Economic Uncertainty Requires More Flexible Budgeting Systems Accounting Essay

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Introduction

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.

Arguments for the usefulness of flexible budgeting systems in economic uncertainty

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.

Additionally, the increased technological advancement in the service sector has resulted to a number of people losing their jobs. This is because most of the activities that are performed by employees are now performed by machines. This indicates that there are times when this company will cut off the number of workers and hence if the budget concerning workers was planned annually, it would be very difficult to rearrange it when a number of people are replaced by technology. On the other hand, technology calls for employment of new employees who are highly specialized in different areas. For example, technological advancement calls for improvement in innovativeness of employees as employees are given chances to learn how to use this technology (Schwartz and Trigeorgis 2004: 202). In this case, some new employees will be needed to teach others how to operate these new technologies. When this is the case, annual budgets would be very hard to change in order to add other employees this is because the newly employed employees will not be paid as there is no money set a side for them.

From this case study it can be learned that, the Astorica PLC has in-process budgets that help it in meeting its needs and requirements. In this case, many things or events may occur in the process of production or marketing which were not budgeted for and hence there is a need to find some funds for them. On this basis, technological advancement may come up with a more modern method of advertisement which is more productive than the traditional ones. In this relation, for this company to yields more profits it needs to promote its services through this new method. As a result of this, continuous budgeting is therefore found to be more appropriate than fixed ones (Frow et al 2010: 446).

It can be learned from the case study that managers regularly review their performance continually against key performance indicators. This indicates that they are flexible in their performances as one process in performance may be altered by uncertainties. In the service sector flexible budgeting is required since the business is not rigid or fixed since many innovations are deemed to arise. This is the reason as to why managers in this organization are continuously engaged in out looking with an aim of ascertaining what is required to be done in the process of achieving targets. Additionally, continuous budget is very useful in assessing the potential impacts of uncertainties by determining how best they may be solved. This is because when flexible budgeting systems are used the company managers are required to make sure that any uncertainty is detected and dealt with accordingly and hence there are continuous assessments of the company's operations in the effort of detecting an uncertainty.

Sudit (1984: 52) argued that, most successful multinational businesses like Toyota Company and General Motors have strong dynamic adaptability and adjustment capability especially in matters relating to finances. In this case, these companies are doing well because they budget for each and every that is supposed to take place in a year and some finances are kept a side for continuous budgeting. Basically, continuous budgeting here means that the activities which may take place like employees' training, increasing sales representatives, and promotion costs will be budgeted even though they were not included in the annual budgeting. It should be noted that, even in these successful companies there are economic uncertainties which need to be addressed through flexible budgeting systems.

Flexible budgeting systems are also used by governments in solving the problems of economic uncertainties. On this basis, the government of New Zealand uses a combination of fixed and continuous budgeting systems in order to solve problems that may be brought about by economic uncertainty. It should be noted that, a company which plans and arranges its budget annually may be faced with problems especially when uncertainties arise that need some cash. For instance, a country that budgets some amount of money for food security may be forced to add this money in case of a drought. This case applies to businesses where some businesses plan to produce a certain amount of products in a year. On this basis, the demand for the company's products in a certain year may increase forcing the company to increase its production (Brigham and Ehrhardt 2008: 492). In this relation, if the company had not planned to increase its production, it will be forced to forego some other activities in order to raise money for the excessive production. From this observation it can be argued that, flexible budgeting systems are very essential since in case of unpredictable circumstances a company is able to raise money for the uncertainty.

As indicated by Brigham and Ehrhardt (2008: 96), a flexible budgeting system has an ability to compensate for the amount of activity that is involved in a business and hence is more useful than static budgeting systems which do not change at a specific amount irrespective of increase or decrease in activity in a business. On this basis therefore, flexible budgeting systems can response to changes that may be needed depending on the levels of activity which include; customers served, products produced, and inputs taken.

Arguments Against the usefulness of flexible budgeting systems in economic uncertainty

It should be noted that, there are some other static budgeting systems that are more useful in responding to economic uncertainties than flexible budgeting systems. In this case, their usefulness in this field shows the weaknesses of flexible budgeting systems. Capital budgeting systems involves planning for new investments. In this case, there are some amounts of finances that are kept aside in a company aimed to be used in managing new investments. On this basis therefore, a company does not have to plan for an activity whenever it arises. In flexible budgeting systems, budgets are made for activities in accordance to the level of the activity. This means that there are a lot of budgets that are made by a company since many activities arise and are of different levels (Peterson and Fabozzi 2002: 138). This can be made easy if a capital budget is made to represent investments with techniques such as net present and internal rate being used in evaluating potential investments. In this case, this budget is incorporated in investment management and hence an organization that uses capital budgets is able to respond to uncertainties that may arise as investments (Dayananda 2002: 120). Importantly, the concept of investment management involves a company having to plan and make decision for process of acquiring and using all company's resources which include; technology, human resource, facilities and equipments.

The concept of uncertainty in any organization should be adequately addressed using the appropriate budgeting method. On this basis, flexible budgeting systems are not wholly required as capital budgeting system which is an approach of a static budgeting system is very useful. In this relation, budgets are made annually where a company caters for uncertainties like new investments by providing some money to be used in such cases. As indicated by Jones (2004: 269) a company does not need to have continuous budgets for each and every investment or event but there may be one fixed budget that is used for all the investments or events. This is more cost effective as those people involved in planning or making a budget in case of uncertainties will not be continuously involved since one budget is made annually. Capital budget is very useful as it includes any potential uncertainty or investment and hence there will be no problems of looking for funds (Aggarwal 1993: 19).

Conclusion

In winding up, the arguments for the usefulness of flexible budgeting systems like continuous budgets under economic uncertainty outweigh those against the usefulness of flexible budgeting. On this basis, this study has indicated that companies and businesses need to have flexible budgeting systems that will take care of new developments in technology, labor turnover, increase or decrease in inputs, and increase or decrease in production. As can be learned from this study, mangers need to make sure that whenever an activity of any level arises it is well addressed in terms of finances.

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