Essay on Budgeting: Role, Styles, and Business Environment

This essay delves into the crucial role of budgeting in today's dynamic business environment. It emphasizes the importance of budgeting in facilitating effective planning and decision-making, particularly in response to technological advancements and market changes. The essay highlights budgeting as a communication tool, facilitating strategic alignment across an organization, and as a means of evaluating performance. It then explores various budgeting styles, including static and flexible budgets, analyzing their respective advantages and disadvantages. The static budget's ease of implementation and ability to provide insights into costs and profits are contrasted with its inflexibility. The flexible budget's adaptability to changing production volumes is discussed, along with the challenges of its formulation. The essay also touches upon participative budgeting. The essay concludes by advocating for the use of flexible budgeting in technology-driven businesses to support short-term decision-making.

MANAGEMENT
ACCOUNTING – ESSAY

Table of Contents
INTRODUCTION......................................................................................................................4
Role of budgeting in changing business environment...........................................................4
Budgeting styles.....................................................................................................................5
CONCLUSION..........................................................................................................................7
REFERENCES...........................................................................................................................8

INTRODUCTION
With the advancement in technology there is an increasing need for the real time
decision making which will result into effective planning process in order to sustain the
competitiveness. With the fast moving changing business environment in terms of technology
it becomes important to convert medium term plans into short term plan with the objective of
capitalizing the short term opportunities. This essay throws some light on the budgeting with
respect to decision making.
Role of budgeting in changing business environment
After analysing the dynamic business environment through situational analysis, the
business organizations identify the various potential strategies which can be useful in
achieving the desired goals. Budgeting is an initial step in assist the organization in reaching
the its strategic goals by supporting the management to plan and exercise control over the
major business activities. Budgeting plays an important role in meeting with the changing
business environment. First is effective mode of communication (Greenberg and Hershfield,
2019). Budgeting is basically a formal approach to communicate the organizations strategic
plan to its internal stakeholders which includes executives, department head and others
having interest and responsibility for monitoring the performance of the company. It
communicates everything about the revenue and the expenditures. Second is planning,
preparing budget increases the requirement of the managers to consider and evaluate the
various aspect of the business (Henttu-Aho, 2016). It includes certain assumptions based on
which the budget is prepared, long term and short term financial goals, the position of the
company in the market and the contribution of each department in supporting the strategic
plan. For this, each department is required to work in coordination with each other for the
deriving the realizable sales goals and the expenses attached to it.
Next is budgeting helps in evaluating the actual outcomes with the budgeted ones
which helps in determining the cash flow level of the business for various level of production
along with the additional requirement of the funds in case the need arises (Weigel and Hiebl,
2018). The budget prepared provides assistance to the business sin identifying the profitable
areas so that more efforts and focus can be put on it rather than the weaker areas for
accomplishing the goals quickly and efficiently. It also helps in identifying the loopholes in
the other components which were not able to reach the desired profitability level. Budgeting
also helps in setting benchmark based on which the performance can be further evaluated

with respect to the other companies within the same industry. Budgeting creates can
opportunity for the companies effectively meeting their business objectives can making
changes to it with respect to the change in the business environmental factors (Cools,
Stouthuysen and Van den Abbeele, 2017). Thus, it helps in effectively making changes in its
business processes and activities on account of the changing business environment so that the
changes work in favour of it and it can take advantage of it by taking quick decisions
resulting in taking competitive advantage.
Budgeting styles
There are different types of budgeting styles which can be used by organizations but
here static budget and the flexible budget will be evaluated in detail. Static budget is majorly
used as the projection tool for the purpose of evaluating the business expenses and revenue
for the specific period of time. This budget incorporates the fixed amount before the
budgetary period starts. Once the static budget is prepared the company follows the same but
also keeps track of the actual expenses being incurred and regularly monitoring any budget
variance that might pop ups (Popesko and et.al, 2017). If the company brings in higher
revenue than estimated then it is considered favourable otherwise unfavourable. The benefit
of using static budget is that it is very easy to implement as it is not required to be updated
regularly through the time period for the which the budget is prepared. It also provides a
strong insight into the company’s costs and the profits while conducting variance analysis
(Lombardi and et.al, 2016). This allows the company in determining where it is
overestimating and underestimating the financial figures with respect to the revenue and
expenses based on which it can alter the its business strategy and this also helps the
companies in making smart decisions along with exercising control over the costs. The only
biggest disadvantage of this budgeting method is that it is not flexible (Alighanbari and Chia,
2016). In case, if the budget is based on the certain level of sales and if the volume rises, in
that situation, it cannot allocate the additional resources in order to meet up with the changes.
Also, in the situation where the company finds out the underperforming areas, in that time
also it cannot allocate additional resources to it which in turn can negatively impact the
company’s revenue.
For example, in case of a company like Samsung outlines are static budget for its
business operational cost for a quarter. The values are design software - £15000, contractors
fees - £35000, Network subscription fees - £10000 and cloud storage fees - £5000. So, the
expected fixed cost is £65000. In situation like if the revenue increases to £125000 its static

budget will remain the same at £65000 and also in case of revenue of only £50000, the static
budget is same. But it can be used by Samsung in analysing its financial budget in order to
know the point of increase or decrease in the costs of production.
The next budget is flexible budget. This budget adjusts with the change in the volume
of production of the company. It continuously flexes on account of the business variations
which are taking place in terms of costs (O’Grady, Akroyd and Scott, 2017). In this type of
budget, the variable cost is being taken rates per unit instead of fixed amount which allows
the organizations to anticipate the future potential variation in the financial needs. This
budget is based on the actual changes in the revenue. With the help of flexible budget, the
organizations are in a better position to see where they can increase focus when there is an
increase in the revenue (Severova and Surikova, 2017). Along with that it also helps the
organization in looking at the changes in the certain cost so that timely adjustments can be
made to compensate the decrease in sales. In contrast to it, it is difficult to formulate this type
of budget. Also, this budget is not beneficial to companies mainly having fixed overhead
cost.
For example, Samsung has planned for £5 million in sales and £1 million in COGS.
The organization has confirmed that £400,000 of the £1 million of the COGS is fixed and
$600,000 of the COGS will fluctuate dependent on its revenue. This implies the variable
number of COGS is 12% of the organization's sales. Toward the finish of the accounting
period, Samsung verifies that it really had sales that rose to £6 million, which is £1 million
progressively more (Ouassini, 2018). Utilizing the flexible budget, the fixed COGS stay at
£400,000, while the variable segment would have been changed to £720,000 to mirror the
12% assigned. Therefore, the organization would have had the option to fuse an extra
£120,000 into its variable cost of goods budget plan to represent the increase in sales.
Therefore, it is method is perfect for short term decision making in the fluctuating business
environment.
Under participative budgeting, people who implement the budget and those who are
affected by it are involved in the budget preparation process. In this, the top management
shares the responsibility with the lower level mangers which gives better stake in the
organization (K Chong and Strauss, 2017). This method has certain benefits such as it
provides motivation and also boosts the morale of the employees by given them
responsibility. It also helps the employees in achieving higher standards as what set for

themselves which leads to increase in productivity. It enhances creativity and makes the
budget looks more realistic. On the other hand, there are certain demerits of its. It requires
exercising lot of time for the lower management (Kopel, Riegler and Schneider, 2018). It also
involves large of the people which consequently leads to higher labour cost. There are also
chances of budgetary slack where the managers deliberately under or over estimates the
income and expenditure.
After evaluation of the above two budgeting types it is can be said that flexible budget
is more beneficial for the technology driven businesses as the relevant changes can be easily
made in it as per the requirement. This also helps in short-term decision-making processes.
CONCLUSION
It can be summed up from the above that budgeting plays an important role in
effectively managing the business activities by estimating the revenue and expenses. It
provides assistance in taking relevant business decisions in respect to the dynamic business
environment so that the organization can take competitive advantage of it. Participative
budgeting, static budget and flexible budget all have positive and negative side but based on
the technological advancement taking place, it is highly recommended to use flexible
budgeting in order to make changes in the plan in respect to short term decision making.

REFERENCES
Books and Journals
Alighanbari, M. and Chia, C. P., 2016. Multifactor indexes made simple: A review of static
and dynamic approaches. The Journal of Index Investing. 7(2). pp.87-99.
Cools, M., Stouthuysen, K. and Van den Abbeele, A., 2017. Management control for
stimulating different types of creativity: The role of budgets. Journal of
Management Accounting Research. 29(3). pp.1-21.
Greenberg, A. E. and Hershfield, H. E., 2019. Financial decision making. Consumer
Psychology Review. 2(1). pp.17-29.
Henttu-Aho, T., 2016. Enabling characteristics of new budgeting practice and the role of
controller. Qualitative Research in Accounting & Management.
K Chong, V. and Strauss, R., 2017. Participative budgeting: the effects of budget emphasis,
information asymmetry and procedural justice on slack-additional evidence. Asia-
Pacific Management Accounting Journal (APMAJ). 12(1). pp.181-220.
Kopel, M., Riegler, C. and Schneider, G. T., 2018. A new perspective on the benefits of slack
building under participative budgeting. Available at SSRN 3014881.
Lombardi, R. and et.al, 2016. Economic valuation of structural capital through static and
dynamic approaches: first evidence. Journal for International Business and
Entrepreneurship Development. 9(2). pp.135-151.
O’Grady, W., Akroyd, C. and Scott, I., 2017. Beyond budgeting: distinguishing modes of
adaptive performance management. Advances in management accounting. 29. pp.33-
53.
Ouassini, I., 2018. An introduction to the concept of Incremental Budgeting and Beyond
Budgeting. Available at SSRN 3140059.
Popesko, B. and et.al, 2017. The maturity of a budgeting system and its influence on
corporate performance. Acta Polytechnica Hungarica. 14(7). pp.91-104.
Severova, M. O. and Surikova, E. A., 2017. QUESTIONS THE DEPENDENCY OF COSTS
ON THE VOLUME OF WORK IN THE COST MANAGEMENT. ИННОВАЦИИ
В ЖИЗНЬ. p.27.
Weigel, C. and Hiebl, M. R., 2018. Beyond budgeting: review and research agenda. Journal
of Accounting & Organizational Change.