Why do SMEs need to define their budgeting in the present day scenario
Budgeting and forecasting are the functions that go hand in hand. With so much uncertainty, in the business environment, it is always advised to choose the right mix of both tools.
Yogesh Pawar January 12, 2022
Founder School of inspirational leadership, Chairman Association of Inspiring Syndicate of Entrepreneurs
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The Indian economy is showcasing improvement despite the signs of new virus mutation approaching. There are quite a few reasons why India should not be worried about the Omicron; more than 130 crore people are vaccinated, of which 56% are vaccinated with both doses; the second wave has helped in creating the right immunity in the population. To add to it, the right move by the Government in postponing full-fledged flight operations from the international destination has been helping in controlling the virus spread.
Indian businesses are improving, even SMEs and MSMEs are showing signs of recovery, but the time is such that we should not be complacent, instead, we should be more cautious and focused in our approach towards improving and strengthening our businesses. SMEs have been the backbone of our economy, employing more than one-fourth of the country’s population. Indian MSMEs employees more than 11 crore people in the country. The contribution of these 6.3 million to GDP is around 29% (according to IBEF).
These entities must grow as they not only generate employment but also are the fodder for the large-scale industries. For the SMEs to grow at this juncture, there is a very critical function which they need to understand and implement, i.e. “Budgeting”
Working capital: Working capital is the most critical for any business, the working capital ratio of 1.2 and 2 is considered an ideal situation for any organization. Working Capital in the case of SMEs is the day-to-day requirement of cash which is required to pay for raw materials and labor.
Defining working capital requirements is the key to success for small and medium enterprises. It is one of the most important functions for running a business. It holds great importance as without adequate working capital, the business might have to face the uncertain monetary market environment and not so easy availability of liquidity in the market. Despite lots of Government efforts, it is not easy for SMEs to get collateral-free loans. Thus, these businesses need to bifurcate monthly, quarterly and yearly requirements of liquidity for day-to-day operations.
Projecting inventory: Having the right inventory is the most important for any business. How one can arrive at that figure is a tricky affair. The easiest way is to pick the most important customers and forecast their demand on a monthly, quarterly, and yearly basis. One should always keep in mind the 80:20 rule while projecting the inventory. This will ease the pressure on businesses and help in streamlining future courses of action as well.
Employee cost: The businesses have faced huge losses due to the unavailability of a skilled workforce for years now. One can assume through an example that 90% of the engineers graduating from the country are not employable. They need upskilling or training anywhere between 3-6 months after completing their graduation.
Over and above, pandemic-related labor issues have added to the woes of businesses, where even an unskilled workforce was unavailable for so many months. According to data shared by the Ministry of labor almost 10 million workforces migrated to their native places during the first lockdown. Now, one can imagine how important it is to define and project employee costs in these certain times. While defining inventory requirements we need to simultaneously define employee projections as well.
Raw Materials: This is one of the most critical and tricky affairs. With the fluctuating prices of commodities, no one can ever project when to bulk buy and store raw materials. With the steel prices almost doubling as compared to last year, small businesses cannot afford that kind of inflation. Similarly, a lot of other raw materials like mild steel plates, aluminium alloy, copper, CRCA Sheet, pig iron, MS Scrap, and engineering plastic rates have gone up anywhere between 50-150%and have impacted lots of smaller businesses.
Budgeting and forecasting are the functions that go hand in hand. With so much uncertainty, in the business environment, it is always advised to choose the right mix of both tools. It is always possible to predict the future but with the right calculations, we can reach a goal, where the business can become sustainable in tougher times.