Effects of the budgetary process on SME’s performance: An Exploratory study based on Selected SME’s in India

Abstract

This research study is intended to find out the impact of budgeting on the performance of small and medium enterprises of India. Three major areas of the study are budgeting in SMEs, performance measurement in SMES and Small and Medium Enterprises. The budgeting process is explained and analyzed from the point of view of budgetary planning, budgetary sophistication and control. A sample of two hundred and sixty eight firms is selected from SME sector of India. The sample was selected from three districts of Mumbai, Pune and Solapur. Impact of budgeting on firm performance in these firms was tested through detailed analysis. Questionnaires and other statistical tools were used for analysis of the problem statement. A positive relationship between firm performance and budgeting process is found in this research study. The performance of Small and Medium Enterprises of India is further affected by the characteristics of the budget goals. The results add to the fact that higher performance can be achieved through more clear goals. Astonishingly budget goals that are difficult but achievable motivate employees to achieve budget goals. Moreover tight but achievable goals also increase employee’s motivation in achievement of budget objectives and it improved the performance of Small and Medium Enterprises of India. Another important result is that formal and tight control mechanism of control for budgetary process also tends to increase firm performance in the SME sector of India. It was very interesting to find out that budgetary process have greater impact on the performance of the firm in SME sector as compared to the budgetary control process. Furthermore budgeting planning affects the sales growth of firms in Small and Medium Enterprises more than the budgetary control phenomena. But the impact of budgetary planning on sales becomes very weak and in turn budgetary control strongly affects the profit in small and medium enterprises. Sales and budgetary sophistication have a statistically insignificant relationship and budget sophistication relationship with profit is even negative. The sophistication of budgetary tools includes acquiring and installation of costly financial modeling software, training and expensive training and follow up mechanism. This needs a huge investment which is difficult for Small and Medium Enterprises to acquire that much huge investment. If firm goes for these huge investments this increase in their expenses will decrease their net profit value. Budgetary goal clarity has a statistically insignificant relationship with the employee’s motivation level and further the budget goal difficulty and employee’s job involvement also shows a statistically insignificant relationship. As far as the firm size is concerned it affects sales insignificantly, however it impacts profit of the firm in SMEs sector. Medium sized firms showed a greater growth in their sales as compared to the smaller sized firms.

Key Words: Small and Medium Enterprises, Budgeting, Firm Performance, Budget Control