Budget Development and Use in Small- and Medium-Sized Enterprises: A Field Investigation

We examine the process by which operating budgets are developed and how they are used for control, evaluation, and reward purposes in small- and medium-sized enterprises (SMEs). SMEs (i.e., fewer than 500 employees) represent the dominant organizational form in North America but surprisingly little research has examined how these companies develop and use management controls. Our study focuses on a key element of the management control system, operating budgets, because prior research on SMEs indicates this as an important and commonly used control tool in such companies. Prior research on budgeting practices, while extensive, has almost exclusively examined larger companies. We conduct in-depth field interviews at 12 participating SMEs to address four theory-based research questions intended to provide insights regarding the development and use of budgets by SMEs. Our first question examines how budgets are developed, top-down versus collaborative. Our second, third, and fourth research questions examine, respectively, whether budgets are used tightly or loosely for results control, performance evaluation, and reward purposes. As a first step in providing a deeper understanding of budget development and use in SMEs, our results have implications for practice, theory development, and management accounting education.