Annual Budget Planning in SPARK Incubator: Analytical Essay

Structured planning is key to business growth focussing resources on improving profits, reducing costs, and increasing returns on investment (Drury, 2001). Gowthorpe, (2011) and Hanninen, (2013) recognised that budgeting is a financial interpretation of the business plan and should align with organisational targets, provide scope to control cash flow, allow investment in new opportunities, identify project resource requirements, and plan for the future (Ostergren and Stensaker, 2011).

There are several key issues that need to be considered when planning an annual budget. Sufficient time must be allocated to the planning stages to ensure the budget is comprehensive and effective. Neely et al. (2003) indicate that the budgeting process can utilise up to 20% of managerial time. For this reason, many businesses adopt incremental budgeting, using historical figures to project future revenue. An inflationary factor is added to all costs thus reducing the time spent on budgeting, however, it can result in an under or overestimate and the budget becoming misaligned with the operational situation.

Business plans focus on improvements to the business in sales, growth or diversity over the planning period. The budget confirms the costs involved in achieving the plan and plays a crucial role in management control in organisations by tracking progress against the plan. The University is currently implementing a futureproofing programme so will undoubtedly view budget setting as a value-adding activity. An annual budgeting process or traditional budgeting system is used by companies to control demand of consumers/customers, adopt organisation strategy of past years, and to fix errors in co-ordinating managerial process in the future years (Neely et al., 2003)

Budget planning should involve the right people and determine responsibilities. The University corporate finance team coordinate all budget activities, set timescales, and carry an element of responsibility. To achieve a realistic budget and gain commitment consultation should involve staff from different areas of the business for example finance accountants, project staff, department managers, and facilities staff. Budgets can be established via a top down or a bottom up approach. Top down budgets are levied from above by senior management (Banks and Giliberti, 2008) whereas bottom up budgets are participative and involve staff in the budget setting process (Gowthorpe 2011). Budget timescales should be set in advance and published to all involved in the budget setting process.

For SPARK Incubator the most important factors to be considered when setting a budget are behavioural considerations relating to employee participation in the development of the budget targets (Walther and Skousen, 2014). Tayles et al., (2007) and Welsch and Hilton, (1988) suggest that the performance is positively influenced when there is participation in the budget process, resulting in increased commitment, improved communication, and higher levels of staff morale. SPARK’s budget is imposed and based on income only. The target is set at 85% Centre occupancy and it is implied that it is non-negotiable and achievement is imperative (Hope and Fraser, 2003). The budget being based solely on income does not reflect the ethos of an incubation unit, suggesting minimal understanding of rental subsidies and the consequential income variance income over the 3 year subsidy period. Hence long term the budget is not a useful performance measure.

The budget being an integral part of any business is often prepared in advance of the start of the fiscal year. At the University the fiscal year commences on 1st August however budgets are frequently disseminated 5-6 months later. The lack of involvement and inability to make changes to the budget when it is finally disseminated is highly de-motivational. SPARK liaises regularly with finance accountants and receives a formal quarterly budget report but participatory talks with the budget holder should be mandatory. The budget is currently set without any liaison or link to operational targets or performance review targets both of which are set by a different line manager and independent of the budget. As a result, there is a distinct lack target correlation and organisational performance (Drury, 2000).

SPARK’s annual budget is not currently related to appraisal targets or the goals of the unit. Exceeding budgetary targets has no impact on performance or salary and any financial surplus achieved is not used for SPARK entrepreneurship initiatives. SPARK has repeatedly exceeded its occupation target of 85%, currently being over capacity and taking several additional offices outside of SPARK in the wider Science Park to grow the unit and meet demand. However, the same target has been allocated year on year without any reference to economic fluctuations, opportunities for development/growth, improvement projects, or the increased support requirements for the constantly increasing number of entrepreneurs within in the Hub (Jensen, 2000).

Traditional budgeting is not appropriate for SPARK Incubator largely due to SPARK’s variable objectives and obligations (Nazli Nik Ahmad et al. 2003; Kiani, 2016). Traditional budgeting has limitations, can be time-consuming and monotonous, with few links to organisational strategy, little flexibility and focuses on cost reduction rather than value-creation (Doyle, 2003). The focus tends to be achieving budgetary targets rather than enabling operational flexibility (Hanninen, 2013; Libby and Murray, 2007). Daum, (2002) suggests that the beyond budgeting model, based on transparency in forecasting and resource allocation, encourages an adaptive management process, clear communication channels, and supports decentralised decision-making by encouraging individual responsibility. Today’s high growth companies require flexibility, achieved through developing employees to have financial management skills thus targets can be achieved with minimal supervision. For a similar process to be implemented at the University would require a significant change in leadership styles and a new philosophy to enable managers and employees to fully understand the organisation’s strategic plans.

Several companies have changed their culture and management philosophy by adopting this approach, two well-known examples are Boots and IKEA. Hope and Fraser, (2000) argue that rolling forecasts offer flexibility, focus on decision making that encourages value creation allowing unforeseen circumstances to be anticipated before they significantly affect performance. This degree of flexibility would be effective for SPARK Incubator as the dynamics of the entrepreneurship environment are in constant flux. Libby and Murray, (2007) suggest that conventional annual budget concepts encourage reliance on a command and control mechanism in organisations. This is typical of the situation experienced at the Science Park and the adopted de-motivational budget directive. Wildosky, (1978) suggests that organisations that practice annual budgets view it as a method to create stability in economic and management processes. Hansen, Otley, and Van der Stede, (2003) suggest embracing benchmarking against performance evaluation whilst Hope and Fraser, (2003) stress that KPI’s are a good way of comparing and measuring long-term goals. Stedry, (1960) suggested that there is no perfect budgeting system and participation is situation specific. Organisations need to understand the importance of the psychological contract for different people, in different jobs, in different departments, and at different levels affects motivation and therefore measures to influence performance through budget management must be adaptive and reflect this need.