Budgeting in big and small companies is not the same.

 In Featured, Industry News

Budgeting and business planning are established and repetitive activities in any big corporation. Excel templates and fixed planning formats are made available ensuring that the budgets and corresponding plans are comparable and can be consolidated across business units.

Sometimes the process is organized as a bottom-up process, where managers are asked to give their best bets on the next 12 months, but mostly it is a top-down process where managers are asked to meet certain objectives. These activities consume massive amounts of resources and typically take place by the end of the fiscal year when people are busy meeting the objectives of last year’s budgets.

The small world is different

Small and medium-sized companies have little tradition for the very formal budgeting and business planning exercises. The reason is that the companies are managed by the owners and they only answer to themselves. If we do not have ambitions for change, why should we waste time and money on lengthy planning exercises?

In the software and information technology industry, we cannot afford to not have ambitions. The nature of our industries dictates to us to grow faster than our competitors or we will be left more and more disadvantaged. We constantly have to review our position and our options for growth and take steps to win further market share. Organizing these reviews in an annual budgeting and planning cycle may not be a bad idea, but believing that the business (model) environment is fixed for a year at a time is obviously naive.

Where the main objective of the big corporations, that are listed on the stock exchanges, is predictability the objective of the small and medium-sized companies is maximum growth without falling into a cash-flow trap. Having plans and budgets cut in stone for the coming 12 months doesn’t serve the small company well. Having a good idea of the direction, while maintaining the ability to reshuffle cost and investments, and being able to take advantage of opportunities seems much more attractive.

The budgets in big as well as in small and medium-sized companies are used to break down the objectives and assign them to individuals. This is a big job and it is understandable that big companies don’t want to do this more than once a year. In smaller companies, we must be prepared to do this as required. If an opportunity presents itself we must be able to reshuffle resources and ask people to assume new responsibilities. If these people are paid based on their performance we obviously need to redesign their remuneration packages, too.

As I wrote in a previous post, it is the annual budgeting and business planning exercise in the big corporations where the outcome may lay the foundations for our success or be the kiss of death.

This is completely different in a small company. With fewer management layers the small or medium-sized company has direct communication between the executive management and the people responsible for execution. They are in the same room sharing the same discussions. We may put together a 12-months budget with a corresponding plan, but we all know that everything can be changed based on what actually happens. We know that no plan survives the meeting with reality and we are prepared to change at short notice.

Budgeting and planning in small and medium-sized companies are not a sandbagging game that determines our destiny in the company. People approaching the exercise with such an attitude will not last long in this environment. Budgeting and planning in small and medium-sized companies require taking off the masks and speaking our minds frankly. Being wrong is not a capital offense as long as we move swiftly to raise the issues and find a new solution.

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