On the other hand, another reason that I have agreed to this statement is because in my reseach, I have found that some of the companies which have tried various flexible budgeting system are able to help the companies more easy to achived the business goal. However, some of the companies is using the flexible budgeting system combine with other management controls to become a strong strategic to manage the uncertainty.
The paper will discuss the causes of the economic uncertainty such as politcal factor, economic factor, social factor and the rapid changes of technology that will truly impact the companies. In addition the paper will discuss if the companies do more flexible budgeting system it will also get a lot of benefits such as have a better strategic planning, contolling, perfomance evaluating and etc, that it will discuss more details in the body of the coursework.
A flexible budgeting system is a common budgeting system that use by the company. A flexible budgeting system is a budget system which is designed to change in accordance with the level of activity attained (Lohrmann, Glenn M 1989). Sometimes flexible budgeting system also known as variable budget. The flexible budgeting system are complement the used of fixed budget, so they can apply in more than one context. The differences between the flexible budget and fixed budget that is for fixed budget is based on original budget, however for flexible budget is based on actual output.
Frankly, the flexible budgeting system is much more useful for the company controlling, planning, perfomance evaluation and etc, if compared to others budgeting system. The reason is because "flexible budgeting system it is not confined to one level of activity, so it can be tailored to any level of activity within the relevant range" (W. Steve Albrecht, James D. Stice, Earl K. Stice, Monte R. Swain 2008). For example: if the company using flexible budgeting system, then the company manager can look at the actual result of the activity that attained, after that the manager can determine what costs should have been at that sales level.
The following figure1 shows the examples of how the flexible budget works. The Figure 1 is on next page.
Why the companies required more flexible budgeting system? The first reason is because the economic uncertaity such as the political, social, economic and rapid changes of technology factors (Byars, L. (1991) and (Kotter, J. and Schlesinger, L. (1991), in a result of companies become unstable, so needs more flexible budgeting system to helps the companies become more effectively and efficienly. According to Byars, L. (1991), the causes of the economic uncertainty such as political factor which include tax policy, trade restriction, employement law and etc. However, the economic factors such as the inflation or deflation of the economy, exchange rates and interest rates. This factors will impact companies, so needs more flexible budgeting system to stable the companies. According to Kotter, J. and Schlesinger, L. (1991), the causes of the economic uncertainty such as the social factors which often looks at the social such as the population of growth rate, health conciousness and etc. However, the rapid changes of technology will also impact the companies such as the rapid changes from the automation. This factors will impact companies, so needs more flexible budgeting system to stable the companies.
The second reason is because due to economic uncertainty then if the companies do more flexible budgeting system it will allows businesses to respond quickly to changes and maximize the profits, because flexible budget is a performance management tool that allows effective management control (Jean Scheid Sep 25, 2010). However, some of the companies said or argued that budgeting system are increasingly inappropriate for organizations desiring to achieve high performance in competitive conditions and should be abandoned (Hansen et al.,2003; Otley, 2006). Hope and Fraser (2003). Although some of the companies said that the budgeting system is inappropriate or have some limitation, but most of the companies around the world are still doing budgeting system, the reason is because the companies need to achived the predicted financial performance and also able to controlled the costs.
Due to economic uncertainty, it is more important for the large companies to required more flexible budgeting system. However, for a small companies it is also important but not as much as large companies. At now, the essay will talk about the case study for a large company that use budgeting system to development a more flexible modes of management.
In this case study, the large company that is called Astoria Plc. The Astoria Plc is a large, multinational, document technology and services organization and a leading player in its sector (Natalie Frow, David Marginson and Stuart Ogden (26 November 2009). According Natalie Frow, David Marginson and Stuart Ogden, the Astoria Plc is operates in a highly competitive, global market place and characterised by rapid technological change. Therefore, the Astoria Plc is in a high levels of economic uncertainty. So the Astoria Plc required more flxible budgeting system. The Astoria Plc is using the flexible budgeting system to combine with other management controls as a strategic to manage the economic uncertainty. The Astoria Plc called this strategic as "Continuous Budgeting" system. The continuous budgeting system is a system which is enable the company managers to confront with the unexpected events such as problems or unexpected changes in circumstances. According to the Astoria Plc manager has stating that "things come along during the year that you have not planned for, so you then have to adjust". Therefore, the continuous budgeting that Astoria Plc are using able to prioritise and also have a revision of plans and reallocation of resources in pursuit of strategic organisation objectives (Natalie Frow, David Marginson and Stuart Ogden (26 November 2009). On the other hand, the continuous budgeting also enable the Astoria Plc to easily achived the company's financial targets. In order for the Astoria Plc to create a continuous budgeting system, each of the company departments must be produce the flexible budget as much as possible such as the manufacturing, finance, supply chain, human resources, purchasing, sales, product development, marketing department, and etc, then it will combine with the other management controls. So this is the reason why the economic uncertainty required more flexible budgeting system.
The economic uncertainty will truly impact the companies, therefore a lot of company had tried adopting various flexible budgeting system to stable their company. In my reseach, I have found that one of the company that have been tried using various type of flexible budgeting system to help its company more stable and efficiency. In this second case study, the company names that is called HON Company. The HON Company is a office furniture manufacturer. According to (Drtina, Ralph, Hoeger, Steve, Schaub, John 1996), the HON Company stating that the annual budget of the company is not consider as an effective control tools. The reason is because the expenses and income targets of the companies in the annual budget is always different from the actual results. Therefore, the HON Company had tried using various type of flexible budgeting system to help the firm become more stable.
Hence, the HON Company is tried to used various flexible budgeting system to overcome this problems such as implement a continuous 3- month budget cycle (Drtina, Ralph, Hoeger, Steve, Schaub, John 1996). In this continuous 3- month budget cycle, there are contains 5 steps process involves. In the first step, the HON Company will do a sales budget. In the second step, it will transform the sales budget into a shipping schedule and plant production. In the third step, the HON Company will only do the expenses budget. Then in the fourth step, the HON Company will consolidate the budgets then compare with the strategic plan. Then in the final step, the HON Company will only create a budget for the parent company.
If the HON Company tried used the various flexible budgeting system that is the continuous 3- month budget cycle, then the companies will get a lot of benefits such as uses this budget as an planning and controlling device to help the firm fullfill some business goals and also a strategic to manage the economic uncertainty. The business goals of HON Company such as rapidly continuous improvement of the firm and rapidly continuous new product or service development.
The companies must adopting more flexible budgeting system because it can brings a lot of benefits or advantages. The reason is because most of companies finance departments are always under pressure cause by the climate of economic uncertainty. Therefore, the companies must adopting more flexible budgeting system to stable the company internal and also external environment. Futhermore, it can also gain a lot of benefits.
The benefits for the companies adopting more flexible budgeting system such as have a better strategic planning (William P. Cress & James B. Pettijohn 2002). Due to economic uncertainty, the companies must adopting more flexible budgeting system. Normally, the flexible budgeting system can be a useful tools before or after a specific period for the companies. Therefore, all the companies will prepared the flexible budget at the start of the budget period to incorporating different line values for different sales projections, so it will also become a useful planning tools, and help react to changes in an external environment more effectively and efficiently (Jean Scheid Sep 25, 2010). In the economic uncertainty, it will always have some unexpected events that arise, so if the companies adopting more flexible budgeting system it would amount to a better startegic planning. Therefore, the strategic management of the companies enabled to prioritize, as necessary, the revision of plans and reallocation of resources in order to meet wider strategic organizational objectives (Natalie Frow, David Marginson and Stuart Ogden (26 November 2009). For example: An ice cream company have adopting a lot of flexible budgeting system, so the company have prepared a flexible budget based on anticipated sales for every possible variation in temperature, and this will led to a better strategic planning such as helps to plan daily staffing, purchases of milk and cream, production, and distribution levels in advance (Jean Scheid Sep 25, 2010).
The benefits for the companies adopting more flexible budgeting system such as have a better management and operational control (William P. Cress & James B. Pettijohn 2002). Due to economic uncertainty, the companies must adopting more flexible budgeting system to helps the companies have a more stable management and operational control. The advantages of a flexible budgeting system that brings to the business that is it allows the operational and management have a greater level of controlling. Therefore, adopting more flexible budgets allows real time monitoring and control of actual results against budgeted results (Jean Scheid Sep 25, 2010). For example: Better control on raw material inventory, better control on schedule distribution, and undertake other supply chain tasks more effectively and efficiently.
The benefits for the companies adopting more flexible budgeting system such as have a better performance evaluation (William P. Cress & James B. Pettijohn 2002). Due to economic uncertainty, the companies must adopting more flexible budgeting system to helps the companies have a more accurate performance evaluation such as have a more correct or accurate camparison between budgeted performance and actual performance (Jean Scheid Sep 25, 2010). Therefore, flexible budgeting system is also an useful tools at the end of the specific period.
To conclude, the flexible budgeting system is a system that is it very important for the companies in order to manage the economic uncertainty. Therefore, the flexible budgeting system are able to help the firms becomes more stable and more efficiency. Most of the organization in the world are using flexible budgeting system to manage the economic uncertainty, especially the large organization because it has more uncertainty such as high competitive, rapid technological change and etc. However, small organization also using it as well.
In the essay main body, it described the two case study of the current situation of the large organization that using more flexible budgeting system to manage economic uncertainty. In the two case study, the companies that sucessful using the flexible budgeting system to manage economic uncertainty that is the Astoria Plc and HON Company. The Astoria Plc is using the flexible budgeting system to combine with other management controls as a strategic to manage the economic uncertainty, this strategic that is called the "Continuous Budgeting system" (Natalie Frow, David Marginson and Stuart Ogden (26 November 2009). However, the HON Company is using various flexible budgeting system that is called the 3- month budget cycle to overcome the economic uncertainty (Drtina, Ralph, Hoeger, Steve, Schaub, John 1996).
On the other hand, the essay will decribed the benefits for the companies adopting more flexible budgeting system to manage economic uncertainty. The benefits such as better strategic planning, better management and operational controling and also better or more accurate performance evaluation. Flexible budgeting system were identified a very important system to manage the economic uncertainty, therefore economic uncertainty required more flexible budgeting system for the companies to stable it.
