SME Budgets – My CFO Portal

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    Is budgeting a waste of time for small and medium-sized enterprises (SMEs)?

    There is a famous quote from TshOxenreider: “The simplest definition of a budget is ‘telling your money where to go.’

    It is very important for SMEs to evaluate them income and expensesand based on that assessment, tell their money where to direct it.

    Budgeting provides planning and control of financial activities; therefore, it is important for small and medium-sized enterprises that want to maintain and develop their activities.

    What is a budget:

    An estimate of income and expenditure for a specified period is known as a budget.

    Are there different types of budgets:

    Yes, there are different types of budgets depending on where they are needed. These include, but are not limited to, historical or incremental budgeting, flexible budgeting, zero-based budgeting, Kaizen budgeting, etc.

    This is a fact that small and medium-sized enterprises can consider due to lack of finance and lack of personnel and control facilities Historical or supplementary budget as a tool for managing and controlling their organization.

    Approaches to budgeting:

    There are basically two approaches to budgeting. From top to bottom, and the other from bottom to top. To clarify from top to bottom budgeting, this means that the top level (strategic leadership) of the business sets a budget for a specific period and the whole team works to achieve that budget. There is one more bottom-up budgeting which attempts to determine the basic costs of each segment of the organization and then summarize each department. Because it is developed at the operational level, it is less stressful for operational and tactical management, and it makes more sense of reach and goals compared to top-down budgeting.

    Factors to consider when creating a budget:

    When we talk about planning and budgeting, we have to consider various factors:

    • If the company is new, we may need to look at the financials of another comparable company that is the same size and also operates in the same industry. To develop a budget for a new company, you need to look at the sales, operating expenses, revenues and earnings of a comparable company. This is a kind of historical budgeting.
    • While an established SME is considering developing a budget, the company must follow some basic rules or the result will be completely different than expected. We see many new SMEs start their business and fail within a short period of time. One of the reasons for this failure is the lack of planning and budgeting.
    • Being very optimistic and having a high budget can lead to a lack of motivation and stress due to not being able to achieve it.

    Similarly, a pessimistic budget can lead to a lack of focus and desired goals.

    • Lack of attention to cost elements. An example is the cost of research and development.

    Research and development costs include fixed and variable costs. A startup has to bear these costs regardless of whether the company makes a profit or not in a given period. Since the fixed portion is unavoidable, the appropriate budgeting activity can develop a plan to minimize the variable cost elements.

    • Another factor that has a significant impact on the company is revenue stream forecasting, this means that the company should have a goal that the whole team should work towards. When developing the budget, the company should use conservative and achievable revenue estimates/goals.
    • Emphasis on the non-financial factors of budgeting also plays a role in developing a financial target/budget as it can be said that a company cannot achieve its projected revenue without a strong customer base.
    • Expenditure discussions with tactical management (head of department) will address many questions and concerns regarding practical budgeting and behavioral issues during the financial/budget period.
    • Creating a contingency plan or allocating contingency expenses can help a small business thrive during a recession. Conducting risk analysis and planning for financial shortfalls helps develop a contingency plan.
    • The most important thing in budgeting is planning to review the budget regularly. If the budget is revised quarterly, it allows flexibility and responsiveness helps the business to grow properly.

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