Role of Budgeting in Changing Business Environment

This essay provides an insight about the usefulness of budgeting in decision making process in a changing business environment.

LCBB5002 MANAGEMENT
ACCOUNTING – 1

TABLE OF CONTENTS
Role of budgeting in changing business environment...........................................................3
Budgeting styles.....................................................................................................................4
REFERENCES...........................................................................................................................7

The upgradation in the technology has caused various changes in the business
working environment. These changes are having a huge influence over the working of the
business. Every day there is something new is coming up in regard to the advancement in the
technology which makes it important for the businesses to make their business plan to be
flexible enough so that the changes can be made in respect to the opportunity available which
might require medium term plan to be converted to short term plan. This essay provides an
insight about the usefulness of budgeting in decision making process.
Role of budgeting in changing business environment
The role of budgeting starts after the management effectively carries out the market
analysis along with the factors having an impact over the business over which the business
has no control (Henttu-Aho, 2016). Budgeting is an underlying step for providing help to the
association in arriving at its key objectives by supporting the administration to plan and
exercise control over the significant business exercises. Budgeting assumes a significant job
in meeting with the changing industry condition. First is viable method of communication.
Budgeting is fundamentally a proper way to deal with conveying the associations vital
arrangement to its internal partners which incorporates managers, division head and others
having interest and duty regarding checking the performance of the organization (Prohnitchi
and Cadri, 2018). It conveys everything about the income and the consumptions. Next is
planning, getting ready the budget expands the prerequisite of the management to consider
and assess the different part of the business. It incorporates certain presumptions dependent
on which the budgeting plan is created, which includes both short and long-term related
objectives, the situation of the organization in the market and the commitment of every
division in supporting the key strategic plan. For this, every division is required to work as a
team with one another for determining the feasible sales targets and the costs associated with
it.
Budgeting also helps in assessing the real results with the planned ones which helps in
deciding the cash flow level of the business for different degree of production alongside the
extra prerequisite of the assets in the event that the need emerges (Di Francesco and Alford,
2016). The financial plan arranged gives help to the businesses in recognizing the gainful
areas with the goal that more resources and focus can be put on it as opposed to the more
weaker areas for achieving the objectives rapidly and productively. It likewise helps in
recognizing the loopholes in different parts which resulted into not able to achieve the desired
profitability and goals (Kovaleva and et.al, 2016). Budgeting additionally helps in setting

benchmark dependent on which the performance can be additionally assessed concerning
different organizations inside a similar industry. Budgeting also helps in creating
opportunities for the organizations in successfully meeting their business targets by making
changes to it in regard to the changes in its business environmental factors. Along these lines,
it helps in viably making changes in its business procedures and exercises by virtue of the
changing industry condition with the goal that the progressions work benefit of it and it can
exploit it by taking decisions in order to take competitive advantage.
Budgeting styles
The budgeting style being implemented in the organization is dependent upon the
various factors and the requirement of the business. There are mainly 2 types of budgeting
style which is static and flexible budgeting. Static budget is the process of budgeting in
which the figures does not vary with the change in the level of activities (Aryshev and
Ivanyuk, 2020). Therefore, if there is any change in the sales volume with respect to the
expectations which is stated in the budget, then too amount cannot be changed. This budget is
useful to the organizations having greater sales predictions and the expenditure is not going to
vary much in that period. It is mainly used as the basis for evaluating the actual performance
level with the budgeted one.
When the static budgeting plan is created the organization follows the equivalent yet
in addition monitors the real costs being caused and consistently observing any spending
fluctuation that may pop ups. On the off chance that the organization gets higher revenue than
evaluated, at that point it is viewed as positive and in the reverse situation unfavourable. The
advantage of utilizing static financial plan is that it is very easy to execute as it isn't required
to be updated consistently through the timeframe for the which the budget plan is readied
(Weigel and Hiebl, 2018). It likewise gives a solid understanding into the organization's
expenses and the benefits while directing difference examination. This permits the
organization in figuring out where it is over and underestimating little of the budgetary
figures as for the income and costs dependent on which it can modify its business
methodology and this additionally helps the organizations in making smart choices alongside
practicing control over the expenses (Perkin and Abraham, 2017). The main drawback of this
planning strategy is that it isn't adaptable. In the event that, if the financial plan depends on
the specific level of sales and if the volume increases, in that circumstance, it can't assign the
extra assets so as to get together with the changes. Likewise, in the circumstance where the

organization discovers the underperforming areas, in that time likewise it can't designate
extra assets to it which therefore can contrarily affect the organization's income.
For instance, the apple co. prepares its static budget for its operational cost. It includes
the cost of designing software - £15000, agents fees - £35,000, network connection charges -
£10,000, cloud storage cost - £5000. Thus, the total anticipated fixed cost is amounting to
£65,000. Under the condition like, increase in revenue to £125,000 but the budget will remain
the same. This budget can eb utilized by the Apple co. for analysing the rise or fall in the cost
of manufacturing.
Flexible budgeting is also used by the businesses because of its main advantage of
change in the volume of production (Adilli, 2020). This is helpful to the management as the
relevant changes can be made in the budget. This method is very useful in increasing the
efficiency level of the management in respect of both planning and exercising control over it.
This budget is more realistic as compared to the static budget and puts more focus on the
changing cost behaviour at the different levels of business activities (Klimaitienė and
Ramanauskaitė, 2019). For creating this budget, the management of the organization is taking
into account the various factors and the impact of it over the cost and how the organization
will respond to it.
For instance, the Apple company has expected the sales of £5mn and the COGS of
£1mn. Of this amount, £400000 is fixed and remaining is variable which might change with
change in the revenue. It means that the variable number of COGS is nearly 12% of sales.
Towards the ending of the period, it is verified that the sales increased to £6mn. With the help
of flexible budget, the variable segment of the COGS has been changed to £7.20mn (Marecki
and Wieloch, 2019). Therefore, the company an infuse additional £1.20mn in its budget for
representing additional sales. Therefore, this approach is recommended for the purpose of
short term and quick decision making in the changing environment.
In participative budgeting, individuals who actualize the budgeting plan and the
individuals who are influenced by it are engaged with the budgeting process. In this, the top
administration imparts the duty to the lower level mangers which gives better stake in the
association. This technique has certain advantages, for example, it gives inspiration and
furthermore supports the confidence of the representatives by given them duty (Yuliansyah
and Khan, 2017). It additionally enables the workers in accomplishing higher expectations as
what set for themselves which prompts increment in profitability. It upgrades innovativeness

and makes the spending looks more practical. Then again, there are sure bad marks of its. It
requires implementing huge amount of time for preparing the budget (DHIMITRI and
BURDA, 2019). It likewise includes large group of the individuals which subsequently
prompts high labour cost. There are also chances of budgetary slack where the administrators
purposely under or over appraisals the income and expenses.
Therefore, based on the analysis, it can be said that flexible budgeting style is more
advantageous to the managing in the current scenario of rapid changing business
environment. This will support the management in making variation in the budget with
respect to the change in the working conditions and also in order to take the advantage of the
opportunities that come across.
Thus, it can be summed up the above that budgeting is a crucial part of an
organization planning which is used as the guiding tool by the management in order to attain
success in the right possible way. Also, implementing right budgeting system in place is also
important as it results into better and desired outcome working in favour of the management.
Each style has its pros and cons but the best one is required to be implemented. It is
recommended to use flexible budgeting in the situation given.

REFERENCES
Books and Journals
Adilli, A., 2020. The Flexible Budget as a Development Tool: Evidence From the Personal
Preparation Course. Available at SSRN 3539720.
Aryshev, V. A. and Ivanyuk, T. N., 2020. BUDGETING IN THE CONTEXT OF
BUSINESS DIGITALIZATION. Bulletin of Zaporizhzhia National University.
Economic Sciences. (2 (46)). pp.49-53.
DHIMITRI, E. and BURDA, M., 2019. The Participatory Budgeting for Local Governance.
Case study Municipality of Korca (Albania). Journal of Applied Economic
Sciences. 14(2).
Di Francesco, M. and Alford, J., 2016. Balancing control and flexibility in public budgeting:
A New Role for Rule Variability. Springer.
Henttu-Aho, T., 2016. Enabling characteristics of new budgeting practice and the role of
controller. Qualitative Research in Accounting & Management.
Klimaitienė, R. and Ramanauskaitė, J., 2019. Insight into budgeting practices: empirical
study of the largest manufacturing companies in Lithuania. Science and Studies of
Accounting and Finance: Problems and Perspectives. 13(1). pp.19-27.
Kovaleva, T. M. and et.al, 2016. The Budgeting Mechanism in Development
Companies. International Journal of Environmental and Science Education. 11(15).
pp.7726-7744.
Marecki, K. and Wieloch, M., 2019. Dilemmas of the budgeting process. Journal of
Management and Financial Sciences. (39). pp.61-69.
Perkin, N. and Abraham, P., 2017. Building the agile business through digital
transformation. Kogan Page Publishers.
Prohnitchi, E. and Cadri, J., 2018. Viability of Budgets in Uncertain Environments. A
multiple-case study of budgeting practices.
Weigel, C. and Hiebl, M. R., 2018. Beyond budgeting: review and research agenda. Journal
of Accounting & Organizational Change.
Yuliansyah, Y. and Khan, A. A., 2017. A revisit of the participative budgeting and
employees’ self-efficacy interrelationship–empirical evidence from Indonesia’s
public sector. International Review of Public Administration. 22(3). pp.213-230.