Breaking down the budgeting process for SMEs
Struggling with the financial and accounting side of the business is not uncommon for SME owners in Singapore. Without an accounting background, many SME owners find themselves at a loss when it comes to making complex financial decisions. They may have built their business from a simple start-up or family business to what is now an SME with perhaps quite a significant number of employees. It can become increasingly challenging to evaluate the financial performance of the company, and difficult to predict and control the company’s profit and loss going forward.
So here are some simple steps for putting together a budgeting program which can be implemented by any SME owner. Usually it is a good idea to plan a budget about 3 months before the start of your next financial year. In the initial stages, you might want to begin the process slightly earlier to provide more time for learning and fine-tuning the steps along the way.
Step 1: Establish Objectives and Long Term Goals
Start by determining the objectives you have for your company in the short, medium and long-term, as well as the objectives you wish to achieve via this budgeting process.
This will allow you to streamline the process by keeping only the steps necessary to achieve your objectives. Every step taken in the process should lead to the fulfilment of an objective, in order to maintain an efficient and effective budgeting system.
Step 2: Review & Discuss Financial Performance
Next, evaluate the past and present financial position and performance of your company. Ask questions such as: what is the cash flow position? Is the company generating sufficient revenue to support the expenditure? Have net profits been trending up or down?
This will give not only you, but everyone involved in the process, a clearer idea of what would be a realistic financial projection for the next year.
Step 3: Create A Budget Template
The budget should incorporate important assumptions such as industry growth rates, expected company growth, prospects for inflation (or price rises), and interest rates (these will affect any company debt). It can also include various financial targets, eg profit margins, determined by the management.
Step 4: Create & Consolidate Budget
Top management should set the overall goals and direction of the company. In this step, however, the budget is broken down into the individual line items, and distributed to the relevant personnel that are responsible for each item. These personnel then forecast each line item within the budget. At the end of the process, the finance department will collect and consolidate the budget, making and explaining any necessary adjustments. This should involve more feedback and discussion.
Having employees contribute to the creation of the budget builds a stronger sense of accountability amongst employees, and can even improve employee morale. It also allows you to obtain a different perspective related to the on the ground situation.
Step 5: Review & Finalise Budget
After the budget is consolidated, it should be reviewed and approved by appropriate key management personnel. Different departments will need to be consulted to assess the viability of the created budget. This process continues until a general consensus is formed.
Step 6: Distribute Budget & Appoint Task Managers
Distributing the budget and appointing task managers is a major step that is only too commonly skipped. After finalising your budget, send it out to key personnel to ensure that they are aware of the company direction. Reinforce their crucial role in contributing to the company’s financial performance. For some, the budget can also become the basis upon which Key Performance Indicators (KPIs) are based. Appoint suitable task managers to monitor and follow up on the budget.
Step 7: Monitor Performance
Lastly but most importantly, monitor and review the company’s financial performance against your budget on a regular basis. Schedule quarterly or half-yearly updates to make assessments. Investigate any unexpected or huge variances.
The purpose of the budgeting process is to allow you to manage your company’s financial performance, objectives, and goals more effectively, so streamline the process accordingly. There is no one-size solution fits all, and you will need to gage what works best for your company.