CHAPTER ONE 1.0 INTRODUCTION 1.

1 Background of the study Financial management of non-profit organisations (NPOs) 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 organizations primary goal is not to increase shareholder value rather its 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 its 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 organisations 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 organisations 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)

Budgets are the organizations operating plan for a fiscal period. They express, in monetary terms, the boards and staffs decisions regarding how the organization will fulfill its stated purpose. The board and staff decide what programs will be undertaken for the upcoming fiscal year. The staff then allocates resources to ensure that those programs are delivered. The budget charts a direction for allocating and maximizing the use of resources. Ideally it also identifies any financial problems that could arise in the coming year. In addition, the budget should provide indicators for gauging staff performance and give staff goals to reach and steps to achieve them. (Blazek, Jody 1996) Since non-profit organisations have different goals to fulfill, these organisation have different objectives and in case of non-profit organisation which provides services for children care centres have the following goals; To equip orphans and street children with life skills and vocational training for self-reliance.

To provide protection and development services to orphans and street children in region through the residential care centre and education program at centre, community based mechanisms that address child vulnerability and referrals to other service providers within a region.

To educate the community about the causes and effects of orphans and street children in a region.

To Network with other like-minded organizations and individuals to exchange ideas, experiences and techniques so that together they can build a stronger and more caring community.(www.mkombozi.org, 30/1/2012)

Accomplishments

of

these

objectives

depend

on

fund

which

collected

by

the

organization. Failure to compute an effective budget will also cause failure to meet the organizations objectives. One difficulty encountered in non-profit organizations is that precise objectives are difficult to define in a quantifiable way, and actual accomplishments are even more difficult to measure. In most situations outputs cannot be measured in monetary terms. By outputs we mean the quality and amount of the services rendered. The effect of this is that budgets in non-profit organization tend to be mainly concerned with the input of resources (i.e. expenditure ). (Drury, 2004) Profile of Mkombozi Centre

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

1.2 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. For example, the education, health, housing and social services departments of nonprofit organizations will propose specific activities and related costs for the coming year. These budgets are co ordinate by the accounting department into an overall budget proposal. (Drury, 2004) Non-profit organizations are provided with limited funds hence other several services and objectives cannot easily be attained. 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. A budget is used as a means of allocating resources into various departments within an organization. (Anthony, et all, 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. Budgets are prepared by managers focusing overall objectives of the organization without involving individual units within an organization. Most probably a budget prepared thus may not be owned by the individual units and as such implementation may not be optimal. 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. 1.3 Research Objectives 1.3.1 General Objective. To assess the preparation of effective budget in achieving organizational objectives in nonprofit organizations. 1.3.2 Specific Objectives. i. To find out the steps being followed by Mkombozi Centre for street children in preparation its annual budget. ii. To find out how Mkombozi Centre for street children addresses the challenges faced in preparation its annual budget.

iii.To find out how prepared budget is being monitored to achieve the organisational objectives of Mkombozi Centre for street children. iv. To asses the feedback mechanism in budgetary control used by Mkombozi Centre for street children.

1.4 Research questions i. What are the steps being followed by Mkombozi Centre for street children in preparation of its annual budget? ii. How does Mkombozi Centre for street children in address the challenges faced in preparation of its annual budget? iii. How does Mkombozi Centre for street children in monitor its annual budget so as to achieve the desirable objectives of the organization? iv. Which feedback mechanism used by Mkombozi centre for street children in budgetary control? 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- profit organizations. Many researchers highly focused on the budgetary system of the profit oriented organizations, and with less said on the non profit organizations, which depend so much on the effectiveness of budget in proper allocation of donor funds. In recent years, many international organizations such as IMF (International Monetary Funds) have been funding various projects in Tanzania, which are run by the non profit organizations, and they focus on improving the social welfare of this country. Projects on poverty alleviation, fighting malaria and AIDS and other problems facing people in Tanzania, have been financed by a number of donors, but there have been complaints on the constant lack of correspondence between the funds released and the services which are ultimately offered.

The major problem leading to this has been weakness in budgeting as well as application of inappropriate budget policies. Nowadays, the non-profit organizations are increasing in number as they try to meet the increasing need of society, and much emphasis should be on how to improve their performance. The study will be beneficial to the organization itself (Mkombozi), the researcher and community as a whole. Definition of key terms; Owler and Brown, (1984) Budget is plan quantified in monetary terms, prepared and approved prior to a defined period of time, 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, (2003) Budget is quantitative statement, for a defined period of time, which may include planned revenues, expenses, assets, liabilities, and cash flows .A budget provides a focus for the organization 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. Horngren (1982), a budget is a quantitative expression of action and aid to coordinate and implement. Budget can be prepared for the whole organization or for sub-units within the organization. Sharma (1987) defines budget as follows: A budget could mean a statement of intentions, statement of income and expenditure under a certain anticipated operating conditions. It is in the activities that quantitative plan to coordinate and control the use of resources for a specific period. 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. Shirima (1987) defines budget as an allocation of resources prepared in advance relating to the future period based on forecasted key variables. 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.