Entrepreneurs, like big corporates, should do budgeting. In fact, it’s a prerequisite for success. Planning has been cited as one of the key pillars for business longevity.
The simplest definition of budget, as aligned to planning, has been translated to monetary language; that is through a qualitative plan accompanied by quantified data (budget) for now a future decision making. In its sense, a budget balances between deficiencies and surpluses, which are wastages in business economics.
Agreed – simply formulating a plan and a budget does not guarantee success. However, a budget breaks down the long term quantitative goals into short term achievable targets.
By doing so, budgets give a clearer perspective of what is to be accomplished in the short-run so that the long-run aim can be accomplished.
For example, suppose an entrepreneur aims at generating a profit of twenty-five million dollars in the next ten years.
When communicated to stakeholders, such a figure seems too ambitious.
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However, when broken into annual, monthly and weekly profit targets, the amounts sound reasonable and achievable.
Budgets provide a benchmark against which the entrepreneur can use to objectively assess the progress towards accomplishing their vision; this is necessary as it gives feedback on whether the original plan needs adjusting.
Budgets also motivate employees if formulated and implemented in a manner encouraging progression toward the entrepreneur’s vision as opposed to a de-motivating approach where budgets are set for punitive purposes.
There are various theoretical techniques to preparing budgets, which include zero-based budgeting, incremental budgeting, priority-based budgeting among others.
Effective budgeting requires clear qualitative goals that meet the ‘SMART’ criteria to be in place; thus an individual just stating that they are planning to travel from Harare to Mutare is not a ‘SMART’ goal, but when rephrased to include the means of transport, the stops, the purpose of the journey, the number of people involved it then becomes a ‘SMART’ goal.
The plan can now be put in quantitative terms as the distance between Mutare and Harare can be determined, since the means of transport has been specified, the amount of fuel/ bus fare/ train fare can be determined.
Therefore, before sitting down to prepare a budget; the entrepreneur needs to be clear on what is to be accomplished, how and when. To further ensure feasible budget preparation, an environmental analysis is also necessary; this entails scanning both the internal as well as external business environment.
Several management models can be used as a guide when scanning the environment such as the SWOT analysis, Porter’s Five Forces, PESTELD analysis, McKinsey 7S framework, EPRG framework among others; however it is advisable not to be rigid when using these models but to be flexible so as to be able to identify all factors that can potentially have an effect on the business for consideration during the budgeting process. It is easy to dwell on what is needed to achieve intended aims; resulting in more concentration on expenditure.
However, expenditure can only be incurred where there is income – we cannot spend when there is no money. It is imperative when budgeting to ensure that all expenditure is supported by a revenue stream.
An effective budget rides on stakeholder, especially employees, buy-in.
The budget will be implemented by the employees; especially those not in managerial posts.
The budgeting process should be inclusive and simplified so that everyone understands and appreciates it.
Furthermore, the budget is not a once off hurried process that is done a month or two before year end in preparation for the next financial year.
Rather, it is a process that should be actively being done throughout the year as it involves gathering information as well as forecasting what is likely to occur.
As the budget is being implemented, feedback is being captured on any adjustments that might be necessary due to unforeseen circumstances arising or under/ over budgeting due to the use of estimates.
Thus, budgets should be flexible and adaptable. However, explanations should be sought for variances arising.
Variances between the budgeted amounts and actual amounts are not always a result of human extravagance or error but can be an indication of other factors that need to be considered.
Identification of these variances can be a prompt to enhance efficiency thus improving the business’ operations.
The budgeting process requires expertise, time as well as monetary investment. Limited resources usually limit effective budgeting resulting in budgets that frustrate both the employees as well as the entrepreneur.
Furthermore, the process of scanning the environment as well as forecasting revenues and expenses is not easy and does not translate to accurate amounts (even in stable economies).
The use of computerised packages as well as flexi-budgets which incorporate different likely future scenarios (scenario or what-if analysis) has tried to enhance the level of forecasting accuracy.
Due to these challenges, there has been a lot of theoretical criticism on the necessity of budgets with some advocating for a no budget approach.
However, despite all these challenges and criticisms, budgeting and planning have proven to be unprecedented cornerstones of success.
*Dr Farai Chigora is a businessman and academic. He is the head of management and entrepreneurship at the Africa University’s College of Business, Peace, Leadership and Governance. His doctoral research focused on business administration (destination marketing and branding major, Ukzn, SA). He is into agribusiness and consults for many companies in Zimbabwe and Africa. He writes in his personal capacity and can be contacted for feedback and business at fariechigora@gmail.com, www.fachip.co.zw, WhatsApp mobile: +263772886871
*Ngonidzashe Elizabeth Chirima is an entrepreneur and a seasoned academic, currently a Doctor of Business Administration candidate (Binary University, Malaysia) whose research focus is financial retirement planning, She is a lecturer in the Accounting and Finance Department at Africa University in the College of Business, Peace, Leadership and Governance. She writes in her personal capacity and can be contacted on ne4liz@gmail.com , +263772811598.