii.

liabilities. prepared and approved prior to a defined period of time. The study will be beneficial to the organization itself (Mkombozi). It is adopted by achieving certain objectives which relates planned expenditure to planned revenues and which will form a basis against which actual expenditure and revenue can be measured and controlled. Owler and Brown. It is defined as a quantitative and financial as interpretation of the future plans of operation and as the overall financial plan for the future activities. Definition of key terms. whereas control is generally exercised through the comparison of actual costs with a flexible budget. Nowadays. (1984) Budget is plan quantified in monetary terms. usually showing planned income to be generated and expenditure to be incurred during that period and the capital to be employed to attain a given objectives Lucey T. assets.The major problem leading to this has been weakness in budgeting as well as application of inappropriate budget policies. expenses. Budget can be prepared for the whole organization or for sub-units within the organization. for a defined period of time. a budget is a quantitative expression of action and aid to coordinate and implement. . the non-profit organizations are increasing in number as they try to meet the increasing need of society. It is in the activities that quantitative plan to coordinate and control the use of resources for a specific period. and much emphasis should be on how to improve their performance.A budget provides a focus for the organization aids the co-ordination of activities and facilitates control. (2003) Budget is quantitative statement. statement of income and expenditure under a certain anticipated operating conditions. Horngren (1982). Sharma (1987) defines budget as follows: A budget could mean a statement of intentions. which may include planned revenues. and cash flows . Planning is achieved by means of a fixed master budget. the researcher and community as a whole. Shirima (1987) defines budget as an allocation of resources prepared in advance relating to the future period based on forecasted key variables.

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