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The need for real-time decision making continues to increase as businesses continue to adapt to more advanced technology. Making informed decisions is critical for sustaining competiveness and the role of budgeting in supporting management decisions to take advantage of the available opportunities has become of much importance particularly in a changing business environment. The purpose of this assessment is to assess the role of budgeting in helping managers make optimal decisions in a changing environment.
Budgeting is the process of implementing, operating, and designing budgets. A budget is a revenue estimation of expenses over a particular duration of time (Shim, Siegel, and Shim, 2011). Budgets are usually re-evaluated and compiled frequently. Budgeting involves looking at the estimated incomes of a business, which includes the money acquired from selling products and services and the expenditures. The expenditures include the money from a company used to pay bills and expenses. Through budgeting, a business can gauge whether they can continue working on a certain level with the allocated expenditures and projected incomes (Shim et al., 2011). Budgeting is an internal tool by the management of most organisations, and it cannot be reported to external parties. Kilfoyle and Richardson, (2011) explained that budgeting is a crucial part of implementing managerial policies which include cash expenditure, cash flow, project management, and long-range planning. Budgets are mostly created for a financial year, and they contain information on the anticipated or expected sales as well as other costs associated with the business in that duration. Budgeting is considered to be the highest level of accounting with regards to the future of a business, and thus it indicates the definite course of the company and the actions to take.
There are usually different types of budgeting and the three main ones include incremental budgeting, rolling budgeting, and zero-based budgeting. Incremental budgeting refers to that budget that an organisation prepares using a previous financial year budget or actual performance as the basis in which incremental amounts are usually added for the new budgeting period (Ryan, 2004). In other words, the allocation of resources is usually based on the previous period allocations and many organisation do not recommend it considering that it fails to take into account the changing work environment. For example, all companies have been forced to take into account the negative effects of Covid 19 on businesses across the global supply chain. If an organisation uses incremental budgeting, it would mean that it would not consider the adverse effects of Covid 19 despite the widespread business disruption.
The second type of budgeting is rolling budget which refers to a budget in which an organisation continually updates the budget either quarterly or monthly. In other words, this budgeting approach calls for incremental extension of the budgeting model which exists at a particular time (Ryan, 2004). As a result, businesses find themselves having a budget extending a full year into the future. This type of budgeting calls for increased management attention compared to when a company prepares a one year static budget as some budget updating activities have to be undertaken monthly. The advantage of this type of budgeting is that an organisation can revise budget assumptions that were made in the last incremental period.
The third and final type of budgeting is zero based budgeting which means that an organisation prepares the budget from scratch with the base as zero. It is a method of budgeting where all expenses for the new period are calculated based on the actual expenses to be incurred rather than the differential basis (Ryan, 2004). When using this approach to budgeting, an organisation ensures that each activity is justified giving explanations of the revenue that each cost generates. Among the benefits of this budgeting approach is reducing activities which are redundant, taking into account inflation, efficient and also more accurate. Nonetheless, it has some disadvantages which include time consuming, lack of expertise can lead to a poor budget and also requires high manpower.
One of the main goals of budgeting is to come up with short and long term plans. When a manager evaluates their current standing, they get the tools to look into their future plans (Østergren and Stensaker, 2011). Therefore, through budgeting, a manager is able to see the realistic expansions which can be made. Budgeting indicates areas of wasteful spending that can be eliminated. Moreover, a manager who budgets their projects avoids engaging themselves in projects which are beyond their means.
A business may be doing everything right except on cash flows, and this may cause a big problem for a company. Budgeting is essential here as it allows a manager to find the best ways to fund projects. On a theoretical basis, most companies will take significant risks, such as taking huge loans for new projects with the hope of earning income from the project (Bierman and Smidt, 2012). However, the plan may backfire, but with a proper budget, a manager avoids bankruptcy by budgeting for a project with loans that can quickly be repaid with the anticipated returns.
The foundation of a manager’s budget is their income. A budget allows them to know what and how their income targets are doing (Bierman and Smidt, 2012). With this information, a manager can make decisions on whether to cut expenditures or increase them in order to achieve the targeted objective.
Considering the changing business environment brought about by Covid-19 like that of Softconic, the most suitable budget is a flexible budget and not a static one. The reason a flexible budget is preferred because it is one which flexes or adjusts with changes in activity or volume (Smith, 2002). What this means is that a budget adjusts to the level of activity at a particular period. It takes into account the current situation such as Covid 19 where there has been an increase in demand in one of the products. An example of a flexible budget is shown below.
Figure 1 Flexible Budget
A static budget is not an option for a company such as Softconic which has had to changes its operations following the pandemic. Having a static budget means the budget amounts remains unchanged despite the change in business demand and supply (Smith, 2002). An example of a static budget is as shown below.
Figure 2 Static Budget
Real-world examples of IT companies that can be applied in this scenario are firms such as Microsoft which owns products such as Skype which have become increasingly used due to the lockdown and Zoom Video Communications. Therefore, technology companies with products associated with distance education, telecommuting, and teleconferencing that provide easier communication channels following the lockdown are applicable to this scenario as the demand of these products increased despite the negative effects of the global supply chain.
We have two types of budgeting systems; top-down budgeting and bottom-up budgeting also known as participative budgeting. Top-down budgeting refers to a budgeting method where senior managers in an organisation prepares what is known as a high-level budget based on the company objectives and then gives to the unit managers for implementation purposes. One of the advantages of this system of budgeting is that it allows or gives an opportunity for lower managers to focus or concentrate on other aspects of the business. However, it can be demotivating and might not be accurate (Balakrishnan, Sivaramakrishnan, and Sprinkle, 2008). The second type of budgeting system is bottom-up budgeting also known as participative budgeting which is the direct opposite in that departmental managers are responsible for preparing the budget based on experience and present information and given to the management for approval.
Participative budgeting is a process where people involved in budgeting, as well as those who implement the budget, are involved in budget creation (Kahar, Rohman and Chariri, 2016). Heinle, Ross and Saouma, (2014) explained that participative budgeting involves a design where subordinate managers are involved in setting and designing the budget rather than merely imposing it. The main aim of budget participation in a budget setting is to share responsibility between the managers and to set personal ownership on the final budget. The participative budgeting approach enables subordinate managers to provide information or their own views, which can be used by the supervisors to come up with a participative or self-imposed budget.
Participative budgeting has desirable impacts on the performance of a company, which includes the transfer of information from subordinates to their superiors, thus improving job satisfaction in the process. With participative budgeting, a company can come up with more achievable budgets, considering that the subordinate managers have the freedom to contact and inform the supervisors on areas that need fund allocation. The subordinates get a sense of ownership, which gives them the motivation to work harder towards the goals that they help prepare (Heinle et al., 2014). Participative budgeting shows the belief of a company towards its employees.
In changing environments, participative budgeting supports decision making through listening to the views and judgments of all individuals at different management levels within the organisation. It gives an opportunity for consultation and the person in direct contact with activities to make budget estimates. Departmental managers are responsible for day-to-day firm activities and they are best suited to make budgets in an environment which is changing as they are more informed. Importantly, a self-imposed budget has a unique system of control and hence perfect for a changing environment.
In conclusion, in a changing environment, the use of flexible budgeting style than static one is advisable due to the fact that it allows adjustments as changes are experienced in the level of activities. Participative budgeting is also suitable in changing environments as it originates from the managers running departments. These managers have adequate knowledge on daily business activities and considering it is not imposed, it gives an opportunity for consultations. There is no doubt organisations have to make informed decisions when it comes to budget making.
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Balakrishnan, R., Sivaramakrishnan, K., and Sprinkle, G. (2008). Managerial accounting: Models for decision-making. Hoboken, N.J: Wiley.
Bierman Jr, H., and Smidt, S. (2012). The capital budgeting decision: economic analysis of investment projects. Routledge.
Heinle, M. S., Ross, N., and Saouma, R. E. (2014). A theory of participative budgeting. The Accounting Review, 89(3), 1025-1050.
Kahar, S. H., Rohman, A., and Chariri, A. (2016). Participative budgeting, budgetary slack and job satisfaction in the public sector. Journal of Applied Business Research (JABR), 32(6), 1663-1674.
Kilfoyle, E., and Richardson, A. J. (2011). Agency and structure in budgeting: thesis, antithesis and synthesis. Critical Perspectives on Accounting, 22(2), 183-199.
Østergren, K., and Stensaker, I. (2011). Management control without budgets: a field study of ‘beyond budgeting’in practice. European Accounting Review, 20(1), 149-181.
Ryan, B. (2004). Finance and accounting for business. London: Thomson Learning.
Shim, J. K., Siegel, J. G., and Shim, A. I. (2011). Budgeting basics and beyond (Vol. 574). John Wiley and Sons.
Smith, G. S. (2002). Managerial accounting for libraries and other not-for-profit organisations. Chicago: American Library Association.Bottom of Form
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