Small business budgeting is often marred by some fundamental problems and drawbacks that stems from the fact that most people who are responsible for preparing budget do it without really appreciating what they do. Anyone can manipulate accounting software with the capability of forecasting and come up with some figures.
Nowadays, managers at all levels tell their subordinate that they need to prepare budget for the period. However, very many few actually appreciate the rationale behind the whole acts of budgeting and budgetary process. People now prepare budget without asking the fundamental question of “why do we prepare this budget”?
The other day, I was having a chat with a junior accountant at one of the local council in Renfrewshire area of Glasgow and I asked him why they prepare budget in their organization and all he told me was that they do it every year. The importance of budgeting functions in small businesses includes the three points made below.
To assist in Planning: one of the traditional reasons why we prepare budget is to assist managers carryout their management function of planning. Through good planning, businesses can prevent financial crisis. Yes, small businesses can easily run into financial shortage that will ultimately lead to both long and short term liquidity problem.
To control cost: an important function of management accounting is to provide information to managers in formats that assists in cost control. Variance analysis is done based on the deviation from the standard budgeted or targeted figures.
Motivating and measuring mangers: budgets when used when can be a powerful management accounting control tool that will help motivate employees and keep them motivated. Motivating employees is according to management accounting experts the most important use of budgeting process. There are however problems that usually crop up during design, implementation and monitoring budgeting process.
Problems and challenges that small businesses face during budgeting
- Budget padding: due to the fact that the bottom up style of budgeting are widely used in practice, managers tend to introduce slacks into their budget so that they can easily achieve it.
- Can lead to loss of motivation: when targets are set too high, managers will simply give up and never try to achieve the budget. For budget to achieve its objective of motivating staff and managers, it must be attainable.
- Managers may not be in controls of what they are been measured on: the truth about management and budgeting is that the resource that managers are been measured on are usually not what they control thereby causing all sorts of resentment.
- Time consuming and costly: most time, the time and other resources invested in preparing budget are simply not worth it considering the fact that over 87% of budgets are not used in reality. Proper cost-benefit analysis process should be done before preparing the budget.
- Restricts actions: managers of small businesses tend to turn down brilliant ideas and projects just because it is not in the budget. This is the most undesirable feature of budgeting system as a whole that must be avoided. One way of avoiding it is to make room for flexibility in the budgetary control.
- Budget forecasts are mere intelligent guesses: changes in variables like inflation, consumers’ willingness to spend, the economic outlook, employment rate, etc that the budget is based on most time do affect the whole output and managing the aftermath of this becomes a problem in small and medium size companies.
The universally accepted way of budgeting for businesses (large or small) is to employ the SMART approach. It is almost guaranteed that every budget that is Specific, Measurable, Achievable, Relevant and Time bound will always succeed. Other management accounting tools like balanced scorecard, ratio analysis, contribution analysis and sensitivity analysis should also be employed in the overall management of a company.