Financial Challenges for SMEs

This assignment delves into the financial hurdles encountered by Small and Medium-Sized Enterprises (SMEs). It requires students to examine various factors influencing their access to financing, analyze their capital structures, and critically evaluate the broader business environment that shapes their financial landscape. The analysis draws upon academic literature and real-world examples.

BUSINESS FINANCE

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Part 1................................................................................................................................................3
1Purpose and objective of preparing a budget.............................................................................3
2. Application of traditional budgeting system in the business...................................................4
3 Appropriateness of the traditional budget for the business firm...............................................5
Part 2................................................................................................................................................6
4 Alternative budget system........................................................................................................6
5 Application of zero based budget and activity based budget for Emilla..................................8
6 Appropriateness of the budgeting method for Emilia...............................................................9
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................11

INTRODUCTION
In current time period most of the business firms are laying down emphasis on controlling
expenses in the business. In the current business report, purpose and objectives in respect to
preparation of budget are explained in detail. Along with this, application of the traditional
budgeting system is also described briefly. In middle part of the report, alternative budgeting
systems are discussed in detail. Apart from this, application of the zero and activity based
budgeting in respect to business is discussed briefly. At end of the report, best alternative
budgeting method is selected for the business firm.
Part 1
1Purpose and objective of preparing a budget
Budget is a statement which is used to prepare a projections about the cash inflow and
outflow that may takes place in the business. Firms irrespective of their size prepare a budget.
Purpose and objective for preparing a budget are given below.
 Control on expenses: The main aim of preparing a budget is to maintain stiff control on the
expenses. The main aim of the business firm is to make expenses within the estimated
revenue amount (McLean and Zhao, 2014). So that surplus cash balance can be maintained in
the business. In the budget projections about the income and expenses are prepared and
expenses are made with in the value that is determined in the budget. By doing so elevation
in the expenses is controlled by the business firm which enhance cash balance in the
business. Thus, it can be assumed that budget have a significant importance for the business
firms.
 Employee’s motivation: Emilia need to prepare a budget for its business because budget give
multi-dimensional benefits to it. In the budget projections about sales is prepared. Firm
prepare a strategy in order to achieve target sale in the business. Under this targets for each
and every employee is determined in respect to area in which he is working for the business
firm. Achievement of this targets help business firm in achieving its objectives (Hillier, and
et.al., 2014). Tough targets are determined for the employees which motivate them to work
hard at the workplace. It can be said that budget help business firm in making best use of the
workforce.

 Making best utilization of funds: Most of business firms irrespective of their size face a lots
of fund problems. This is evident from the fact that in case of most firms balance sheet debt
is identified with big amount in the liability side. To some extent it is difficult for the
business firms especially those are of small size to obtain loan from banks and other financial
institutions. By preparing a budget allocation of fund that company received from the bank or
any other financial institution is made among different expenses (Cheng, Ioannou and
Serafeim., 2014). In this way best use of available fund is made by the business firm and
maximum return is obtained on same in terms of profitability. This reflects that there is an
importance of the budget for the business firm.
 Performance measurement: The main aim of preparing a budget is to measure firm
performance. At end of the specific time period, actual figures in respect to the components
of the budget are computed and compared with the values that are in the budget. On this
basis, performance of the firm is measured. Corrective actions are taken in respect to areas
where performance was not up to expected level.
2. Application of traditional budgeting system in the business
Under traditional budgeting system past years figures are taken in to consideration and on
that basis budget for the current time period is prepared by the business firm. Incremental
budgeting method is used under the traditional budgeting. In this approach percentage increase is
done in the values that are in the previous year budget. In order to prepare an incremental budget
specific process is followed by the managers of the firm. First of all current year business
environment is evaluated deeply. In this regard PESTEL analysis is done by the managers.
Thereafter impact that all components of the mentioned analysis may have on the business firm
revenue and expenses is identified. For example if turmoil will comes in existence in the UK
economy then inflation rate may increase above a certain level which may be dangerous for the
business firm. In such kind of situation revenue of the business firm may decline (Bánciová and
Raisová, 2012). By doing analysis in such a way percentage change that may take place in the
sale and expenses of the business firm in comparison to previous year are identified. Apart from
this, while preparing an incremental budget previous year variance that was identified between
actual expenses and budgeted one is taken in to consideration. Manager of the business firm
make an attempt to identify the reasons due to which such variance comes in existence. There
may be two reasons due to which variance comes in existence. Business environment may

change at fast pace or firm can make a mistake in making forecast. Apart from this, there is no
third reason due to which variance comes in existence. By analysis of identified reason that was
responsible for variance firm can ensure that it is determining value for the budget in right way.
In order to prepare an incremental budget in the right way managers often analyze previous year
business environment and identify the extent to which firm performance deviate from standards.
Impact of business environment on firm performance in previous years is analyzed in systematic
way (Munteanu, 2012). This help managers in identifying that with change in business
environment to what extant change comes in revenue and expenses. Obtained result help
managers in ascertaining the percentage change that may be observed in the revenue and
expenses if expectation that they have about business environment really happen in future. In this
way percentage increase that need to be made in the previous year budget value is determined
and incremental budget traditional budgeting system is prepared by the managers. This is the
entire approach that is used to prepare an incremental budget for the business firm.
3 Appropriateness of the traditional budget for the business firm
Traditional budgeting system is appropriate for the business firm. Some reasons due to
which it is assumed appropriate for the business firm are explained below. Business will grow in future: It is well known fact that every business firm prepare a plan
for expansion of the business. Usually, business firm expand its business in other product
line. With increase or diversifying business operations expenses of the business also
increases. Apart from this, sale revenue of the business also increase. Hence, there is high
probability that with passage of time revenue and expenses of the Emilia will increase. In the
incremental or traditional budget also past year budget values are increase (Masca, 2012).
Thus, it is clear that traditional budget is appropriate for the Emilia. Enhancement in inflation rate: In the domestic economy usually inflation rate get increase
or remain at same rate. With elevation in the inflation rate price of the raw materials and
products get increased. On other hand, business firms also enhance their product price. Thus,
it can be said that with passage of time business firm’s revenue and expenses increased by
low or moderate rate (Irwin and Scott, 2010). In case of incremental budget also values of
sales and costs are enhanced by the certain percentages. It can be said that in business firms
both variables increased on year on year basis. Same thing happened in case of budget. Due
to this reason use of traditional budget is appropriate for the business firm.

 Enhancement in production capacity: Business firms does not stop at specific level in terms
of enhancement of the business operations. They consistently increase their production
capacity and those firms that are operating in the service sector like Emilia increase their
customers serving capability and capacity. Hence, even firm is operating in same product line
it is confirm that its sales revenue and cost will increase (Oakshott, 2012). Due to this reason
traditional budget system is assumed appropriate for the Emilia. By using this budgeting
approach cost and cash inflow values can be projected in better way. Hence, incremental
budget is assumed appropriate for the Emilia. Little change in the past and current year economic environment: It is well known fact that
economic environment does not change suddenly. With passage of time changes takes place
in the economic environment slowly. Thus, it can be assumed that impact which economic
environment have on the business will remain continue. Previous year budget was prepared
by considering the economic conditions that prevailed in the current time period. There is a
very high possibility that in current time period percentage change that was made in the
budget of the previous year in the variables will repeat again in current time period
(Bahrammirzaee, 2010). Hence, incremental budget is appropriate for the business firm.
Part 2
4 Alternative budget system
In opposite to the incremental budget system zero based budgeting method is used by the
business firms. The approach that is used to prepare a zero based budget is totally different in
comparison to the alternative budget system. In the zero based budgeting method previous year
projections are not taken in to consideration. Instead, from starting point new budget is prepared
by the business firm. Under zero based budgeting method all departments head have to make
projections. Means that sale department head will prepare a sales budget under which he will
make projections about sales and marketing expenses (Zikmund and et.al., 2013). Apart from
this he will need to give justification for the assumptions that he made about components of the
sales budget. Same thing other department heads needs to be done from their side. After
receiving projections from the all department heads final budget is prepared by the relevant
person. Until budget is not received from any department no allocation is made to same. This is
the main feature of the zero based budgeting. It is the entire approach that is followed to prepare

a budget under zero based budgeting method. It can be said that correct method is followed to
prepare a zero based budget. This is because every time it is not necessary that past will repeat
itself. Sometimes trends got break and in that situation huge fluctuation comes in the sales and
cost of the business firm. In the zero based budgeting method all possibilities are covered and
justifications are demanded from the relevant people. This approach ensured that after due
consideration of factors and long hours brainstorming appropriate values are determined in the
budget which are highly reliable in nature. It can be said that alternative budget system is
appropriate for the business firm (Stevenson and Wolfers, 2011). Hence, it can be said that
legitimate approach is followed by the business firm to prepare a budget under zero based
budgeting method. There is a logic behind determination of each and every value for the budget
that is prepared for the business firm. Sometimes different interrelated department’s think the
varied directions. Sales department head may think that sales will not increase in the upcoming
time period. On other hand, finance manager may think that heavy amount of money will be
needed to meet business requirements. In case of such kind of situation relevant managers carry
out detail discussion on the assumptions that they made in respect to projections prepared by
them. Hence, it can be said that after doing discussion in detail appropriate values for the budget
are determined. Such kind of approach enhance reliability of the budget that is prepared by
following a zero based budgeting approach.
Apart from zero based budgeting other alternative budgeting system is activity based
budget. In the activity based budget activities are identified that play an important role in
generating revenue for the business firm (Tirole, 2010). Cost is directly allocated to these
activities of the organization. Interrelationship among these tasks are identified and analyzed
deeply. Values of the budget are enhanced but only inflation factor is not considered to increase
values of the budget in comparison to previous year. Hence, it can be said that after considering
multiple factors final value for all components of the budget are determined. This sort of budget
is prepared by the firms that are involved in manufacturing goods and services at the workplace.
Hence, it can be said that there is an importance of the activity based budgeting (Serghiescu and
Văidean, 2014). There are advantages of the activity based budgeting because in preparing same
instead of expenses activities cost is taken in to consideration for preparing a budget. The cost of
activity based budgeting method is very high. This is because more information and time is
needed to prepare activity based budget relative to zero based budgeting and incremental budget.

5 Application of zero based budget and activity based budget for Emilla
Zero based budget is applied in simple way at the workplace. However, one needs to
follow a long process in order to prepare a zero based budget. Under this budget method first of
all top management give an instruction to the department heads to prepare a projections for their
departments. Usually, departmental head evaluate the business operations and on the basis of
their estimation prepare projections for the departments. These department heads have to send
projection prepared by them to the top managers along with the assumption sheet. Top manager
read out entire budget that is prepared by the department heads. Relevant entity try to verify the
assumption (Hale and Held, 2011). After passing projections that are prepared by the all
department heads same are combined in order to form final budget for all departments.
Sometimes if required meeting is organized among the department heads and broad consensus on
specific thing is developed among them. In this way if required assumptions that are prepared by
the department heads are altered to some extent. This is the entire process by following which
zero based budget is prepared for the firm and implemented at ground level.
Advantage
 Reliable values are ascertained for each and every component of the budget (Klapper and
Parker, 2011).
 On budget preparation process different level of manager’s work together. All things are
cross checked and it is ensured that budget is prepared in right way.
Disadvantage
 Lot of time is spend on discussion and preparation of budget.
There is a specific approach that is followed to prepared activity based budgeting for the
organization. Under this first of all activity based costing is done by the managers at the
workplace. On the basis of activity based costing amount of expenditure that will be made on all
sort of activities of the organization are determined. These values are included in the activity
based budget. This is the entire approach which is followed to prepare an activity based budget
for the organization. It is clear that the application of the activity based costing is different from
the other methods (Activity based costing, 2012). This is because in other methods on the basis of
likely changes that may take place in the business environment values for the component of the
budget is determined. In case of activity based budgeting first of all managements accounting
tools and techniques are used to compute cost of each and every activity. Hence, it can be

assumed that long process is followed to prepare an activity based budget for an organization. It
can be said that there is a great importance of the activity based budgeting for an organization in
its business.
Advantage
 Better picture of the expenditure that can be made in different activities of organization is
obtained from the activity based budgeting.
 Operating costs that have higher proportion in overall cost can be identified easily.
Disadvantage
 Lot of time is spend on identifying key activities and relevant cost drivers
6 Appropriateness of the budgeting method for Emilia
Out of both methods zero based budgeting is most appropriate for the Emilia. This is
because in this method after considering number of factors final value for the budget is
determined. Detail discussion is carried out among the managers if required. Moreover,
managers have to give justification about the factors on the basis of which they prepare an
assumption. Hence, it can be said that in the activity based budgeting method managers that
prepare a projection are fully accountable to the top managers. In case it is identified they
wrongly prepare assumptions they can be made liable for their mistakes (Phelp, Webb and Koh,
2011). In case of activity base budgeting cost of the activity is computed and same is included in
the budget. Hence, it can be said that activity based budget is a set of cost of different business
activities. This method is not appropriate for the firm because in this lots of time is spend by the
manager to prepare a budget. Management accountant have to do calculations for the different
type of the business activities. Then that values will be incorporated in the budget. Lots of time
need to be spend on identification of activities that will be included in the budget. Hence, it can
be said that activity based costing method is not appropriate for the Emilia.
CONCLUSION
On the basis of above discussion it is concluded that there are different type of budgets that
can be prepared for the business firm. All these budgeting methods have some advantages and
disadvantages. Hence, after considering positive and negative points of the budget specific one
must be selected for the business firm. It is also concluded that incremental budget is one which
must be prepared by every business firm. This is because under incremental budget values of

components are increased. Business revenue and expenses also enhance year by year. Hence,
incremental budget suits to all sort of business firms.

REFERENCES
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creation. The World Bank Research Observer. 26(2). pp.237-257.
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Zikmund, W.G., Babin, B.J., Carr, J.C. and Griffin, M., 2013. Business research methods.
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