Dealing with Uncertainty in the Environment

NotesQuizCBE

In the budgeting process, there may be uncertainty at various levels.

Causes of uncertainty in the budgeting process

  • Customers. They may decide to buy less than forecast, or they may buy more.

  • Products/services. In the modern business environment, organisations need to respond to customers' rapidly changing requirements.

  • Inflation and movements in interest and exchange rates.

  • Volatility in the cost of materials.

  • Competitors. They may steal some of an organisation's expected customers, or some competitors' customers may change their buying allegiance.

  • Employees. They may not work as hard as was hoped, or they may work harder.

  • Machines. They may break down unexpectedly.

  • There may be political unrest (terrorist activity), social unrest (public transport strikes) or minor or major natural disasters (storms, floods).

Rolling budgets and flexible budgets are a way of trying to reduce the element of uncertainty in the plan. There are other planning methods which try to analyse the uncertainty such as probabilistic budgeting, sensitivity analysis (what if?), scenario planning and simulation.

These methods are suitable when the degree of uncertainty is quantifiable from the start of the budget period and actual results are not expected to go outside the range of these expectations.

NotesQuizCBE