The importance of budgeting in your small business
The importance of budgeting in your small business cannot be underestimated. Not only does budgeting provide a benchmark against your peers, it also allows for variance analysis and performance assessment, leading to improved sales. Are you actively budgeting in your small business? Read on to learn more on budgeting processes that can help your small business.
Overview of budgeting
Budgeting is an essential part of sustained growth in any size of business and by all management levels of business. Senior management in a business will be focused primarily on long-term planning considering the development of new products. Middle management will be more involved with medium term budgetary planning and control focused on budgeting sales targets. Junior management will be focused on short term planning looking at budgeting on material costs. All these levels of budgeting - short, medium and long term planning - are linked in a business and in combination, provide a robust budgetary system to set up your business for success.More generally, budgeting is useful for planning, cash flow control, motivation and communication of management and employees and performance assessment in a business.
Types of budgeting
A master budget collates the budgets of different business functions and is consistent with financial reporting. Reporting can include a profit and loss account, a statement of financial position and cash flow forecasting. A master budget therefore represents an overarching budget of a business, but it is not useful for management control if you have staff to manage.A functional budget is prepared for each business function specifically looking closely at sales, material, labour, or overall budget. The idea behind a functional budget is to highlight a business' structure and responsibility.A fixed budget is made at the start of the year. It looks at one level of activity, and anticipate the levels of sales and production for the year ahead.A flexible budget on the other hand, although prepared at the start of the year as a fixed budget is, looks instead at multiple levels of activity which gives it the advantage of more easily assessing the real performance in a business against the start of year targets.
How do budgets work in practice?
A budget can have an “imposed” or a “participative” style, depending on the involvement of employees.Top-Down Budgeting is an imposed budget. It is set by senior management and reflects their overall corporate objectives, and then works down through the different levels of the organisation setting appropriate targets to ensure the higher objectives are achieved.The advantages of top-down budgeting are numerous. The process is fast as there is no participation of middle or junior management. Therefore, with less staff training required, less cost is incurred, and there is a heightened awareness of resource availability.Furthermore, budgetary slack is avoided and potentially more objective or fresher perspectives may be gained.There are downsides however to be aware off in top-down budgeting. Senior management may come up with unrealistic targets, which will demotivate other staff and increase staff turnover.
Budget pressure can result in employees uniting against management resulting in reduced motivation and reduced employee motivation.Bottom-up budgeting, on the other hand, is a budgeting system in which all budget holders are given the opportunity to participate in setting their own budgets.
It starts with the personal and departmental objectives set by junior management, and then works its way up through the different levels of the organisation setting appropriate targets to ensure the lower objectives are achieved.The advantages of bottom-up budgeting include increased likelihood of employee motivation increasing the likelihood of budgetary success. Junior management will have a more detailed knowledge of their area and will produce more realistic budgets.
It will also encourage and improve communication between departments and free up the time of senior management time to focus on other important matters.The disadvantages, however, are that it can be time consuming and expensive to set-up and implement and there is a risk that budgetary slack may be included. Also, there is a risk that goals set by the junior management may not be consistent with the strategic objectives of senior manager and there is a potential risk of dysfunctional behaviour b junior management if they are not managed properly.
Mirandus Accountants can help
Mirandus Accountants are your local accountants and tax advisers in Farringdon, Holborn, Clerkenwell, Blackfriars, Old Street and also Edinburgh, providing accounting services, tax returns, corporation limited annual accounting and trusted tax adviser, national and international advise.You can contact us for a tailored solution to your unique business circumstances.Whether you are an individual, freelancer, contractor or you run a small or medium sized business, sole trader or limited company, we can help to minimise your tax burden with our tax planning and tax advice services. That way, you can ensure you are only paying what you should be and nothing more.We strongly recommend you speak with a tax and accounting specialist like Mirandus Accountants, who can provide expert advice for your business and personal tax planning needs.
