IB Business Management HL 3.9.4 Budgets in decision-making Question Bank

Budgets are an important planning tool for businesses, as they are based upon forecasted revenues and costs, thus providing a business such as B B a framework as part of its strategic planning. It translates objectives and strategies / financial discipline.

A budget is essentially a tool for resource allocation as part of a strategic planning.

Budgets provides financial direction / discipline for a business / BB. Managers such as Nicolás and Loura know to limit expenditures to remain within their allocated resources and to ensure that the forecasted revenue are also met.

However, the process of budgeting is time consuming especially for Nicolás and Loura as both are inexperienced. Still, given the small size of the business, one may argue that the process can be quick and relatively efficient.

Budgets, especially if negotiated rather than imposed, can create a sense of clarity / direction, unity, and if adhered to / achieved, sense of achievement to B B 's employees.

However, budgets are a form of forecast. Actual revenue or expenditure can differ due to internal and external circumstances.

For this reason, analysing variances, or instances when revenue or expenditures differed from the budget can be helpful. If a business can understand why particular expenses or revenues were higher or lower than budgets, in subsequent periods, budgets can be adjusted depending on the reasons why a variance occurred, allowing for better decision-making about allocation of resources.

Budgets can create resentment and demotivation among B B employees, especially if unrealistic high targets for revenue and low targets for expenditure are set. There may also be some disagreement between Nicolás and Loura especially as they lack experience. Unhealthy competition may occur.

Moreover, analysing variances can also take up time and resources. The partners of B B, who are essentially the decision makers, can be biased in their interpretation of the variances. They may have to employ an accountant or outside person to give them a more objective view of the performance of the business.

Accept any other relevant analysis.
It is not expected that the candidates covers all of the above issues.
Do not credit an answer that refers to different sources of finance to deal with the forecasted / budgeted cash flow problems.

It is expected that candidates refer to: the issue of strategic planning; budgets and not just cash flow.

Since there are two issues / concepts to analyse, one argument for and one argument against each (budgets and variances) should be judged as a balance response.

Accept generic application as there is not much specified in the stimulus. A balance response of one concept / issue, award up to [4].

For [5] it is expected that the analysis is relevant and detailed, but it may lack some balance. For example, it includes only two detailed arguments for and one detailed argument against.

For [6] it is expected that the analysis will contain at least two detailed arguments for and at least two detailed arguments against budgets and variances, in strategic planning, for businesses such as BB.

Marks should be allocated according to the markbands on page 3.