Economic uncertainty requires more flexible budgeting systems
Economic uncertainty as defined by Anderson and Meyerson (1990: 15) is the aspect that the future process of economy in a company, organization, or a country is not known. This means that there are fluctuations in economy making it vey hard for one to anticipate the future. Uncertainty is different from taking risk in that when one takes a risk he/she is aware abut the future but in uncertainty there is a possibility that a number of things may happen in future hence making it very hard to anticipate the future. Businessmen and company managers are faced with difficulties in determining the future of their businesses especially in cases of uncertainties. It is because of this that budgeting is deemed very essential. This study explores the role of budgeting in the concept of the more flexible methods of management that are specifically essential in conditions of uncertainty. On this basis, because of uncertainties, there is a need for a business to meet the financial targets which are expressed in budget and require more flexible and innovative forms of managements that are heightened by the concept of market volatility and technological advancement.
In this case therefore, a continuous budgeting is more significant than a rigid one since the future may favor or go against the budget (Malliaris 2005: 56). Basically, managers integrate different uses of budgeting and management controls while making a continuous budget. Managers usually use their own discretion to alter their budgets in operational matters when faced by unexpected events. Additionally, flexible budgeting makes sure that there are strict accountabilities in ensuring that managers are committed to the achievement of organizational financial goals and objectives. It should be noted that, financial target is one of the key aspects that should be considered in any organization. This is because all activities in a business involve use of finances and hence they should be appropriately managed by using a good budget.
As can be learned from Warren et al (2008: 240), there are different types of budgets which include; appropriation budgets, flexible budgets, capital budgets, and master budgets. All these types of budgets can be used in budgeting for economic uncertainties but some are more useful than others. In this case, flexible budgets in this study are found to be more useful than all the others. Notably, a flexible budget is designed in such a way that it changes in accordance with the level of activities carried out in a business. On this basis, there are costs behavior which occurs as a result of fluctuations in outputs and labor turnover. A good example here is the soft drink industry like Coca Cola which may budget a certain amount of finances to be used in the production, marketing or selling of these soft drinks. In this case, the amount of finances budgeted for, may increase or decrease with changes in weather. It should be noted that, changes in weather can be termed as an uncertainty which is deemed to alter the budget of the industry. Basically, the budget planned will be changed by altering some parts and hence flexible budget is more appropriate in cases of economic uncertainties. This is because in case of change in climate, cold weather indicates very few people will be purchasing soft drinks hence lowering the profitability of the industry.
Lee et al (2008: 54) noted that, budgeting, planning, and forecasting are very crucial in laying the foundation of any effective business plan. On this basis, economic uncertainties brought about difficulties to any company when setting clear goals and objectives that sustain financial plan of that company. As a result of this, it’s the duty and responsibility of any company to utilize the most effective budgeting system that would solve problems brought about by economic uncertainties. It should be noted that, organizations require more flexible budgeting forms that would respond to the increasing rates of technological advancement, competition, and market volatility. In this case, the traditional ‘command and control’ arrangements in the process of planning and budgeting have been deem less useful since there are increased changes that have occurred in economic field.
In order to clearly understand the concept of usefulness of flexible budgeting systems in response to economic uncertainties, this study addresses the case of the Astorica PLC which is a large multinational, document and services organization (Flow et al 2010: 446). This company is usually faced with economic uncertainties as a result of high competition, increased technological advancement, and need for creativity as well as innovations. It is because of these uncertainties that this company has encompassed the capacity for flexibility and adaptation in matters relating to budgeting. As indicated in this company, high competition occurs in different times and hence it would be very difficult to plan through budgeting on the number of services to offer in the market. In this case therefore, flexible budgeting systems are more appropriate since they are planned and arranged in the time when competition is high or low.
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