Tiểu luận: PURPOSE OF BUDGETING IN SME.docx

Luận Văn Group hỗ trợ viết luận văn thạc sĩ,chuyên đề,khóa luận tốt nghiệp, báo cáo
thực tập, Assignment, Essay
Zalo/Sdt 0967 538 624/ 0886 091 915 Website:lamluanvan.net
TABLE OF CONTENTS
I. INTRODUCTION...................................................................................................................2
II. METHOD OF PREPARING BUDGET ................................................................................2
Top-Down Budgeting Approach.............................................................................................2
Bottom-Up Budgeting Approach............................................................................................3
Which method is more frequently used by SMEs ..................................................................3
III. PURPOSE OF BUDGETING IN SME................................................................................4
Controlling Purposes ..............................................................................................................4
Performance Evaluation Purposes..........................................................................................5
IV. CONCLUSION.....................................................................................................................7
REFERENCES...........................................................................................................................8

I. INTRODUCTION
It is undeniable that the importance of Small and Medium-sized Enterprises (SMEs) to the
economy serves sustainable and rural development while fostering entrepreneurship
efficiency (Endris & Kassegn, 2022). They not only contribute to employment, alleviate
poverty, and enhance living standards but also promote economic growth, particularly in the
less developed regions (Ogunjimi, 2021; Manzoor et al., 2021). Given the critical role of
SMEs, research into their budgeting practices is both timely and essential. Budgeting within
SMEs plays an important role in resource allocation and control, which is crucial for
businesses with limited resources (Matsoso et al., 2021). Moreover, budgeting also serves as a
framework for performance evaluation and decision-making, allowing SMEs to identify
strengths and weaknesses and adjust strategies accordingly (Sarwary, 2019). Hence, this essay
provides a critical discussion of the budgeting practices in SMEs, with a focus on the
budgeting methods and purposes, along with practical insights into their application within the
context of SMEs.
II. METHOD OF PREPARING BUDGET
As stated by Mah’d (2020), choosing the appropriate budgeting approach in SMEs for
aligning financial strategies with business objectives, optimizing resource allocation, and
enhancing operational efficiency. Both top-down and bottom-up budgeting methods offer
advantages tailored to the unique needs and structures of SMEs (Hendieh, 2023).
Top-Down Budgeting Approach
The top-down budgeting approach is characterized by its centralized decision-making process,
typically managed by senior management. This method is advantageous for its speed and
efficiency, as it circumvents the time-consuming process of collecting and synthesizing inputs
from various departments (Hansen et al., 2003). By directly aligning the budget with high-
level strategic goals, senior management ensures that all departmental budgets are
synchronized with overarching business targets, fostering a cohesive strategic direction
throughout the organization (Goode & Malik, 2011). Furthermore, top-down budgeting
leverages historical financial data and previous years’ budgets as benchmarks, enabling
management to set high-level targets for departments and functions. This approach not only
streamlines the budgeting process but also ensures that allocations are made with a strategic

perspective, considering both past performance and future objectives (Libby & Lindsay,
2010).
Bottom-Up Budgeting Approach
Conversely, the bottom-up budgeting approach is distinguished by its inclusivity, engaging
employees at all levels in the budgeting process. This method is renowned for producing more
accurate budget estimates since it draws on the detailed knowledge and firsthand experience
of staff directly involved in day-to-day operations (Hilton, 2005). The collaborative nature of
bottom-up budgeting enhances morale and motivation among employees by giving them a
voice in the process, which can lead to increased commitment to achieving budget targets
(Lambert, 2006).
Moreover, involving employees in budget preparation encourages a sense of ownership and
accountability, leading to more realistic and attainable budget goals. This budgeting approach
can improve the accuracy of budget forecasts and serve as a significant morale booster,
fostering a positive organizational culture and enhancing overall performance (Shim & Siegel,
2008).
Which method is more frequently used by SMEs
According to a field investigation by Huy & Phuc (2022), it was found that SMEs
predominantly favor the bottom-up approach due to their collaborative nature and
effectiveness in resource allocation and decision-making. Statistically, the adoption of top-
down budgeting in SMEs stands at 33.7%, while bottom-up budgeting accounts for 40%,
indicating a clear preference for the bottom-up (Vuong, 2023). The bottom-up approach is
praised for encouraging collaboration across different departments within SMEs, actively
involving both employees and management in developing operational budgets. This process
ensures that budgeting does not just become a managerial directive but a collective
responsibility, thereby minimizing information asymmetry and promoting transparency and
fairness in the budget formulation process (Sarwary, 2019)
Moreover, information asymmetry, prevalent in top-down budgeting, can lead to a lack of
transparency and misalignments between management’s expectations and the operational
realities of different departments (Weiskirchner-Merten, 2020). Bottom-up budgeting
addresses this issue by facilitating open communication and ensuring that all levels of the

organization have input into the budget. Furthermore, when employees see their budget
suggestions being implemented, it not only reinforces trust but also motivates them to actively
work toward the company’s financial goals (Hansen et al., 2003). This involvement has a
positive impact on the motivation of managers and staff responsible for executing the budget,
leading to a higher commitment to attaining budget targets and greater performance outcomes.
Mah’d (2020) also emphasized that bottom-up budgeting leads to better engagement and
performance compared to the top-down approach. Hence, the preference for the bottom-up
budgeting approach in SMEs is attributed to its ability to facilitate effective resource
allocation, enhance decision-making, and promote a culture of collaboration and transparency,
which are essential for the context of SMEs.
III. PURPOSE OF BUDGETING IN SME
Controlling Purposes
Budgeting in SMEs serves as a fundamental tool for financial and operational control. A study
conducted by Armitage et al. (2020) revealed that approximately 80% of respondents utilize
budgets predominantly for control purposes. This preference underscores the critical role of
budgeting in ensuring that SMEs remain within their financial and operational boundaries, a
necessity for their sustainability and growth. The importance of budgetary control in SMEs is
further highlighted by the financial challenges they face, particularly in developing
economies. Matsoso et al. (2021) pointed out that these entities are often denied funding due
to inadequate cash flow and insufficient operating history, emphasizing the need for stringent
budgetary controls to mitigate these challenges. Through effective budgetary control, SMEs
can demonstrate fiscal responsibility and operational efficiency to potential investors and
lenders, enhancing their credibility and attractiveness for funding.
Moreover, SMEs operate in highly dynamic and uncertain markets, where conditions such as
consumer demand, pricing strategies, and competitive landscapes can shift rapidly. In such
volatile environments, controlling budgets becomes essential to swiftly respond to market
fluctuations, ensuring that SMEs can adapt their strategies and operations to maintain
competitiveness and financial stability (Bui et al., 2020). Compared with performance
evaluation purposes, it allows SMEs to assess how external market fluctuations impact their
financial and operational targets, providing insights for strategic adjustments (Sarwary, 2019;
Matsoso et al., 2021). While performance evaluation focuses on long-term strategic

alignment and learning, controlling emphasizes short-term adaptability and financial
discipline, which is critical for immediate response to market volatility.
Besides, operational focus is another reason why SMEs prioritize budgeting for control
purposes. Especially in their early stages, SMEs need to ensure that their operations are
streamlined and efficient to meet production or service delivery targets. Controlling budgets
enables SMEs to monitor and manage their operational expenses closely, facilitating smooth
business processes and the achievement of immediate operational goals (Schubert & Kirsten,
2021).
Performance Evaluation Purposes
Budgeting is equally significant for performance evaluation purposes in SMEs, with 61% of
the firms in a sample placing significant weight on budget results for this purpose (Armitage
et al., 2020). As a result, it illustrates how integral budgeting is not just for controlling
finances and operations but also for assessing the overall performance of the business.
Performance evaluation through budgeting allows SMEs to set clear financial and operational
targets and measure actual outcomes against these benchmarks. This process is crucial for
identifying areas of success and areas needing improvement (Zor et al., 2019). Through
regularly reviewing performance against the budget, SMEs can make informed decisions
about strategic adjustments, resource reallocation, and operational enhancements to drive
business growth and efficiency.
Furthermore, budgeting for performance evaluation fosters a culture of accountability within
SMEs. When employees and departments understand that their performance will be assessed
against predefined budgetary targets, it motivates them to achieve or exceed those goals,
aligning individual and departmental objectives with the broader organizational aims
(Weygandt et al., 2019). Additionally, in the context of seeking investment or funding, the
ability to present a track record of budget adherence and financial performance is invaluable.
It demonstrates to potential investors and financial institutions that the SME is not only
capable of planning for its financial future but also adept at executing its plans effectively and
adjusting its strategies in response to changing markets (Sulthana & Subrahmanyam, 2022).
Generally speaking, budgeting plays a dual role in SMEs, serving both as a critical control
mechanism to ensure financial discipline and operational efficiency, and as a tool for

performance evaluation, enabling businesses to assess their progress toward achieving
strategic goals.

IV. CONCLUSION
In summary, this essay has investigated the critical aspects of budgeting practices within
SMEs, highlighting their indispensable role in achieving financial and strategic objectives.
The analysis underscored the bottom-up approach as the most frequently utilized method
among SMEs, attributed to its collaborative nature and efficacy in resource allocation and
decision-making. Furthermore, it was established that the primary purpose of budgeting
within SMEs is controlling, due to its positive advantages, including enhancing financial
discipline and operational efficiency. Based on these findings, it is suggested that SMEs invest
in financial literacy training for their employees. This could be facilitated through government
agencies or private consultants, which can enhance their budgeting skills and knowledge.
Thanks to it, SMEs can not only enhance their budgeting practices but also gain invaluable
insights and best practices from other SMEs, fostering a culture of continuous improvement
and strategic financial management.

REFERENCES
Armitage, H. M., Lane, D. & Webb, A. (2020). Budget Development and Use in Small‐ and
Medium‐Sized Enterprises: A Field Investigation. Accounting Perspectives, John Wiley &
Sons, 19(3), 205-240.
Bui, N. T, Le, O. T. T, & Nguyen, P. T. T. (2020). Management Accounting Practices among
Vietnamese Small and Medium Enterprises. Asian Economic and Financial Review, 10(1),
94–115.
Endris, E., Kassegn, A. (2022). The role of micro, small and medium enterprises (MSMEs) to
the sustainable development of sub-Saharan Africa and its challenges: a systematic review of
evidence from Ethiopia. J Innov Entrep, 11(1), 33-40.
Ogunjimi, J. A. (2021). The role of small and medium scale enterprises in tackling
unemployment in Nigeria. DBN Journal of Economics and Sustainable Growth, 4(1), 74-91.
Manzoor F, Wei L, Sahito N. (2021). The role of SMEs in rural development: Access of SMEs
to finance as a mediator. PLoS One. doi: 10.1371/journal.pone.0247598.
Matsoso, M.L., Nyathi, M. and Nakpodia, F.A. (2021). An assessment of budgeting and
budgetary controls among small and medium-sized enterprises: evidence from a developing
economy. Journal of Accounting in Emerging Economies, 11(4), 552-577.
Sarwary, Z. (2019). Capital Budgeting Techniques in SMEs: A Literature Review. Journal of
Accounting and Finance, 19(3), 45-50.
Mah’d, O. (2020). Bottom-up rather than top-down: evidence from Middle Eastern and North
African educational institutions. Journal of Public Budgeting, Accounting & Financial
Management, 32(4), pp. 671-690
Hansen, S. C., Otley, D. T., & Van der Stede, W. A. (2003). Practice developments in
budgeting: An overview and research perspective. Journal of Management Accounting
Research, 15, 95-116.
Goode, M., & Malik, A. (2011). Beyond budgeting: The way forward? The Pakistan
Accountant, 31(4), 56-61.
Libby, T., & Lindsay, R. M. (2010). Beyond budgeting or budgeting reconsidered: A survey of
North American budgeting practice. Management Accounting Research, 21(1), 56-75.

Hilton, R. W. (2005). Managerial accounting: Creating value in a dynamic business
environment. McGraw-Hill/Irwin.
Lambert, C. (2006). Built to budget. Harvard Business Review, 84(12), 50-59.
Schubert, H., & Kirsten, S. M. (2021). Effect of Budgeting Control on the Financial
Performance of SMEs in Germany. Journal of Finance and Accounting, 5(2), 1–9.
Shim, J. K., & Siegel, J. G. (2008). Budgeting basics and beyond. John Wiley & Sons.
Sulthana, A., & Subrahmanyam, N. (2022). Financial problems and prospects of MSMEs in
the State of Telangana. Journal of Commerce and Accounting Research, 11(4), 9-14
Weygandt, J. J., Kieso, D. E., Kimmel, P. D., Trenholm, B., Warren, V., & Novak, L. (2019).
Accounting Principles, 2. John Wiley & Sons.
Zor, U., Linder, S., & Endenich, C. (2019). CEO characteristics and budgeting practices in
emerging market SMEs. Journal of Small Business Management, 57(2), 658-678.

Tiểu luận: PURPOSE OF BUDGETING IN SME.docx

Recommended

Recommended

More Related Content

Similar to Tiểu luận: PURPOSE OF BUDGETING IN SME.docx

Similar to Tiểu luận: PURPOSE OF BUDGETING IN SME.docx (20)

More from lamluanvan.net Viết thuê luận văn

More from lamluanvan.net Viết thuê luận văn (20)

Recently uploaded

Recently uploaded (20)

Tiểu luận: PURPOSE OF BUDGETING IN SME.docx