Why is budgeting the most critical role in a small business?

SMEs have to deal with the challenge of price rise in raw material, even more than 100% in some of the components.

Dr Yogesh Pawar

Industries across the globe are recovering from the post-pandemic. The revival for Indian industries is also at an upward trajectory, which is seen with the announcement by the RBI on the GDP figures forecast at 9.5% for the current fiscal. SMEs despite being severely hit by the pandemic have been able to ride the crisis with some efforts from the Government. SMEs still have to deal with the challenge of price rise in raw material, even more than 100% in some of the components.

In these trying times, SMEs have been constantly not only able to restore but also to generate employment. The critical part is that despite all the efforts, some of them are still feeling the heat of the not-so-friendly environment brought in by the pandemic. Profitability and sustainability are at stake right now for them. The way forward for SMEs is to concentrate on the key function of management which is budgeting. Through this article, I am trying to define why SMEs should focus on budgeting to ride the bumpy tide successfully and most importantly profitably.

Uncertain environment– There is a constant fear amongst small businesses due to the onset of variation of the new virus Omicron. After almost three months of complete first lockdown, the order book of most SMEs either went to zero or was reduced by half. The payments have been delayed beyond contractual agreements. Some of the SMEs we are working with have not received payment from Government businesses for more than 5 or 6 months.

Raw materials– Rising prices of raw materials have been creating havoc on the business environment for small and medium enterprises. There is a constant fear of losing business from larger business houses. Basic material such as steel prices has risen anywhere between 70-100%, which is one of the most used raw materials in industries. Whether these small businesses lose their clients permanently or close down; profitability is farfetched thing sustainability has become a huge point of contention for them. 

Labor issues: With the pandemic, labor traveling to native cities has posed a huge challenge to small and medium businesses in cities. The cost of labor has reached beyond sustainable for the existence of these businesses. Post the second lockdown and restrictions being removed by the Government, the situation has improved but with the advent of the Omicron scare the situation may go out of hands shortly. Keep fingers crossed that the effects may not be worse this time.

The way forward for SMEs is through the right budgeting for the next couple of years as the pandemic situation will at least take a year to subside or give a clear indication of where the environment is going to move ahead. Right budgeting tools can be used to define the inventory, raw materials requirement, labor adjustments and defining working capital requirements. This will go a long way for the smaller businesses to come back to profitability and will be key to success for them in the years to come.

The opinion mentioned above are of Dr. Yogesh Pawar, Founder School of inspirational leadership, Chairman Association of Inspiring Syndicate of Entrepreneurs and TheSMEIndia.com does not necessarily subscribe to it and will not be held liable for any direct or indirect damage caused to any person or organisation.