Popular in Professional

Human Rights Law

Human Rights and Corruption: Problems and Potential of Individualising a Systemic Problem

Max Planck Institute Anne Peters

Law

A statistical approach to law school citation rankings

University of Virginia Joshua Fischman

Education

High school change

Boston College Andrew Hargreaves

Constitutional Law

What is constitutional ideology?

University of Oxford Nick Barber

Civil Procedure Law

Politics, Identity, and Class Certification on the U.S. Courts of Appeals

University of Pennsylvania Sean Farhang

Culture and Society

The City as a Growth Machine: Toward a Political Economy of Place

New York University Harvey Moltoch

Education

The Role of Education in Reducing Racial Inequality

University of Southern California Pedro A. Noguera

Budget Development and Use in Small and Medium-Sized Enterprises

View more insights in Professional - Finance

View more figures from University of Waterloo

View the page of Howard Armitage

Read the Study

Next in Finance

Chinese Exchange Rate Policy: Lessons for Global Investors

Michael Melvin | University of California San Diego

Firm Performance Pay as Insurance against Promotion Risk

Alvin Chen | Stockholm School of Economics

Howard Armitage examines how small- and medium-sized firms generate operating budgets and use them for control, evaluation, and reward functions.

Image courtesy of interviewee. February 5, 2024

Log-in or Sign-up to Faculti
Currently viewing this subject insight as a guest. You have insight(s) remaining for this month. Login to view 8000+ figures on the platform.

Generating Workspace...

Export as PDF

This video video discusses a research study on the development and use of operating budgets in small and medium enterprises (SMEs). While operating budgets are widely recognized as critical management controls across organizations, most existing research has focused on larger companies. This video video study aimed to fill that gap by examining how SMEs utilize budgets for control, evaluation, and reward purposes.

The researchers conducted in-depth interviews with executives from 12 SMEs to explore four main questions: (1) how budgets are developed (top-down or collaborative), (2) how tightly budgets are used for controlling results, (3) how they are employed for performance evaluation, and (4) how they link to reward systems or compensation.

Key findings include:
1. Most SMEs employ a collaborative approach to budget development rather than a strictly top-down method, particularly in larger SMEs that need decentralized decision-making.
2. While some SMEs use budgets tightly for control purposes, many adopt a looser approach, focusing more on the planning discipline budgets provide rather than strict control.
3. The tight use of budgets for performance evaluation is not widespread; many SMEs feel that the unpredictability of their environments makes it inappropriate to heavily link budgets to evaluations.
4. Linking budgets to compensation occurs in only a few cases, typically limited to sales staff due to similar concerns about environmental uncertainties.

Overall, the research revealed that budgets in SMEs are perceived more as flexible planning tools rather than rigid control mechanisms. The findings suggest a need for management accounting education to incorporate the distinct budgeting dynamics of SMEs, which differ significantly from the processes seen in larger organizations. The research underscores the importance of collaborative budgeting and the role of informal communication in financial management within SMEs.

Language:

Export as PDF

X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

00:00.345 --> 00:01.485
We examine the process

00:01.785 --> 00:04.565
by which operating budgets are developed

00:04.705 --> 00:08.365
and how they are used specifically, for control,

00:08.935 --> 00:12.365
evaluation, and reward purposes in small

00:12.425 --> 00:14.205
and medium sized enterprises.

00:14.505 --> 00:18.325
Uh, and we do that because small medium enterprises simply

00:19.005 --> 00:22.165
represent the dominant form of organizations,

00:22.265 --> 00:24.765
not just in North America, but literally around the world.

00:25.385 --> 00:29.445
And we found that surprisingly little research has been,

00:29.605 --> 00:33.405
examined on just how those particular companies use

00:33.405 --> 00:35.085
what we call management controls.

00:35.785 --> 00:39.325
Now, we focus on one specific management control,

00:39.325 --> 00:40.605
which is to your question,

00:40.985 --> 00:44.405
and that is operating budgets, likely

00:44.405 --> 00:46.645
because prior research indicates

00:46.675 --> 00:49.805
that budgets have been a very important,

00:49.805 --> 00:52.565
control tool in virtually all companies.

00:52.985 --> 00:55.765
But that research, while extensive,

00:56.145 --> 01:00.685
has almost always been focused on larger organizations.

01:01.345 --> 01:06.005
Uh, so what we've done here is conducted, in-depth,

01:06.095 --> 01:08.805
field studies, which, which really means interviews with,

01:08.805 --> 01:10.685
with corporations, 12,

01:11.125 --> 01:14.245
participating small medium enterprises, to address

01:14.825 --> 01:19.725
really four theory based questions to try to add

01:19.745 --> 01:22.725
to our knowledge and insight, as to the use

01:22.865 --> 01:25.845
and development of budgets in small, medium enterprises.

01:26.545 --> 01:30.005
Um, our first question, of these research questions is,

01:30.305 --> 01:31.405
is, is fairly straightforward.

01:31.515 --> 01:33.685
It's just how are budgets developed?

01:33.865 --> 01:36.645
Are they primarily top down,

01:36.645 --> 01:38.245
more directed from top management,

01:38.265 --> 01:40.845
or are they more collaborative and bottom up.

01:41.345 --> 01:43.005
And then the second, third,

01:43.145 --> 01:47.925
and fourth research questions examine respectively,

01:47.925 --> 01:49.885
whether budgets are tightly and,

01:49.885 --> 01:53.165
and I'll define tightly in a moment here or,

01:53.185 --> 01:56.485
or loosely, used for controlling results.

01:56.945 --> 01:59.485
And then for performance evaluation.

01:59.665 --> 02:02.365
And then finally, for reward purposes

02:02.385 --> 02:04.925
or compensation, how are they used in SMEs?

02:05.545 --> 02:07.765
Uh, so this is a first step, I believe,

02:08.265 --> 02:12.485
to providing a deeper understanding of budget development,

02:12.665 --> 02:15.525
and use in small medium enterprises.

02:16.145 --> 02:19.325
And I will talk a little bit towards the end of this,

02:19.625 --> 02:22.765
about the implications that what our findings have been

02:22.865 --> 02:25.765
for practice, for future theory development,

02:26.185 --> 02:28.645
and for management accounting education.

02:29.015 --> 02:32.165
First, I'll just say that almost anyone who listens to this

02:32.265 --> 02:34.725
or is part of organizations, they're aware

02:34.725 --> 02:36.685
that operating budgets are very,

02:36.685 --> 02:38.885
very common throughout organizations.

02:38.905 --> 02:41.565
Almost everyone uses them at some point,

02:42.065 --> 02:44.445
and you can see why, because they,

02:44.555 --> 02:46.565
help coordinate planning,

02:46.565 --> 02:48.685
they improve resource allocation.

02:48.835 --> 02:52.525
They, are useful for a control, idea

02:52.705 --> 02:56.245
of aligning employees' behavior with organizational goals.

02:56.985 --> 03:01.925
Uh, so given the pervasive use of how we see budgets used,

03:02.305 --> 03:05.405
management researchers have long been interested in just

03:05.985 --> 03:07.245
how are they developed

03:07.305 --> 03:09.285
and how are they part of the control system.

03:09.785 --> 03:13.285
So what we're trying to do here is, contribute

03:13.385 --> 03:16.485
to this literature and practice,

03:16.485 --> 03:19.205
but to see how they are used for control

03:19.205 --> 03:22.165
and evaluation purposes in small

03:22.385 --> 03:25.565
and medium enterprises, an area which seems not

03:25.565 --> 03:28.365
to have been, the target of most of the,

03:28.545 --> 03:29.645
budgeting research.

03:30.345 --> 03:31.805
So, couple of questions then.

03:32.305 --> 03:36.325
Why focus on operating budgets? Um, two reasons.

03:36.865 --> 03:39.765
Uh, one, because they're a particularly important element

03:39.945 --> 03:42.005
of, SMEs control systems.

03:42.665 --> 03:45.805
Uh, and they're one of the few management controls we see

03:45.805 --> 03:48.965
that are used extensively, even by smaller companies.

03:49.435 --> 03:52.005
However, there are fundamental differences

03:52.005 --> 03:56.205
between the operations of SMEs and larger organizations.

03:56.425 --> 03:58.205
And we believe, and we were told

03:58.665 --> 04:01.045
by many in the small medium enterprise market

04:01.475 --> 04:04.405
that management controls are used differently,

04:04.585 --> 04:07.005
but we just really don't know how yet.

04:07.025 --> 04:08.925
And that was part of what we wanted to do.

04:09.345 --> 04:12.805
So, for example, some have suggested that smaller emphasis,

04:12.945 --> 04:15.565
sorry, smaller organizations,

04:15.615 --> 04:17.525
place a higher emphasis on

04:18.155 --> 04:20.325
more entrepreneurial management styles.

04:20.905 --> 04:23.005
And if that's the case, formal

04:23.585 --> 04:26.165
and tight uses of management controls

04:26.825 --> 04:29.645
may constrain rather than facilitate decision making.

04:29.645 --> 04:31.845
And SMEs or smaller firms,

04:32.005 --> 04:35.645
because they have a much higher degree of uncertainty,

04:35.665 --> 04:39.005
in their day-to-day operations, they're probably going

04:39.005 --> 04:40.205
to have a looser fit

04:40.265 --> 04:43.685
for their budget control system than larger organizations.

04:43.785 --> 04:46.965
But again, this is still largely, speculation.

04:46.965 --> 04:50.205
And so our study is designed to, address

04:50.435 --> 04:51.645
that specific issue.

04:52.305 --> 04:56.365
The, the second reason for operating budgets is, and, and,

04:56.365 --> 05:00.885
and the SMEs is that SMEs, they're just a dominant,

05:01.505 --> 05:03.885
segment of all economies.

05:04.065 --> 05:07.285
Uh, if I just gave you the Canadian examples,

05:07.285 --> 05:11.805
over 99% of all organizations,

05:11.945 --> 05:14.685
are classified as small medium enterprises.

05:14.705 --> 05:19.245
And by, by SME, I mean, between say 105 hundred

05:19.765 --> 05:22.645
employees, sorry, less than 500 employees for sure.

05:23.245 --> 05:27.305
Uh, they in total here in Canada contribute over 50%

05:27.465 --> 05:28.905
of our gross domestic product.

05:29.645 --> 05:33.065
Uh, SMEs employ almost 90%

05:33.565 --> 05:37.025
of individuals in the private sector market.

05:37.645 --> 05:40.585
So absolutely, we just need a better understanding

05:40.725 --> 05:44.025
of the development and use of budgets in

05:44.535 --> 05:46.665
SMEs if we are going to contribute

05:47.085 --> 05:49.745
to practical knowledge within organizations

05:50.085 --> 05:51.825
and build a little better theory.

05:52.925 --> 05:57.065
So, to guide the inquiry, then to get into the research,

05:57.705 --> 06:02.205
we developed four theory based research questions,

06:03.085 --> 06:05.165
examining specific elements of SMEs.

06:05.865 --> 06:08.205
And for those researchers in the group, we,

06:08.225 --> 06:12.565
we focused on these aspects of budget development and use.

06:12.985 --> 06:16.965
We, we theory and practice from previous research indicates

06:16.965 --> 06:20.805
that the unique nature of small medium enterprise operations

06:21.425 --> 06:24.165
may yield some different and important insights.

06:24.945 --> 06:29.725
So our first research question examines the approach used

06:29.825 --> 06:31.765
for budget developments in SMEs.

06:32.165 --> 06:36.405
Specifically, we focus on our questions on whether it's top

06:36.405 --> 06:39.845
down or a more collaborative approach being employed by

06:40.555 --> 06:41.805
SMEs and why.

06:42.585 --> 06:47.005
Our, our next three research questions examine the tightness

06:47.275 --> 06:49.685
with which budgets are used for control,

06:50.155 --> 06:54.205
performance evaluation, and for compensation purposes.

06:54.705 --> 06:57.565
Uh, we focus on these three specific purposes

06:57.565 --> 07:00.965
because each is well established in the budget literature,

07:01.325 --> 07:03.325
although it's almost always, again, from

07:03.325 --> 07:05.485
that large organization perspective.

07:06.765 --> 07:08.005
I mentioned this word tightness.

07:08.465 --> 07:12.925
Uh, tightness simply refers to the emphasis that,

07:13.305 --> 07:18.005
is placed on a specific element of a control system, so

07:18.005 --> 07:21.325
that organizations can align individual behavior

07:21.835 --> 07:23.045
with their objectives.

07:23.545 --> 07:28.125
Um, so tightness, in control purposes,

07:28.385 --> 07:30.405
for example, would include regular

07:30.665 --> 07:35.285
and frequent, reviews of actual versus budget,

07:35.705 --> 07:40.245
results, establishing, accountability

07:40.345 --> 07:41.925
for significant variances,

07:42.345 --> 07:44.845
and simply a more formalized approach for explaining

07:45.385 --> 07:47.765
why results are not according to

07:47.765 --> 07:48.805
what we thought they would be.

07:49.785 --> 07:52.005
Um, type budgets for

07:52.655 --> 07:56.925
evaluation purposes would involve actual versus budget

07:56.995 --> 08:00.245
results that have a strong influence on employees

08:00.245 --> 08:01.805
performance evaluations.

08:02.715 --> 08:04.125
Similarly, type budgets

08:04.125 --> 08:07.845
for reward purposes would result in budget results,

08:08.305 --> 08:12.565
having a direct impact on the determination of the salary

08:12.625 --> 08:14.725
and compensation of individuals.

08:15.625 --> 08:19.285
So for each of these research questions, we develop,

08:19.345 --> 08:20.525
and I won't go into this,

08:20.545 --> 08:24.685
but theory-based reasons why we might observe tight

08:24.745 --> 08:26.245
or loose use of budgets.

08:26.505 --> 08:29.205
And again, back to the point that we have had

08:29.265 --> 08:31.845
so little research on this, we really don't know

08:31.845 --> 08:33.085
what we're going to come up with.

08:33.425 --> 08:36.125
It is sort of an inquiry into this whole area,

08:36.545 --> 08:37.965
and it could go one way or the other.

08:38.065 --> 08:40.235
We didn't know. Um,

08:40.345 --> 08:42.155
I'll just mention a little bit on the methodology.

08:42.855 --> 08:47.595
Um, we, did in-depth interviews with,

08:47.595 --> 08:51.915
senior executives of 12 small medium enterprises,

08:52.095 --> 08:55.035
to gain, an insightful knowledge of,

08:55.110 --> 08:57.190
of the budgeting processes used by their firms.

08:57.905 --> 09:01.125
Um, the interviews are, are really a good way

09:01.145 --> 09:04.645
of doing this form of research, much better than,

09:04.995 --> 09:08.045
surveys or, other,

09:08.055 --> 09:10.605
other ways in which you don't get face-to-face

09:10.605 --> 09:12.045
with executives.

09:12.425 --> 09:15.925
Uh, here it's a particularly rich form of research where,

09:16.225 --> 09:19.205
not only are we able to ask the questions we want,

09:19.225 --> 09:21.085
but we're able to get a lot

09:21.085 --> 09:23.045
of additional information from people

09:23.075 --> 09:26.245
that we might not even have thought about, prior

09:26.265 --> 09:27.525
to the actual interview.

09:28.185 --> 09:30.805
So for those interested, what, what we ended up with was

09:31.395 --> 09:34.045
following kind of, of mix with our, our 12.

09:34.545 --> 09:37.045
Uh, we, looked at size,

09:37.145 --> 09:39.045
and we ranged from the number

09:39.065 --> 09:40.805
of employees in the organization

09:40.805 --> 09:44.165
that went from 18 individuals up to 280.

09:44.985 --> 09:48.405
Um, we looked at different industries, for example, software

09:48.625 --> 09:51.805
as a service versus manufacturing.

09:52.585 --> 09:56.245
Uh, we looked at how old these organizations are,

09:56.435 --> 09:57.685
younger versus older.

09:57.785 --> 10:00.565
We went from two years in operation up

10:00.565 --> 10:02.405
to 47 years of operation.

10:02.985 --> 10:06.205
Uh, the revenues also had quite a range from less than

10:06.505 --> 10:09.005
1 million up to 60 million.

10:09.825 --> 10:12.885
And the other important part here is that given our

10:13.685 --> 10:17.925
research questions on budgets, informants had to be really

10:18.475 --> 10:21.685
knowledgeable about how budgets are developed

10:21.685 --> 10:23.765
and used, in their organization.

10:23.825 --> 10:28.445
So we conducted every one of those interviews with the CEOs

10:28.905 --> 10:29.965
or the CFOs.

10:30.585 --> 10:34.365
And in general, we, our interviews lasted,

10:34.465 --> 10:37.325
in a semi-structured way from anywhere from 45

10:37.705 --> 10:38.725
to about 90 minutes.

10:39.105 --> 10:41.525
So that gives you a bit of, of our, our methodology.

10:41.985 --> 10:44.365
We know what we are interested in. The research questions.

10:44.885 --> 10:47.285
I, I'll, I'll repeat them again to make sure we're,

10:47.285 --> 10:48.485
we're on the same wavelength.

10:48.505 --> 10:50.765
But here, here's the, the key findings

10:50.765 --> 10:52.245
that we were able to come up with.

10:52.665 --> 10:55.285
So for research question number one, which is

10:55.425 --> 10:59.485
how do organizations use budget top down or more bottom up?

10:59.705 --> 11:02.365
Uh, most of the SMEs in the sample tended

11:02.365 --> 11:05.805
to follow a collaborative, rather than a top down approach

11:05.865 --> 11:07.085
to developing budgets.

11:07.425 --> 11:10.845
And they did involve managers throughout the organization.

11:11.585 --> 11:15.885
Now, this was particularly true in the case of the larger

11:16.265 --> 11:19.045
or the medium size SME companies,

11:19.045 --> 11:21.765
which is quite understandable, I think

11:21.765 --> 11:25.005
because the larger SMEs are, the more likely they are

11:25.005 --> 11:28.285
to have responsibility centers, more likely the needs

11:28.305 --> 11:30.125
for decentralized decision making.

11:30.625 --> 11:34.245
Uh, and what we also found in this collaborative part is

11:34.245 --> 11:37.245
many of the SMEs were involving their boards

11:38.185 --> 11:41.925
in finalizing the budget, indicating to us

11:42.195 --> 11:45.005
that they often ask the board to,

11:45.035 --> 11:47.525
provide input into the development process.

11:48.345 --> 11:52.565
Now, that same collaboration we saw with smaller SMEs,

11:52.665 --> 11:56.005
but there were two at the very low end of the size,

11:56.935 --> 12:00.925
which used a much more top down and autocratic approach.

12:01.725 --> 12:03.165
Probably not surprising, again,

12:03.165 --> 12:06.205
because from those company's point of view, it was clear

12:06.665 --> 12:09.445
to their management that they're small enough.

12:09.445 --> 12:12.085
They knew damn near everything that there was

12:12.085 --> 12:14.645
to be known about that organization's development.

12:15.105 --> 12:18.845
And, they just felt that, finalizing the budgets

12:18.845 --> 12:20.925
with other people in the organization was

12:20.925 --> 12:22.245
simply unnecessary.

12:22.705 --> 12:25.165
But the findings there largely are that there was a,

12:25.325 --> 12:27.845
a collaborative, and I'll, I'll just give a, a,

12:28.205 --> 12:32.165
a a little moments, more on this later

12:32.465 --> 12:33.485
as I wrap this up,

12:33.485 --> 12:34.685
because we found a couple

12:34.685 --> 12:36.725
of other interesting things in this collaboration.

12:37.505 --> 12:41.925
Um, research question two was, how do we use budgets

12:42.025 --> 12:43.325
for control?

12:43.865 --> 12:48.005
Um, and do we use a tight use of budgets for control

12:48.065 --> 12:49.165
or more loose?

12:49.705 --> 12:51.485
Um, more than half,

12:51.945 --> 12:54.725
or I could say, I guess I could say fewer than half of our

12:55.435 --> 12:59.245
SMEs could be characterized as employing a tight use

12:59.245 --> 13:01.285
of budget for control purposes.

13:01.785 --> 13:05.885
Um, and again, our evidence suggests that in part,

13:06.145 --> 13:08.485
the looser use of budgets for control

13:08.485 --> 13:12.045
that we observe just may be a function of the challenges

13:12.265 --> 13:16.245
of creating accurate budgets when you're growing so quickly

13:16.465 --> 13:19.605
and your, environment is so uncertain.

13:20.225 --> 13:23.325
Um, most of the evidence that we found suggests

13:23.325 --> 13:28.045
that the key value for budgets in smaller companies

13:28.615 --> 13:31.045
seems to be derived from the discipline

13:31.395 --> 13:35.205
that it creates in planning activities rather than its use

13:35.225 --> 13:36.765
as a control tool.

13:37.215 --> 13:38.685
Quite a different finding from

13:38.685 --> 13:41.085
what we would find in the larger organizations.

13:42.585 --> 13:47.085
Um, our third, research question again, has to do

13:47.085 --> 13:50.565
with the tightness for evaluation purposes, budgets

13:50.565 --> 13:52.165
and evaluation,

13:52.385 --> 13:55.405
and kind of consistent with the theory-based reasoning

13:55.405 --> 13:57.165
that we use to develop research.

13:57.445 --> 14:01.205
Question, two, most of the SMEs,

14:01.795 --> 14:05.045
characterizes employing tight use of budgets for control,

14:05.715 --> 14:10.285
also utilized tight uses of budgets for their evaluation.

14:10.635 --> 14:14.805
However, there weren't many of, of the 12, two small,

14:14.905 --> 14:16.245
two medium sized companies.

14:16.245 --> 14:19.885
Four in total tended to link results to,

14:19.995 --> 14:22.685
performance evaluation, outcomes.

14:23.185 --> 14:27.925
Uh, the others, were not quite so ready to do that.

14:28.385 --> 14:32.325
Um, mainly because their companies they felt were,

14:32.345 --> 14:34.085
either too young,

14:34.305 --> 14:37.165
budget accuracy was perhaps a, a concern.

14:37.745 --> 14:41.205
And if I could just quote from one of the CEOs that

14:41.745 --> 14:43.765
was asked, why don't you do this?

14:44.225 --> 14:45.965
Uh, basically said, there are just

14:46.225 --> 14:48.365
so many variables that are happening.

14:48.785 --> 14:50.405
So many things are up in the air

14:50.595 --> 14:53.605
that right now we don't think it would be a proper use

14:53.605 --> 14:57.125
of budgets to tie it tightly to performance evaluation.

14:57.345 --> 14:59.125
And we got a few of these kinds

14:59.125 --> 15:01.125
of comments back from, from CEOs.

15:01.785 --> 15:03.045
So that brings us to the fourth

15:03.105 --> 15:06.725
and final research question, which is, a question

15:06.725 --> 15:09.805
of whether or not budgets are tightly tied to,

15:10.185 --> 15:11.285
compensation.

15:11.945 --> 15:16.645
Um, three of our SMEs in the sample did employ,

15:17.065 --> 15:19.445
and it's the same group that were part

15:19.445 --> 15:22.845
of the performance evaluation, for purpose

15:22.905 --> 15:24.085
of determining rewards,

15:24.425 --> 15:28.605
but clearly it was only for one group of individuals,

15:28.745 --> 15:30.885
and that was the sales staff.

15:31.495 --> 15:34.605
Those companies tended to employ tight budgets

15:34.605 --> 15:37.205
for performance evaluation purposes as well.

15:37.785 --> 15:42.005
Uh, so a, a again, this idea of linking budget results

15:42.025 --> 15:46.205
to compensation, used only in a minority of cases,

15:46.825 --> 15:51.205
and probably because of this uncertainty that the budget is

15:51.785 --> 15:55.005
in, in a, in a very rapidly changing environment,

15:55.005 --> 15:57.525
these firms are facing with, it would be a mistake

15:57.585 --> 16:00.605
to try to put too much emphasis on the compensation

16:00.755 --> 16:02.125
side of reaching a budget.

16:02.985 --> 16:04.965
So overall, what, what have we got?

16:05.385 --> 16:09.445
Um, the use of budgets to motivate employees by linking them

16:09.545 --> 16:12.365
to, performance evaluations

16:12.385 --> 16:14.005
and rewards is somewhat limited.

16:14.275 --> 16:17.965
However, what we do tend to see is that there's a lot

16:17.965 --> 16:19.805
of collaboration that is going on.

16:20.105 --> 16:22.405
Boards are, being involved,

16:22.865 --> 16:25.045
and, for the most part,

16:25.195 --> 16:28.925
control is being carried out in, in different manners, more

16:28.925 --> 16:31.725
for planning than it is for actual control purposes.

16:32.345 --> 16:36.325
We did a, a workshop, by inviting not only the people

16:36.385 --> 16:39.805
who were part of the research group, that we met

16:39.805 --> 16:41.085
with all the CEOs,

16:41.345 --> 16:44.045
but the, the general public as well in our area

16:44.665 --> 16:46.645
to just disseminate these results.

16:47.185 --> 16:50.565
Uh, and what we did, find

16:50.665 --> 16:52.285
and be able to talk about,

16:52.505 --> 16:53.965
and that these individuals seem

16:53.965 --> 16:57.925
to be quite interested in is, one, the results are quite

16:58.445 --> 17:01.845
relevant to systems designers in these SMEs.

17:01.845 --> 17:04.925
Those systems designers could be exactly by that name,

17:04.985 --> 17:06.005
or the CEOs

17:06.005 --> 17:09.565
and the CFOs, in showing, again, the benefits

17:09.565 --> 17:11.965
of budgeting, and no one was arguing of that,

17:12.385 --> 17:14.885
but really more so as a critical element

17:15.145 --> 17:18.925
of the planning process rather than as a fixed

17:19.145 --> 17:23.125
and static tool for tightly, controlling

17:23.345 --> 17:25.325
and trying to monitoring behavior.

17:25.785 --> 17:28.925
Uh, this is very distinct from larger company settings

17:29.095 --> 17:31.685
where budgets are claimed to be beneficial, not just

17:31.685 --> 17:35.085
for planning, but certainly for these control purposes

17:35.085 --> 17:36.125
that we described here.

17:37.545 --> 17:40.365
Uh, moreover, I think our findings suggest that,

17:40.645 --> 17:43.005
SME top management,

17:43.525 --> 17:46.685
perceives value in employing collaborative approaches

17:46.705 --> 17:51.005
to budget development, both in terms of engaging,

17:51.845 --> 17:55.205
employees more, and certainly in developing better informed

17:55.205 --> 17:56.365
budget estimates.

17:56.625 --> 17:58.685
So that, that's one, good takeaway.

17:59.265 --> 18:02.165
Uh, for the academics that came to the group

18:02.185 --> 18:05.365
and are interested in the article, there's consequences

18:05.505 --> 18:09.245
for the development of theory, about the use of budgets,

18:09.545 --> 18:12.285
by SME for control purposes.

18:12.895 --> 18:16.925
We've documented a relatively loose use of budgets

18:17.225 --> 18:19.965
as a formal control tool in our sample SMEs,

18:20.705 --> 18:22.325
but some of our informants sort

18:22.325 --> 18:23.845
of took us in a different direction

18:24.065 --> 18:28.445
and said that, the informal, channels

18:28.445 --> 18:32.685
of communication and performance relative to budgets

18:33.755 --> 18:36.885
also serve as one of their important control mechanisms.

18:37.025 --> 18:40.005
And, and what that's doing, I think, is telling us that,

18:40.275 --> 18:45.045
control tightness in an SME may be more nuanced,

18:45.515 --> 18:46.925
than in larger companies

18:46.925 --> 18:50.605
where they're using more budget review meetings, more,

18:50.985 --> 18:53.085
variance analysis types of things.

18:53.785 --> 18:56.365
And finally, one of the things that I mentioned earlier

18:56.365 --> 18:58.525
that I wanted to come back to is,

18:58.745 --> 19:01.005
we had not seen examples

19:01.005 --> 19:02.885
before with large organizations

19:03.655 --> 19:06.205
where they would revise their budgets

19:06.255 --> 19:07.925
after they've been finalized.

19:08.425 --> 19:10.565
In most large organizations,

19:10.575 --> 19:13.085
there is a budget that is fixed.

19:13.645 --> 19:16.605
Forecasts certainly are made to change the nature of

19:16.605 --> 19:19.205
what the future will be, but in many of our SMEs,

19:19.225 --> 19:23.125
we were finding they were actually revising those budgets

19:23.335 --> 19:24.725
after they've been finalized.

19:25.145 --> 19:27.005
And this is sort of interesting

19:27.005 --> 19:28.725
because it's a response

19:28.745 --> 19:31.325
to unforeseen changes in the environment

19:31.745 --> 19:35.365
and maybe a manifestation manifestation for their need

19:35.385 --> 19:36.525
for agility.

19:37.185 --> 19:40.405
So, as such, I think our evidence suggests that management,

19:40.785 --> 19:44.565
at SME companies may be less likely

19:44.665 --> 19:47.405
to view budgets as a static benchmark,

19:48.065 --> 19:52.125
but instead considered to be more flexible in nature

19:52.865 --> 19:55.805
and budget estimates revised as needed

19:55.805 --> 20:00.285
to accommodate changes in the operating environment.

20:00.285 --> 20:04.645
So the final, contribution to this, I think not only,

20:06.165 --> 20:09.305
is, is to assist individuals in firms

20:09.405 --> 20:12.985
to understand this, but I think primarily as an educator,

20:13.365 --> 20:15.145
there's huge implications here

20:15.285 --> 20:16.865
for management accounting, education.

20:17.405 --> 20:20.145
Uh, mostly when we teach,

20:20.675 --> 20:23.865
we're basing it on these maybe mythical

20:24.165 --> 20:27.305
and very large manufacturing organizations.

20:27.885 --> 20:32.185
Um, and all our teaching sort of makes these assumptions of,

20:32.445 --> 20:34.145
large practice.

20:34.565 --> 20:36.745
But SMEs are the dominant form

20:37.205 --> 20:39.825
of organizations literally around the world.

20:40.365 --> 20:42.745
And we believe our findings will be,

20:42.745 --> 20:47.185
and I know have already been useful to post-secondary

20:47.955 --> 20:49.195
educators, as well

20:49.195 --> 20:51.435
as professional accounting bodies like the,

20:51.435 --> 20:52.475
chartered accountancy

20:52.495 --> 20:56.955
and CPA institutes to sort of revise their own curriculums

20:57.215 --> 21:00.755
and help provide students, upcoming individuals

21:00.755 --> 21:03.995
with insights as to how dis the,

21:03.995 --> 21:08.315
the distinct ways in which budgets can be used in smaller

21:08.345 --> 21:10.555
organizations rather than the future.

21:10.575 --> 21:14.275
Let me just take you back to one precursor to this study

21:14.305 --> 21:15.555
that we had done.

21:16.095 --> 21:17.635
Um, I had an opportunity

21:17.695 --> 21:19.875
of having a sabbatical in Australia,

21:20.615 --> 21:21.675
and, one

21:21.675 --> 21:25.755
of my colleagues there had the same concern I did that to

21:25.755 --> 21:28.035
what extent are the management controls,

21:28.135 --> 21:30.195
and I'll describe what I mean by that in a second.

21:30.615 --> 21:34.075
Uh, are they being used at all by SMEs now?

21:34.075 --> 21:37.315
We found that budgets were the one thing which were very

21:37.315 --> 21:39.195
highly used everywhere we went,

21:39.215 --> 21:42.595
and that that's why we wanted to do this particular study

21:42.745 --> 21:45.595
that I just referred to, to understand better

21:45.975 --> 21:48.435
how they're being used, and to what extent.

21:49.535 --> 21:52.515
But when we talk about management controls, there are

21:52.855 --> 21:56.715
so many other things like the, the specific type of,

21:56.715 --> 21:59.835
of perhaps variance analysis that take place.

22:00.455 --> 22:05.315
Uh, there are the, all these statistics on return on,

22:05.495 --> 22:07.955
assets, the, in other words,

22:08.105 --> 22:12.755
what we did was we listed 13 management controls that are

22:13.375 --> 22:15.995
widely promoted in our textbooks

22:16.415 --> 22:20.835
and that the associations require upcoming accountants

22:20.855 --> 22:22.435
and things to have a good knowledge of.

22:22.935 --> 22:24.955
But what we learned from the SMEs,

22:24.975 --> 22:28.995
and again, these are companies less than 500 people, is

22:28.995 --> 22:30.315
that only one

22:30.335 --> 22:33.635
or two of these management controls were used at all.

22:34.535 --> 22:37.075
In fact, it was a lot of seat of the pants type thing.

22:37.075 --> 22:38.115
As you can imagine,

22:38.675 --> 22:41.875
a very uncertain environment in which they're operating a

22:41.895 --> 22:45.875
lot, of, movement ahead was based on who you know

22:45.935 --> 22:48.115
and how well you can work a network, whether

22:48.115 --> 22:50.435
or not you can find the venture capitalists that you need

22:50.435 --> 22:52.195
to help you support your next thing.

22:52.335 --> 22:54.355
But the specific management controls

22:54.355 --> 22:58.195
that were break even analysis and process costing,

22:58.195 --> 22:59.635
and these kinds of things, which are

23:00.015 --> 23:02.075
so important on the educational side,

23:02.575 --> 23:06.035
are just not being used at all in the SME world.

23:06.455 --> 23:10.435
So that, was kind of an interesting thing.

23:11.105 --> 23:13.995
It's helped us to talk to the professional groups

23:14.575 --> 23:17.835
and say, there's things that aren't happening,

23:17.855 --> 23:19.755
but there's a lot of things that are happening

23:19.865 --> 23:20.875
that you're not covering.

23:21.255 --> 23:23.755
So as an example of that, we have,

23:23.815 --> 23:27.355
and that's one of the reasons we picked, these kinds of,

23:27.575 --> 23:30.195
software as a service firms,

23:30.425 --> 23:34.515
because there's a whole world of companies that are now,

23:34.805 --> 23:37.715
we're working on a subscription basis,

23:38.535 --> 23:41.955
and it's reoccurring revenue as, as the,

23:42.135 --> 23:44.915
the whole men mantra for getting ahead

23:45.635 --> 23:49.685
Very little is mentioned in our educational materials

23:49.705 --> 23:51.645
or in the association materials.

23:51.985 --> 23:54.885
So how does that affect the control systems

23:54.945 --> 23:57.085
of organizations when you're dealing

23:57.085 --> 23:59.165
with a completely different revenue model

23:59.435 --> 24:00.725
than we've assumed in the past?

24:01.065 --> 24:03.165
So that that's all part of what's there

24:03.785 --> 24:05.005
in terms of, of the future.

24:05.565 --> 24:08.765
I, I have to tell you, I'm now happily retired,

24:09.145 --> 24:11.525
so I leave this to my younger colleagues.

Exploring Budget Processes in SMEs

00:00:00 - We examine the process by which operating budgets are developed and how they are used specifically, for control, evaluation, and reward purposes in small and medium sized enterprises. and we do that because small medium enterprises simply represent the dominant form of organizations, not just in North America, but literally around the world. And we found that surprisingly little research has been, examined on just how those particular companies use
00:00:35 - Now, we focus on one specific management control, which is to your question, and that is operating budgets, likely because prior research indicates that budgets have been a very important, control tool in virtually all companies. But that research, while extensive, has almost always been focused on larger organizations. so what we've done here is conducted, in-depth,
00:01:08 - with corporations, 12, participating small medium enterprises, to address really four theory based questions to try to add to our knowledge and insight, as to the use and development of budgets in small, medium enterprises. our first question, of these research questions is, is, is fairly straightforward. It's just how are budgets developed? Are they primarily top down,
00:01:38 - or are they more collaborative and bottom up. And then the second, third, and fourth research questions examine respectively, whether budgets are tightly and, and I'll define tightly in a moment here or, or loosely, used for controlling results. And then for performance evaluation. And then finally, for reward purposes or compensation, how are they used in SMEs? so this is a first step, I believe,
00:02:12 - and use in small medium enterprises. And I will talk a little bit towards the end of this, about the implications that what our findings have been for practice, for future theory development, and for management accounting education. First, I'll just say that almost anyone who listens to this or is part of organizations, they're aware that operating budgets are very, very common throughout organizations.
00:02:42 - and you can see why, because they, help coordinate planning, they improve resource allocation. They, are useful for a control, idea of aligning employees' behavior with organizational goals. so given the pervasive use of how we see budgets used, management researchers have long been interested in just how are they developed and how are they part of the control system.

Budgeting Practices in Small Enterprises Explored

00:03:13 - to this literature and practice, but to see how they are used for control and evaluation purposes in small and medium enterprises, an area which seems not to have been, the target of most of the, budgeting research. So, couple of questions then. Why focus on operating budgets? two reasons. one, because they're a particularly important element
00:03:42 - and they're one of the few management controls we see that are used extensively, even by smaller companies. However, there are fundamental differences between the operations of SMEs and larger organizations. And we believe, and we were told by many in the small medium enterprise market that management controls are used differently, but we just really don't know how yet. And that was part of what we wanted to do. So, for example, some have suggested that smaller emphasis,
00:04:15 - place a higher emphasis on more entrepreneurial management styles. And if that's the case, formal and tight uses of management controls may constrain rather than facilitate decision making. And SMEs or smaller firms, because they have a much higher degree of uncertainty, in their day-to-day operations, they're probably going to have a looser fit for their budget control system than larger organizations.
00:04:46 - And so our study is designed to, address that specific issue. The, the second reason for operating budgets is, and, and, and the SMEs is that SMEs, they're just a dominant, segment of all economies. if I just gave you the Canadian examples, over 99% of all organizations, are classified as small medium enterprises.
00:05:19 - employees, sorry, less than 500 employees for sure. they in total here in Canada contribute over 50% of our gross domestic product. SMEs employ almost 90% of individuals in the private sector market. So absolutely, we just need a better understanding of the development and use of budgets in SMEs if we are going to contribute
00:05:50 - and build a little better theory. So, to guide the inquiry, then to get into the research, we developed four theory based research questions, examining specific elements of SMEs. And for those researchers in the group, we, we focused on these aspects of budget development and use. We, we theory and practice from previous research indicates that the unique nature of small medium enterprise operations

Budget Development Approaches in SMEs

00:06:24 - So our first research question examines the approach used for budget developments in SMEs. Specifically, we focus on our questions on whether it's top down or a more collaborative approach being employed by SMEs and why. Our, our next three research questions examine the tightness with which budgets are used for control, performance evaluation, and for compensation purposes.
00:06:57 - because each is well established in the budget literature, although it's almost always, again, from that large organization perspective. I mentioned this word tightness. tightness simply refers to the emphasis that, is placed on a specific element of a control system, so that organizations can align individual behavior with their objectives. so tightness, in control purposes,
00:07:30 - and frequent, reviews of actual versus budget, results, establishing, accountability for significant variances, and simply a more formalized approach for explaining why results are not according to what we thought they would be. type budgets for evaluation purposes would involve actual versus budget results that have a strong influence on employees
00:08:02 - Similarly, type budgets for reward purposes would result in budget results, having a direct impact on the determination of the salary and compensation of individuals. So for each of these research questions, we develop, and I won't go into this, but theory-based reasons why we might observe tight or loose use of budgets. And again, back to the point that we have had so little research on this, we really don't know
00:08:33 - It is sort of an inquiry into this whole area, and it could go one way or the other. We didn't know. I'll just mention a little bit on the methodology. we, did in-depth interviews with, senior executives of 12 small medium enterprises, to gain, an insightful knowledge of, of the budgeting processes used by their firms. the interviews are, are really a good way of doing this form of research, much better than,
00:09:08 - other ways in which you don't get face-to-face with executives. here it's a particularly rich form of research where, not only are we able to ask the questions we want, but we're able to get a lot of additional information from people that we might not even have thought about, prior to the actual interview. So for those interested, what, what we ended up with was following kind of, of mix with our, our 12. we, looked at size,

Budgeting Practices in SMEs: A Collaborative Approach

00:09:39 - of employees in the organization that went from 18 individuals up to 280. we looked at different industries, for example, software as a service versus manufacturing. we looked at how old these organizations are, younger versus older. We went from two years in operation up to 47 years of operation. the revenues also had quite a range from less than 1 million up to 60 million.
00:10:13 - research questions on budgets, informants had to be really knowledgeable about how budgets are developed and used, in their organization. So we conducted every one of those interviews with the CEOs or the CFOs. And in general, we, our interviews lasted, in a semi-structured way from anywhere from 45 to about 90 minutes. So that gives you a bit of, of our, our methodology.
00:10:44 - I, I'll, I'll repeat them again to make sure we're, we're on the same wavelength. But here, here's the, the key findings that we were able to come up with. So for research question number one, which is how do organizations use budget top down or more bottom up? most of the SMEs in the sample tended to follow a collaborative, rather than a top down approach to developing budgets. And they did involve managers throughout the organization. Now, this was particularly true in the case of the larger
00:11:19 - which is quite understandable, I think because the larger SMEs are, the more likely they are to have responsibility centers, more likely the needs for decentralized decision making. and what we also found in this collaborative part is many of the SMEs were involving their boards in finalizing the budget, indicating to us that they often ask the board to, provide input into the development process.
00:11:52 - but there were two at the very low end of the size, which used a much more top down and autocratic approach. Probably not surprising, again, because from those company's point of view, it was clear to their management that they're small enough. They knew damn near everything that there was to be known about that organization's development. And, they just felt that, finalizing the budgets
00:12:20 - simply unnecessary. But the findings there largely are that there was a, a collaborative, and I'll, I'll just give a, a, a a little moments, more on this later as I wrap this up, because we found a couple of other interesting things in this collaboration. research question two was, how do we use budgets for control? and do we use a tight use of budgets for control or more loose?

Budget Control Challenges in Small Enterprises

00:12:51 - or I could say, I guess I could say fewer than half of our SMEs could be characterized as employing a tight use of budget for control purposes. and again, our evidence suggests that in part, the looser use of budgets for control that we observe just may be a function of the challenges of creating accurate budgets when you're growing so quickly and your, environment is so uncertain.
00:13:23 - that the key value for budgets in smaller companies seems to be derived from the discipline that it creates in planning activities rather than its use as a control tool. Quite a different finding from what we would find in the larger organizations. our third, research question again, has to do with the tightness for evaluation purposes, budgets
00:13:52 - and kind of consistent with the theory-based reasoning that we use to develop research. Question, two, most of the SMEs, characterizes employing tight use of budgets for control, also utilized tight uses of budgets for their evaluation. However, there weren't many of, of the 12, two small, two medium sized companies. Four in total tended to link results to, performance evaluation, outcomes.
00:14:28 - mainly because their companies they felt were, either too young, budget accuracy was perhaps a, a concern. And if I could just quote from one of the CEOs that was asked, why don't you do this? basically said, there are just so many variables that are happening. So many things are up in the air that right now we don't think it would be a proper use
00:14:57 - And we got a few of these kinds of comments back from, from CEOs. So that brings us to the fourth and final research question, which is, a question of whether or not budgets are tightly tied to, compensation. three of our SMEs in the sample did employ, and it's the same group that were part of the performance evaluation, for purpose of determining rewards,
00:15:28 - and that was the sales staff. Those companies tended to employ tight budgets for performance evaluation purposes as well. so a, a again, this idea of linking budget results to compensation, used only in a minority of cases, and probably because of this uncertainty that the budget is in, in a, in a very rapidly changing environment,

Collaborative Budgeting in Small Enterprises

00:15:57 - to try to put too much emphasis on the compensation side of reaching a budget. So overall, what, what have we got? the use of budgets to motivate employees by linking them to, performance evaluations and rewards is somewhat limited. However, what we do tend to see is that there's a lot of collaboration that is going on. Boards are, being involved, and, for the most part,
00:16:28 - for planning than it is for actual control purposes. We did a, a workshop, by inviting not only the people who were part of the research group, that we met with all the CEOs, but the, the general public as well in our area to just disseminate these results. and what we did, find and be able to talk about, and that these individuals seem to be quite interested in is, one, the results are quite
00:17:01 - Those systems designers could be exactly by that name, or the CEOs and the CFOs, in showing, again, the benefits of budgeting, and no one was arguing of that, but really more so as a critical element of the planning process rather than as a fixed and static tool for tightly, controlling and trying to monitoring behavior. this is very distinct from larger company settings
00:17:31 - for planning, but certainly for these control purposes that we described here. moreover, I think our findings suggest that, SME top management, perceives value in employing collaborative approaches to budget development, both in terms of engaging, employees more, and certainly in developing better informed budget estimates. So that, that's one, good takeaway.
00:18:02 - and are interested in the article, there's consequences for the development of theory, about the use of budgets, by SME for control purposes. We've documented a relatively loose use of budgets as a formal control tool in our sample SMEs, but some of our informants sort of took us in a different direction and said that, the informal, channels of communication and performance relative to budgets
00:18:37 - And, and what that's doing, I think, is telling us that, control tightness in an SME may be more nuanced, than in larger companies where they're using more budget review meetings, more, variance analysis types of things. And finally, one of the things that I mentioned earlier that I wanted to come back to is, we had not seen examples before with large organizations where they would revise their budgets

SMEs Embrace Flexible Budgeting Practices

00:19:08 - In most large organizations, there is a budget that is fixed. Forecasts certainly are made to change the nature of what the future will be, but in many of our SMEs, we were finding they were actually revising those budgets after they've been finalized. And this is sort of interesting because it's a response to unforeseen changes in the environment and maybe a manifestation manifestation for their need for agility.
00:19:40 - at SME companies may be less likely to view budgets as a static benchmark, but instead considered to be more flexible in nature and budget estimates revised as needed to accommodate changes in the operating environment. So the final, contribution to this, I think not only, is, is to assist individuals in firms
00:20:13 - there's huge implications here for management accounting, education. mostly when we teach, we're basing it on these maybe mythical and very large manufacturing organizations. and all our teaching sort of makes these assumptions of, large practice. But SMEs are the dominant form of organizations literally around the world.
00:20:42 - and I know have already been useful to post-secondary educators, as well as professional accounting bodies like the, chartered accountancy and CPA institutes to sort of revise their own curriculums and help provide students, upcoming individuals with insights as to how dis the, the distinct ways in which budgets can be used in smaller organizations rather than the future.
00:21:14 - that we had done. I had an opportunity of having a sabbatical in Australia, and, one of my colleagues there had the same concern I did that to what extent are the management controls, and I'll describe what I mean by that in a second. are they being used at all by SMEs now? We found that budgets were the one thing which were very highly used everywhere we went, and that that's why we wanted to do this particular study
00:21:45 - how they're being used, and to what extent. But when we talk about management controls, there are so many other things like the, the specific type of, of perhaps variance analysis that take place. there are the, all these statistics on return on, assets, the, in other words, what we did was we listed 13 management controls that are

Management Controls in Small Enterprises

00:22:16 - and that the associations require upcoming accountants and things to have a good knowledge of. But what we learned from the SMEs, and again, these are companies less than 500 people, is that only one or two of these management controls were used at all. In fact, it was a lot of seat of the pants type thing. As you can imagine, a very uncertain environment in which they're operating a lot, of, movement ahead was based on who you know
00:22:48 - or not you can find the venture capitalists that you need to help you support your next thing. But the specific management controls that were break even analysis and process costing, and these kinds of things, which are so important on the educational side, are just not being used at all in the SME world. So that, was kind of an interesting thing. It's helped us to talk to the professional groups and say, there's things that aren't happening,
00:23:19 - that you're not covering. So as an example of that, we have, and that's one of the reasons we picked, these kinds of, software as a service firms, because there's a whole world of companies that are now, we're working on a subscription basis, and it's reoccurring revenue as, as the, the whole men mantra for getting ahead Very little is mentioned in our educational materials
00:24:09 - So how does that affect the control systems of organizations when you're dealing with a completely different revenue model than we've assumed in the past? So that that's all part of what's there in terms of, of the future. I, I have to tell you, I'm now happily retired, so I leave this to my younger colleagues.

Faculti AI can make mistakes

Faculti

Popular in Professional

Human Rights and Corruption: Problems and Potential of Individualising a Systemic Problem

A statistical approach to law school citation rankings

High school change

What is constitutional ideology?

Politics, Identity, and Class Certification on the U.S. Courts of Appeals

The City as a Growth Machine: Toward a Political Economy of Place

The Role of Education in Reducing Racial Inequality

Budget Development and Use in Small and Medium-Sized Enterprises

Next in Finance

Guide

Platform and Category Pages

Contact Us

FAQs

What is Faculti?

How do you select interviews?

Interview Process

Page Structure

Popular in Professional

Guide

Platform and Category Pages

Contact Us

FAQs

What is Faculti?

How do you select interviews?

Interview Process

Accessibility Options

Contrast Adjustment

Text Size Adjustment

Text Spacing Adjustment

Line Height Adjustment

Cursor Size Adjustment

Page Structure Options

Page Structure