Every year most corporate organizations develop their budget, in preparation for the next financial year. However, the same cannot be said of majority of the approximately 37.1 million* Micro, Small and Medium Enterprises (MSMEs) operating in Nigeria. One of the challenges facing the MSME, as identified by a 2013 survey conducted by the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) in collaboration with the National Bureau of Statistics, is "most of the enterprises are operating without a business plan." As a matter of fact, a large number of the MSMEs do not even keep records of their business transactions let alone preparing and implementing a budget. Most of the times, personal finances are not separated from the business' funds. This is one of the hindrances to the growth and development of MSMEs in the country.
Essentially, in the context of MSME, budget simply refers to an estimate of income and expenditure within a given period. Depending on the scale of operation, the budget can be prepared quarterly or yearly. However, to some entrepreneurs, the budgeting process is cumbersome while to others, it is a wasteful exercise of setting targets that may never be achieved. Nevertheless, the importance of a budget as a planning and control tool can never be overemphasized. Budget helps in business performance evaluations and quick decision making. To help small scale business owners master the act of budgeting with a view to inculcating it into their business culture, some simple and easy to follow steps have been outlined below:
- Conduct a macro-economic review: Being an MSME, you may not have the resources to carry out an in-depth macroeconomic analysis, however, for your business to be a profitable going concern, you must understand the trends in the basic macroeconomic indicators. For instance, understanding inflation trends will enable you adequately plan your costs, and how that will affect customers' purchases. Also, a review of income & wages, interest rates, exchange rates and unemployment rates will help you to effectively plan for and control what will happen in your business within the period.
- Industry review: After conducting a broad macroeconomic analysis, you must do an expansive review of the industry in which you play. You have to know:
1. The general direction of the industry,
2. The market value,
3. Your current share of the market,
4. What competition is doing & their results.
This will help you to strategically plan on consolidating your position as a market leader or improving your market share and profitability.
- Business review: This involves a deep and extensive inward looking into all the activities of the business in the outgoing period, and maybe some preceding periods. Here, you have to do a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis with a view to using your strengths to tackle your weaknesses and keying into opportunities while minimizing your threats. You have to identify what worked and what did not work, in the previous periods. This will help you in plugging wastages and better allocate resources for optimal performance.
It is important to note here that for a proper business review, adequate and relevant records must be kept in an easily retrievable manner.
- Set assumptions: Having carried out all the reviews and analyses, next is to set assumptions for the budget period, based on the available facts and figures. For instance, how would government policies and market forces affect inflation, exchange rate, unemployment rate, interest rates, and so on? How would any change affect your industry in general and your business in particular? These questions must be reasonably and realistically answered because whatever assumption you hold, rightly or wrongly, would affect your budget and eventually your performance.
- Project into the future: Coming to the budget proper, you have to put both the reviews and assumptions together and project into the future. Your budget needs not to be overambitious neither does it has to be a timid budget; you just have to be as realistic as possible. More so, the budget itself can be reviewed if and when there is a huge difference between the underlying assumptions and reality, or if new information that will significantly affect the actualization of the budget come to the fore.
- Put measures in place for budget actualization: The budget, no matter how beautifully and realistically crafted, would amount to nothing except deliberate measures are put in place for its actualization. Among these measures are:
- Everyone who will play a part in the budget actualization within the organization should be carried along during the crafting stage.
- The approved budget should be clearly communicated to all units responsible for its implementation.
- People should be empowered through training and retraining.
- There should be a periodic (weekly, bi-weekly, monthly or quarterly) review of budget performance. This would create room for prompt decisions and adjustments where necessary.
A budget is not an end in itself. However, its careful crafting and implementation gives an organization a:
- Sense of direction,
- Tool for planning and control; and
- Tool for quick decision making.
In view of its advantages, the importance of having a budget cannot be overemphasized. However, if as an entrepreneur in the MSME space, you are not able to go through the entire budget process in-house, there are a number of accountants and business consultants that can help out. Get a workable budget today, and see how your business improve.
*SMEDAN and National Bureau of Statistics Collaborative Survey: Selected Findings (2013). The latest available statistics on number of MSMEs.