MANAGING THE FINANCE OF SMALL AND MEDIUM ENTERPRISES FOR SELF RELIANCE: A BUDGETARY APPROACH

1.1   Introduction

The management of finances in any enterprises relates to the managerial activities of planning and controlling the enterprise’s financial resources. Most crucial decisions of an enterprise are those which relate to finance and this makes financial management a vital role in an organisation. Essentially, finance manager is concerned with the raising of funds and the allocation of funds. Since financial decisions are crucial for the survival of the enterprise, these major functions requires a proper planning with control if the financial management role within an organisation is to be meaningful to the overall organisation goals’ attainment.

It is widely recognised that an enterprise should be effectively and efficiently managed. Actually, managing implies coordination and control of the total efforts of an organization towards achieving the corporate objectives. Management can facilitate the process of managing by charting its course of action in advance. A systematic way of attaining effective and efficient performance of management is budgeting which is naturally part of management.

Budgeting should be of interest to finance managers since it assist in regulating flows of funds. To many people, budgeting can also be seen as profit planning. It is essential to state that general management beliefs in plans accompanied by control.

Specifically, budgetary control is required for all budgetary plans. This budgetary approach toward managing the finances of a firm is therefore necessary if the overall objectives are to be met in such organisation.

If the position stated above affects organisations and enterprises generally, this paper will look into how this budgetary approach could be used by small and medium enterprises in Nigeria in managing their finances towards self-reliance. From the point of view of the size and structure of those small and medium enterprises, the paper will focus on budget planning and budgetary control, budget construction, purposes, types, merit, demerits and problems of budgets as they may affect these small and medium scale enterprises’ financial management.

2.1   Descriptions of Medium and Small Enterprises (SMEs)

There had been so many definitions of what qualifies an enterprise to be a small or medium scale enterprise. Many definitions were made based on the number of employees, annual turnover, capital employed or a hybrid of the three.

The CBN (1981) in its Monetary Policy Guidelines defined a small-scale enterprise as one with an annual turnover not exceeding N500,000 (Five hundred thousand naira only). The former Nigerian Bank for Commerce and Industry (NBCI) upgraded the investment by small scale to N1million (including working capital, but excluding the cost of land). In the 1989 Industrial Policy of Nigeria, small-scale enterprises were described as those businesses with investment of between of N1million and N2million (excluding land but including working capital). According to Ozor (2007) there had been little agreement as to what really constitutes a small and medium sized businesses as each of the definitions were made in the light of economic circumstances prevailing in the environment where such definition were made.

Burns and Dewhurst (1989) quoted the 1871 Bolton Report, which described a small business as:

(a) One with a relatively small share of market; (b) managed by its owners in a personalised way and not through the medium of a formalised structure; (c) independent in the sense that it does not form part of a large enterprises and (d) one in which the owners/managers should be free from outside control in taking their decisions. In Nigeria, a current definition of small and medium enterprises was made by the Bankers’ Committee which sees small and medium enterprises as enterprises with a maximum asset base of N500million (excluding land and working capital), and with no lower or upper limit of staff.

According to Paoloni and Dermatine (1999), there had been increasing criticism of the quantitative approach to describing small and medium businesses while the use of more qualitative criteria are being advocated. One of the approaches is the focus on ownership or organisational structure, which is considered far more useful for analysis. However, the Small and Medium Enterprises Department of the World Bank sees small enterprises as those having up to 50 employees, and total assets/ sales of up to US$3million (about N390 million); and a medium enterprises as one having up to 300 employees and total assets/sales of up to US$15 million (about N1,950 million).

3.1   The Concept of Budget and Budgeting

The general overall objectives of an enterprise are agreed upon. After this, plans are drawn up for the organisation to direct its efforts and progress to toward meeting the ends specified in the objectives. Though, it is possible for some of these objectives to be expressed in terms other than in financial and accounting terms. Nonetheless, some of the corporate objectives (such as the attainment of a desired profit level or the attainment of a desired level of asset growth) can be expressed in financial terms. When monetary values are attached to a plan and the plan is expressed quantitatively, it is known as a budget. Anumaka (2007) defined budget as an approved financial and/ or quantitative statement of the proposed plan to be pursued during a defined period for the purpose of attaining a given objective. According to Pandey (1990), a budget is a comprehensive and coordinated plan, expressed in financial terms, for the operatives and resources of an enterprise for some specific period in the future.

Budgeting is periodic financial planning. In a simple sense, budgeting is seen by Wood and Sangster (1999) as the process of converting plans into budgets. Also, Pandey (1990) sees budgeting as the process of preparing and using budgets to achieve management objectives. Budgeting is part of the management process by which managers of small and medium enterprises can ensure that resources are obtained and used efficiently and effectively in the accomplishment of the organisational objectives.

A budget as the plan of an enterprise’s expectation in the future is prepared for various segment of the enterprise, but they are components of the master budget. The budget for a department, unit, or segment of an enterprise will not be of much significance unless it is a part of the master budget for the entire enterprises. A budget is always quantified in financial terms for operational purpose. It is also necessary to add time dimension to a budget since a budget can only be meaningful only when it is related to a specified period.

Budgeting will compel managers of finance in small and medium enterprises to plan in a comprehensive and coherent way. With budgeting, these managers will have an orderly way to proceed to attain goals and also provide a time schedule for future action toward producing measurable results.

Majorly, budget/budgeting is purposed to:

• state the goals of an enterprise in clear and formal terms so as to avoid confusion and to facilitate attainment;
• communicate the expectations (goals) to all concerned with the management of the enterprise so that they are understood supported and implemented;
• provide a detailed plan of action for reducing uncertainty and for proper direction of individual and group efforts to achieve goals;
• coordinate of the activities and efforts in such a way that the use of resources is maximised;
• provide the means of measuring and controlling performances of individuals and units and to supply information on the basis of which the necessary corrective action can be taken.

Lucey (1988) and Pandey (1990) list the following as conditions for successful budgeting in any organisation:

• The involvement and support of top management
• Clear cut definition of long term, corporate objectives within which the budget will operate
• A realistic organization structure with clearly defined responsibilities
• Genuine and full involvement of line managers in all aspects of the budgeting process. (This can include a staff development and education programme in the meaning and use of budgets)
• Regular revision of budgets and targets (if necessary)
• Administration of the budget in a flexible manner
• An appropriate accounting and information system

Although, small enterprises may not see the need for budgetary planning process to be formal in the sense that they may regard the process as an informal process consisting of ideas loosely agreed upon between owners, managers and employees (who may, in fact, be the same people). Except for the smallest organisation, budget plans tend toward a more formal basis as stressed above.

4.1    Budget Construction in Small and Medium Enterprises.

Many enterprises make plans.  Some of these organisations plan in a formal way while others make plans in an informal manner. In general terms, some medium enterprises have a comprehensive system of budgeting where they prepare budgets for all of their important operations.  On the other hand, the small enterprises and some medium enterprises do not have a comprehensive system of budgeting. They prepare budgets for a few of their operations. However, in spite of these, it is not inappropriate for small and medium enterprises to have comprehensive budgets in the form of a master budget that incorporates a complete package of component budget, which comprise of the operating budgets, the financial budget and capital budgets.

The construction of budget in small and medium enterprises will vary between enterprises depending on the size, type of product, type of market, technology, management choice, the degree of uncertainty faced by the enterprise, and many other factors. Anumaka (2007) while stating that all enterprises are unique and that each will produce budgets in an individual manner; gave the procedure that will apply in almost all budgeting situations. He cited the “review of the environment” and the “review of the enterprises” as prerequisites in the process of budgeting.

4.1.1      Review of the Environment

The review of the political and economic environment and conditions under which a small or medium enterprise operates during the period of budget is the first stage in the process of budgeting. At this stage, the small and medium entrepreneurs should consider the following pertinent questions:

·         Are there likelihood for markets to expand, decline or remain static?

·         Will new market open or old ones close?

·         Are customers likely to have increase or decrease in spending powers?

·         Are government policies (interest rates, credit restrictions, public sector spending) affect the enterprise?

·         What will the inflation rate be, in the short and medium term?

·         To what extent will price level changes affect costs, revenue and demand?

·         How will the development among competitors likely affect the enterprises?

·         What are the other features of the economy that will likely affect the enterprises during the budget period?

It may be difficult to provide convincing answers to these questions. But if the enterprise is poised to have a sensible detailed budget it must then provide good answers to the questions because the enterprise concerned will rest its expectations and challenges of the business in the period ahead on the answers. The review of the environment as enunciated above could be regarded as the review of opportunities and threats that are external to the enterprise.

4.1.2   Review of the Enterprise

This is simply an assessment of strengths and weaknesses opened to the enterprise. These will largely determine what the enterprise tackles in near future. This review is inward-looking as it overlaps with the environmental review, but identifies key problems and opportunities with the enterprise.

The first step in the review of the enterprises is the review of recent performance of the enterprises. To a large extent, recent performance review will determine the possible achievements in the approaching budget period. Under this review, Anumaka (2007) opines that it is necessary to ask the following questions in order to establish financial strengths and weaknesses of an enterprise:

• Is the enterprise in strong financial shape?
• Are there any liquidity difficulties?
• Are borrowings excessively high?
• Have recent profit levels been acceptable?

If the recent performance is strong, it may provide the basis for ambitious future budgetary plans, while recent problems like weak cash flow, low profits, will indicate that the budgetary plans have to be restricted to recovery and consolidation.

Apart from the above, the entrepreneurs in small and medium enterprises should identify other important opportunities and problems facing the entrepreneur. The entrepreneur should look at new market or product opportunities, use of improved technology, depressed markets, customer dissatisfaction, inefficient production facilities, shortage of key labour skills etc.

The principal budget factors (which are the major constraints that will operate in the enterprise during the period of the budget) will surface after the process of reviewing the environment and the enterprises. For many enterprises, this key budget factor may be (a) demand for product and service, or (b) finance or cash flows; and these will necessitate the detailed budget plans of sales, working capital, cash, profit and loss, balance sheet, capital expenditure and cash flow statements which are required in the management of finances of small and medium enterprises.

4.1.4   Sales Budget

            This is also called “revenue budget”.  It starts the entire budgetary process.  Since a vital principal budget factor for many enterprises is sales volume, sales budget is the primary budget form which the majority of other budgets are derived (Lucey 1988). Sales budget is the cornerstone for the preparation of other budgets.  Before the sales budget can be developed, it is necessary to make a sales forecast, which is the basis of the preparation of sales budget.  If the forecast is wrong, then the entire budgetary system will be wrong.

            Sales budgets will provide small and medium businesses an analysis of the sales revenue for the budget period, broken down as appropriate for the type and size of the business.  Normally, a sales budget will normally give details of volumes, selling prices and total revenue for the enterprises and these will assist such enterprise to manage its finances.

4.1.5   Capital Budget

            The budget of capital expenditure is also a critical budget statement along with the sales budget.  Capital budget involves the planning to acquire fixed assets such as machinery, building, vehicle computer etc, together with the timings of the estimated cost and cash flow of the entrepreneur.  Capital expenditures requires large sum of funds and have long-term implications for an enterprise.  It is difficult to prepare capital budgets because estimates of the cash flows over a long period of time have to be made and these involve a great degree of uncertainty.

            In capital budgeting, various techniques can be used to determine the profitability of such project.  The techniques used should be objective and free from personal bias of the entrepreneur.

            Capital budgets and sales budgets will be closely related, for customers, the sales potential of a medium size rice seller will, in part depend on the ability of the entrepreneur to buy and develop new outlets through this budgetary planning of its finances.

4.1.6   Production Budget

            This stems from the sales budget.  It is based on sales forecasts.  To prepare the production budget, the sales forcasts for each product are combined with information about the beginning level and the expected level of closing stock of finished goods.

4.1.7   Cost Budget

            Detailed cost budgets could be prepared for an enterprise after preparing sales and capital budgets.  This will encompass the enterprise’s unit production, sales, design, administration, finances etc.  Cost budgeting looks into variable cost (where the cost per unit is subject to changes at all levels of output), and fixed costs (like rent costs, administrative costs, salaries, depreciation) which will remain unchanged despite large changes to output levels.  It is appropriate to analyse these costs monthly in order to show anticipated increases or reductions.

            There could be adjustments to cost budgets to match actual levels of activity.  This is called flexible budgeting.

4.1.8   Working Capital Budget

            Whenever a small or medium enterprise constructs its sales, capital and cost budgets, there will be the need to make decisions that will affect the working capital and the sources of finance of such enterprise. For instance, a sales budget to extend sales to new and untried market will have effect on the level of debtors.  Also, plan to build new outlets in expansion may require additional borrowing facilities for the enterprise.

            For small and medium size enterprises, working capital budgeting should consider:

·         the value of those components of the working capital (stock, debtors, creditors, cash) that will be tied up in working capital during and at the end of the budget period;

·         the likely changes in the value of these components;

·         the evaluation of major finance needs of the enterprises;

·         or the issue of repayment of debts;

·         the credit periods received and given (in respect of creditors and debtors respectively), and stock policies;

·         any plans to raise new funds;

·         evaluation of profit to the entrepreneur.

           

4.1.9   Cash Budget

            First and foremost, when we talk about cash in budgets, cash includes bank funds.  When undertaking a cash budget, “cash” includes both money held in the form of cash and amounts held in the bank.  Therefore, there should not be differentiation between cash and cheque payments and receipts. It is meaningless to budget for sales, capital expenditure, production and so on, if during the budget period, the enterprises runs out of cash funds.  Therefore, cash should be budgeted for in order to know the situation of fund in advance and the action to be taken.  Lucey (1988) indicated that cash budgets are prepared in order to ensure that there will be sufficient cash in hand to cope adequately with budgeted activities.  Pandey (1990) in his words states that major objective of a cash budget is to plan cash in such a way an enterprises always maintain sufficient cash balance to meet its needs and uses the idle cash in the most profitable manner. The cash budget will show the effect of all other budgeted activities on the cash flow of an enterprise.

The cash budget, gives an entrepreneur a clear view of the timing of both the cash receipt and disbursement expected over a given period.  Cash budget allows the entrepreneur to anticipate shortages or excesses of cash in future so that proper action can be planned before such situation become facts accomplished.  If the entrepreneur identifies future shortages, the cash budget allows the entrepreneur to seek additional funds from bank and other sources ion advance of the need for funds.  On the other hand, the entrepreneur can identify future cash excesses for investment opportunities that can be explored in terms of rate of returns and security to the enterprises.  The summary is that a cash budget can reveal:

• if an enterprises will need finance;
• how much finance the enterprises will need and;
• when such finance will be needed.

It is important to state that cash budgeting is a continuous activity with budgets being rolled forward as time progress.

If it is important to keep cash balance at optimum level since too little cash endangers the liquidity of an enterprise and too much cash will impair profitability, it is therefore suffice to state that cash budgeting is a central point of activity which small and medium enterprises can be explored in managing their finances towards self reliance.

            As stressed by Wood and Songster (1999), cash budgeting will therefore offer the following advantage is to a small and medium size enterprise in the management of its finances:

(a)       Having to think ahead and plan for the future and express plans in figure focuses one’s mind in a way and in a general fashion about the future.  A general optimistic feeling that “all will be well” will often not stand up to scrutiny when the views of the future are expressed in a cash budget.

(b)       Seeing that money will have to be borrowed at a particular date will mean that an enterprise can negotiate for a loan in advance, rather that at the time when it has actually run out of cash

(c)        Knowing about the need to borrow in advance also widens the possible pool of lenders.  Such people like friends, relations, businessmen, and investors other than bankers rarely have large sums of cash available.  They need time to turn their own investment into cash before cash could be lent to the enterprise.

(d) Alternatively, the entrepreneur may find out that the enterprise cash funds surplus in relation to what it required.  Knowing this in advance will enable the entrepreneur to investigate properly how the surplus cash could be invested until required; these earn interest and the investment income.

Typically, cash budget has the general form as shown below:

Cash Budget

	Period 1	Period 2	Period 3	etc
Opening cash balance b/f (plus) receipt from debtors (plus) sales of capital items (plus) any loan received (plus) any other cash receipt	XXX	YYY	ZZZ	AAA
Total cash available (minus) payments to creditors (minus) cash purchases (minus) wages and salaries (minus) loan repayments (minus) capital expenditure ( minus) tax ( minus) any other cash payments
Closing cash balance c/f	YYY	ZZZ	AAA	BBB

It could be seen that cash budgeting is a continuous activity with budgets being rolled forward as time progress.

If due consideration are given to all the above issues, there will then be the possibility of preparing the master budget.

4.1.9    Master Budgets

            A master budget is a budgeted set of final account (Wood and Sangster (1999).  In essence, master budgets include profit and loss budget, balance sheet budgets and budgeted cash flow statement. What is summarised in the master budgets are the information from the detailed budgets.  It is possible that when all the detailed budgets have been co-ordinated, the master budget shows a small level of profit which may be unacceptable to the entrepreneur.  These may then bring about the need to recast the budgets to see whether the enterprises can earn greater profit and if possible at all, the budgets can be altered.  Eventually, there will be a master budget which the entrepreneur will agree to and which will in turn, give the targets for the results that the enterprises hopes to achieve in financial term.  Lucey, (1988) described the master budget to be a consolidation of all the supporting budgets which represents the financial effects of the total plan for a business as a whole.

            The profit and loss budget is a forward looking income statement. Its purpose is to project the final profit which serves as the goal toward which all efforts and financial plans are directed.  The balance sheet budget projects the financial position by indicating the status of liabilities, assets and proprietor’s funds at the end of the budget period.  The budget cash flow statement shows the major sources of cash and how that cash would be used.  It shows the total anticipated change to cash and cash equivalents during the budget period Apart from the above benefits of cash budgeting; the general benefits of budgeting to small and medium enterprises could that it:

• compels an enterprise to plan for future;
• helps to coordinate, integrate and balance the efforts of the enterprises in the light of the enterprises overall by objectives;
• facilitates control;
• the quality of communication;
• increases the moral and productivity with the enterprises;
• develops an atmosphere of profit-mindedness and cost consciousness;
• permits to focus entrepreneur attention on significant matters through budgetary reports;
• measures efficiency, permit entrepreneur self-evaluation and indicate the progress in attaining the enterprises objectives.

5.1   Budgetary Control

A budgetary plan cannot carry out itself by the mere fact that it set down on paper.  Control could be exercised through the budget. This could be done by linking the responsibility of an entrepreneur with budgets.  This guide and help an entrepreneur to produce certain desired results, and the actual achieved results can be compared against the expected which is the budget.

            Budgetary control therefore involves the process of comparing actual result with plan or budget, and reporting the variations.  The budgetary control provides some of the feedback necessary to be able to make corrections to current operations and activities in orders to meet the original objectives and plans and some of the feedback upon which alterations to the plans are made, if necessary (Lucey 1988).  Small and medium scale enterprises therefore require a system of budgetary control in order to monitor progress and highlight variances or deviations from budgetary plans.

6.1   Limitations of Budgeting and Budgetary Control

            Apart from the specific merits of budgeting in the management of finances, as discussed above, a small or medium enterprise can encounter the following limitations in the process of budgeting.

(a)       The need to seek support cooperation and involvement of all within the enterprises;

(b)       The need to use human judgment, preparation, interpretation and implementation;

(c)        Inability to develop meaningful forecasts and plans

(d)       Expenditure of a lot of time on budgeting and budgetary control by the entrepreneur.

(e)       Difficulty in establishing realistic objectives, policies, procedures and standards of desired performance.

(f)         The need to educate individuals that would be involved in the process of budgeting.

7.1   Conclusions

            It has been stressed that budget relates estimation of projectional inflows and outflow of any organisation.  It is required so as to draw plans to be achieved by the organisation at the specified period of time.  A well prepared budget will force action within an organisation and also enable easy control of all resources required to carry out all activities within a business organisation.  Cash budgeting and projected statement of sources and application of fund (fund flow statement) are central in the management of the finance of any business organisation and this applies to small and medium scale enterprises.  Actually, the process has served to qualify all of the factors that are likely to affect the financial performance of small and medium enterprises during the period of budget.

8.1   Recommendations

            Given all that was highlighted in this paper, with particular emphasis on budgetary planning and budgetary control as financial management tools and as tools for managing the finances in small and medium scale enterprises, it is therefore necessary to recommend that small and medium enterprises in Nigeria, while considering the process, problems and benefit of budgetary planning and budgetary control, should embrace this budgetary approach in managing their financial toward self reliance.

           

                                               

           

References

Anumaka, N. M. (2007): Budgeting Business Organisations. The Nigerian Banker, October- December 2007, Pg 18-28. Lagos: CIBN

Burns, P and Dewhurst J (1989): Small Business and Entrepreneurship. London: Macmillan Publishing

Central Bank of Nigeria (1981): Monetary Policy Guidelines. Lagos: The Central bank of Nigeria

Lucey T (1988): Management Accounting. London: DP Publication Limited.

Ozor B. M. (2007): The Impact of Deregulation on Accounting for Small and Medium Scale Enterprises: A Review of Related Literature. The Nigerian Banker, July – September,       2007 Pg 15-22.Lagos: CIBN

Pandey, I.M. (1990): Financial Management. New Delhi: Vikas Publishing House PVT

Paoloni M. and Demartine, P., (1999):  Harmonisaing Small Business Financial Reporting in Europe: A Missed Opportunity. Quardeni di Economia Aziendale (Working Papers), Italy Uribino University.

Taiwo, O (1992): The Impact of the Second-Tier Security Market (SSM) on Indigenous Business in Nigeria. NISER Monograph, Series No 4. Ibadan: NISER

Wood F and Sangster A. (1999): Business Account 2. Harlow, England: Pearson Education Limited

A paper presented at the 3^rd National Conference of the School of Business Studies, the Federal Polytechnic Ado Ekiti, Nigeria.