Why Some Businesses Don’t Budget
Smaller businesses generally do little or no budgeting for their company. Even many larger businesses don’t budget — at least in a formal and comprehensive manner. You may encounter many reasons some businesses avoid budgeting, most of which are practical.
To budget or not? Consider the state of the industry
A couple reasons that some businesses avoid the process of budgeting are
Some businesses are in relatively mature stages of their life cycle or operate in a mature and stable industry. These companies do not have to plan for any major changes or discontinuities. Next year will be a great deal like last year. The benefits of going through a formal budgeting process do not seem worth the time and cost.
A business may be in a very uncertain environment, where attempting to predict the future seems pointless. A business may lack the expertise and experience to prepare budgeted financial statements, and it may not be willing to pay the cost for a CPA or outside consultant to help.
But what if your business applies for a loan? The lender will demand to see a well-thought-out budget in your business plan, right? Not necessarily. Some banks don’t expect a business to include a set of budgeted financial statements in the loan request package; instead, they may just ask to see the latest financial statements of the business.
Relying on internal accounting reports
Although many businesses don’t prepare budgets, they still establish fairly specific goals and performance objectives that serve as good benchmarks for management control. Every business should design internal accounting reports that provide the information managers need in running a business. Obviously, managers should keep close tabs on what’s going on throughout the business.
Even in a business that doesn’t do budgeting, managers depend on regular profit reports, balance sheets, and cash flow statements. These key internal financial statements should provide detailed management control information. These feedback reports are also used for looking ahead and thinking about the future. Other specialized accounting reports may be needed as well.
Making reports useful for management control
Managers are very busy people and have only so much time to read the accounting reports coming to them. Ideally, significant deviations and problems should be highlighted in the accounting reports they receive — but separating the important from the not-so-important is easier said than done.
Making reports useful for decision-making
Business managers make many decisions affecting profit: setting sales prices, buying products, determining wages and salaries, hiring independent contractors, and purchasing fixed assets, for example. Managers should carefully analyze how their actions would impact profit before reaching final decisions. Managers need internal profit reports that are good profit models — that make clear the critical variables that affect profit. Well-designed management profit reports are absolutely essential for helping managers make good decisions.
Making reports clear and straightforward
Needless to say, the internal accounting reports to managers should be clear and straightforward. The manner of presentation and means of communication should get the manager’s attention, and a manager should not have to call the accounting department for explanations.
Designing truly useful management accounting reports is a challenging task. Within one business organization, an accounting report may have to be somewhat different from one profit center to the next. Standardizing accounting reports may seem like a good idea, but may not be in the best interests of the various managers throughout the business — who have different responsibilities and different problems to deal with.