When can budgeting activities be called SMART Budgeting?
In general, budgeting helps business managers to plan ahead anticipated sales revenues, profits and costs. After setting targets and coordinating resources, monitoring and controlling the budgets as well as modifying (where appropriate) will happen. Finally, managers will measure results to assess performance which will be derived from Variance Analysis.
When a business organization grows, it becomes increasingly difficult for the Master Budget holder to understand all items of business expenditure. So, the Master budget holder must rely on professional conduct of all budget holders.
If budgets are unfairly or inappropriately set, they will lose their original purpose. What is more, in the wrong hands, anyone who is unethical and has access to huge budgets could cause misuse and abuse of the funds.
How to set up a SMART Budget?
SMART Budget plans can really help fund business growth. SMART Budgeting enables a business to have better cost control as costs clearly increase with business expansion.
Let’s take a look at how SMART Budgeting can help to achieve strategic goals of the organization.
- S – Specific. Budgets should be specifically, narrowly and clearly set according to the strategic vision and mission of a business organization.
- M – Measurable. All items in the budgets must be able to be measured using numbers. Variance Analysis will be used to compare budgeted figures with actual figures. Budget holders will be held accountable for their successes or failures.
- A – Agreed. All budgets must be planned, coordinated and set through a process of negotiations and discussions to ensure that all numbers are appropriate and achievable.
- R – Realistic. Only realistically set budgets can truly motivate employees to reach their set targets. Neither underfunding nor overfunding is likely to generate success.
- T – Timed-constrained. Budgets are quantitative financial plans for the near future, so there must be a time constraint, usually one year.
When done properly, SMART Budgeting can really enhance accountability, foster responsibility and aid financial control of a business organization. It will motivate budget holders to execute effective budgeting – minimize ineffective spending.
This will improve the firm’s competitive strength leading to achieving its strategic objectives. It is simply because budgets are integral to any growth strategy.
