Question

When an annual budget is created, should it ever be changed? Why or why not? If you answered yes, provide an example of when you might change the annual budget.

Answer 1

Solution:-

There is a common saying in business and life that 'A goal without a plan is just a wish'. The purpose of a budget is to ensure that the organization has a plan in in place with respect to its revenues and costs such that its financial goals can be met. Generally, budgets are prepared by financial departments on an annual basis that lay out the financial estimates for the year.

However, it's no secret that in the fiercely competitive world of business, things don't always go as per plan. The companies that survive and beat its competition are the ones that adapt to the changes happening around, therefore it's imperative that the budgets are adaptable to change and have the ability to adjust to the changing requirements of the business.

It is the duty of the financial controller to not just make budgets but to constantly evaluate them regularly to ensure that they serve the purpose of reflecting company's financial plan as per changing business situations. This would require changing budgets as per the requirements of the business.

If a budget is not adaptable to change, it doesn't serve its practical purpose and thus becomes a theoretical exercise serving no purpose. Hence, it is a must that every organization sees budgeting as a dynamic exercise with budgets as flexible tools having the ability to adapt as and when required.

Example:

Let's say there is a food tech company xyz inc. which acts as a delivery partner of restaurants. It prepared its annual budget with its revenues based on a delivery fee of $2 per order (in line with expected fee). However, during the 4th month going into budget, its main competitor abc inc., just fresh out of a large funding round from a leading PE firm, announces a zero delivery fee to the consumers to snatch market share. In such a scenario, xyz inc. must adapt its business strategy and probably slash its delivery fee in order to ensure that its market share is maintained. In such a scenario, the budget of xyz inc. must be changed to reflect the changed competitive scenarios and must be remade with new variables. The company would want to not just change its revenue variables in the budget but also change its cost planning to ensure that the loss in revenue is more than made up. Therefore, the revised budget must reflect this such that it clearly defines the company's path to its financial goals going into future