The design and use of annual budgets to cope with uncertainty

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Finance from the NOVA – School of Business and Economics

For centuries, annual budgets have played a central key role in most organizations serving the main purposes of planning and control. Yet, more recently the budgeting practice has been subject to severe criticisms, among which stands its ineffectiveness to deal with uncertainty. In order to avoid some of the major problems associated with the preparation and usage of budgets, two alternative approaches have been proposed: Better Budgeting and Beyond Budgeting. This study aims to understand which factors companies perceive as uncertainty, and how budgets, either in their traditional form or through new approaches, might be able to help companies deal with them. To do so, two companies with different dimensions, operating in different business sectors and thus subject to different economic contexts were analyzed. Evidence collected seems to indicate that companies are indeed taking a new approach to budgeting, either simplifying it or complementing it with other techniques. The Balanced Scorecard, due to its capacity to link the short with the long-term strategy as well as to link different perspectives of the companies, comes up as one of the most useful techniques to complement budgets to face uncertainty.