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Which are the Roles of the Flexible Budget Practices?
FRANCIELE BECK
Fundação Universidade Regional de Blumenau - FURB
DANIEL MAGALHÃES MUCCI
Universidade de São Paulo
FABIO FREZATTI
Universidade de São Paulo
Abstract
There is an emerging literature that discusses the implications of flexible budget practices in
the business environment. However, it is still unclear about which are the budget-roles that
flexible budget practices play in organizations. The purpose of this study is to investigate the
relationship between the design of budget flexible practices such as budget revisions,
reforecasts, and rolling forecast and the multiple budget-roles, considering the strategic
budget role, managerial budget role, administrative budget role, and external communication
budget role. We developed a survey with medium and large firms that operate in Brazil, from
which we obtained a final sample of 110 firms. We employ the Structural Equation Modelling
technique (SmartPLS) as the primary data analyses procedure to test the hypotheses of the
study. Particularly, our results provide evidence that reforecasts and rolling forecasts are
positively associated with the strategic role and external reporting role of budgets. In addition,
we show that budget revisions and rolling forecasts are respectively negatively and positively
associated with the managerial budget role. We also find that reforecasts and rolling forecasts
are positively associated with the administrative budget role. This topic is relevant for
academics and practitioners since it focuses on the use of flexible budget practices which are
implemented serve to multiple roles, supporting the firm to cope with the external
environment and to deploy its business strategies. Particularly our study sheds light on
flexible budget practices in the Brazilian context and extend the debate about the association
between those practices with multiple roles of budgets.
Keywords: Budgeting; Budget purposes; Budget flexible practices; Budget Revisions;
Forecast.
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1. Introduction
Budgets are considered by prior literature as one of the most important mechanisms
that firms employ for performing the roles of planning, control and performance evaluation
(Merchant & Van der Stede, 2017; Sponem & Lambert, 2016; Libby & Lindsay, 2010).
Budgets are often used for multiple roles (Henri, Massicotte, & Arbour, 2019; Hansen & Van
der Stede, 2004; Sivabalan, Booth, Malmi, & Brown, 2009; Mucci, Frezatti, & Dieng, 2016),
and so there are some challenges related to coupling with these several functions
simultaneously and which might impact the perceived benefits that this mechanism brings to
businesses. There is emerging literature which studies each individual budget function since
different roles might have particular implications on budget design in organizations (Henttu-
Aho, 2018; Sponem & Lambert 2016). For instance, Sponem and Lambert (2016) proposed
four different budget-reasons that were investigated in prior literature, that are the strategic
role, the managerial role, the administrative role, and the external communication role and
suggests that they are more pronounced in different budget configurations.
These budget reasons mentioned above are usually attributed to the traditional
budgeting system which focuses on annually defined targets and is seen as a coordination and
control mechanism (Hansen, Otley, & Van der Stede, 2003). This focus has been criticized by
scholars who see that budgets might also empower managers to develop innovative responses
to external uncertainties and also foster creativity, innovation, and learning (Frow et al., 2010;
Bisbe & Otley, 2004). Based on this last reasoning, there is emerging literature which defends
a more flexible perspective of the budget systems. Goretzki and Messner (2016, p. 3) posits
about the adaptability of planning mechanisms, positing the firms “typically resort to more
operational forms of planning that allow aligning the activities of their members in a more
timely and fine-grained way.”
The most known flexible practices related to budgets are budget revisions, reforecasts,
and rolling forecasts (Bhimani et al., 2018; Sponem & Lambert, 2016). Budget revisions are
commonly a stage of budget control process in which managers might have the opportunity to
reallocate resources or update pre-established targets. The focus os reforecasts is on getting a
reliable picture and does not involve repactuating targets. Reforecasts might have a vital
relevance in revenue and production level prediction (Cassar & Gibson, 2008) which might be
deployed in terms of a firm´s growth and profitability. Budget reforecasts indicate to a
practice which consists of regular estimations of the main budget parameters such as revenue
(Hansen, 2011), which are restricted to the current budget year. In addition, rolling forecast
refers to refers to a forecast which “maintain a constant forward-looking time horizon”
usually a 12 month (Hansen, 2011, p. 301). Recent empirical studies have been showing that
reforecasting or rolling forecasts can be adopted simultaneously with the traditional annual
budget (Sivabalan et al. 2009), increasing the relevance of budgets for organizations.
Therefore, it is essential to uncover the characteristics that drive the implementation of
those flexible practices as parts of the organizations’ planning process. In other words, the
reasons why firms implement those flexible practices is still unclear in the literature (Henttu-
Aho, 2018). For instance, Umapathy (1987) indicate that budgeting flexible practices might
be needed for planning budget roles and not for manager’s evaluation purposes. Henttu-Aho
(2018), otherwise, has suggested that the planning budget-reasons might be positively related
to the use of flexible budget practices. Following, Arnold and Artz (2018) it is relevant to
understand what extent budgets present different levels of flexibility for each of the different
budget roles.
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Therefore, by disaggregating budgeting into different roles, we can shed more light on
mechanisms that are obscured (Becker, Mahlendorf, Schäffer, & Thaten, 2016) such as how
practices related to flexible budgets (Frow, Marginson, & Ogden, 2010) support multiple
budget roles. Based on this rationale we discuss the following research question: how do
budget revisions, reforecasts and rolling forecast practices support multiple budget-
roles? Hence, the purpose of this study is to investigate the relationship between the design of
budget flexible practices such as budget revisions, budget reforecasts, and rolling forecast and
the multiple budget-roles that the budget might play in the organizations, considering the
strategic role, managerial role, administrative role and external communication role (Hansen
& Van der Stede 2004; Brüggen, Grabner, & Sedatole, WP; Ekholm & Wallin, 2011).
This study contributes to the literature of budget reasons (e.g., Hansen & Van der
Stede, 2004; Henri et al., 2019; Mucci et al., 2016) by discussing the design of flexible budget
practices are associated with different budget purposes. We also contribute to the budget
literature by studying sophisticated budget practices which are increasingly implemented in
organizations to support the organizations’ planning process in order to cope with the external
environment and business strategies (Bhimani, Sivabalan, & Soonawalla, 2018), but also to
perform the roles which the budget is designed to accomplish (Henttu-Aho, 2018; Arnold &
Artz, 2018). We finally shed light to the multiple budget roles debate, since prior studies have
suggested the predominance of some budget reasons over other and also due to their in some
extent, the conflictual co-existence of the purposes (e.g., Henri et al., 2019).
2. Literature Review
2.1. Budget Roles
There is a vast literature in the management accounting field which has discussed the
multiple roles (purposes) of a budgeting system (e.g., Hansen & Van der Stede, 2004;
Sivabalan et al., 2009; Sponem & Lambert, 2016; Arnold & Gillenkirch, 2015; Arnold, &
Artz, 2018; Shastri & Stout, 2008; Covaleski, Evans, Luft, & Shields, 2003; Hopwood, 1972).
The roles that a budgeting system perform or the emphasis attached to these roles can vary in
each organization since these purposes (1) might conflict to each other such as motivation and
coordination roles, particular by setting difficulty or realistic targets (Barrett & Fraser, 1977;
Churchill, 1984; Arnold, & Artz, 2018), (2) might present some synergies which could be the
case of the strategic and managerial roles (Fisher et al., 2002), (3) might demand a set of
design characteristics and use of the budgeting system that fit the organizations MCS or
management model (e.g., Hansen & Van der Stede, 2004; Bhimani et al., 2018; Sivabalan et
al., 2009; Sponem & Lambert, 2016), (4) and might fit to the firm´s environment (uncertainty)
and characteristics (size, strategy, structure, etc) (e.g., Ekholm, & Wallin, 2011; Bhimani et
al., 2018).
One of the most prominent studies that investigated budget roles is Hansen and Van
der Stede (2004). This paper discussed two short-term operational reasons (operational
planning and performance evaluation) and two long-term strategic reasons for budgeting
(communication of goals and strategy formation). These four budget-reason were derived
from the perceptions of practitioners based on a list of reasons-to-budget grounded on
academic books and articles. Sivabalan et al. (2009) expanded the two operational budget-
reasons from Hansen and Van der Stede (2004) in three categories deployed in nine sub-
categories of reasons which are (1) planning reasons (coordination of resources, formulation
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of action plans, management of production capacity, determination of required selling prices,
encouragement of innovative behaviour and provision of information to external parties), (2)
two control reasons (monitoring device by the board of directors and control of costs) and (3)
two evaluation reasons (staff evaluation and business unit evaluation). These categories from
Sivabalan et al. (2009) were recently used by Bhimani et al. (2018) to discuss the relationship
between budget-reasons, rolling forecast, strategy, and uncertainty.
Ekholm and Wallin (2011) also investigated the association between uncertainty and
strategy with two main budgeting reasons in the traditional annual budget and flexible
budgets. The reasons discussed by Ekholm and Wallin (2011) which follow Ax and Kullven´
(2005) arguments are ex-ante functions and ex-post functions. As ex-ante functions there are
planning, coordination, and resource allocation and as ex-post functions there are
communication and motivation, for instance. More recently, Henri et al. (2019) introduced the
notion of predominance of budget roles, considering to what extent firms use budgets for
performance evaluation and forecasting purposes.
In this paper, we focus the rationale from Sponem and Lambert (2016), which
considered four main roles for the budgeting system which are consistent with prior literature.
First, they proposed the strategic role which considers the budget as a mechanism for the
formation and implementation of strategies, for the coordination of separate activities of the
organization, for forecasting financial needs, and for managing risks. Second, the managerial
role which relates to the use of budget to motivate managers, to inform managers about
targets to accomplish, to elicit manager´s bechaviour by contractualizing commitment to a ser
of targets. Third, the administrative role which relates to the use of budgets to authorize
spending and allocating resources through the organizations areas, term view. Fourth, the
budget role of communication with external stakeholders such as shareholders and other
external interested parties (e.g., bankers), which can be named as accountability role.
2.2. Flexible budget practices
There is an emerging literature that claim that the context of contemporary
organizations does not fit with the design of traditional budgets mainly due its fixed nature
(e.g., Hope & Fraser, 2003). On contrary, this context might demand the adoption of flexible
management practices such as budget revisions, budget reforecasts and rolling forecast (e.g.,
Bhimani et al., 2018; Henttu-Aho, 2018; Goretzki & Messner, 2016; Ekholm & Wallin, 2011;
Frow et al., 2010).
First, budget revisions have been treated as an ex-post practice developed during
budgetary control. It involves the revisions of budgetary targets or the reallocation of
resources between activities or process, which are usually adopted to overcome the issues
caused by the unpredictability of the environment (Libby & Lindsay, 2010). Budget revisions
do not involve the estimation of financial statements, for example, because it usually
addresses the operational budget plan (Frezatti et al., 2009).
The other two flexible mechanisms are considered advanced practices that firms can
adopt to increase the level of predictability, reliability of forecasts, and also in terms of
considering an extended time-horizon. Mainly, forecasts are a systematic tool which involves
sequential update, being monthly or quarterly updates and which allows the design of future
scenarios for organizations (Henttu-Aho, 2018). In this paper we focus on budget reforecasts
and rolling forecast (Bhimani et al., 2018; Sponem & Lambert, 2016). Budget reforecasts
consists of a regular reestimation ritual involving the update and forecast of budget
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parameters which are limited to the current year (Cassar & Gibson, 2008; Frezatti, 2009).
Rolling forecast involve an extended period, in which the forecasts “maintain a constant
forward-looking time horizon” usually a 12 month (Hansen, 2011, p. 301). In other words,
rolling forecasts in a continuous planning process extended throughout the year (Henttu-Aho
& Järvinen, 2013). Following Henttu-Aho and Järvinen (2013, p. 767), “rolling forecast
include continuous planning throughout the year, less detailed content, easier updating, focus
on the future, and a timely reaction to planning.” In the following subsections, we present the
rationale for these hypotheses. In particular, joint use of annual budgeting and rolling
forecasting has been found to be typical in larger and listed companies (Sivabalan et al. 2009).
2.3. Hypotheses Development
The model presented in Figure 1 highlights four main hypotheses, which comprise the
association between flexible budget practices (revisions, reforecasts and rolling budgets) and
different budget-reasons.
Reforecasts
Rolling
Forecasts
Strategic
budget
Shareholder
budget
Managerial
budget
Administrative
budget
Revisions
Budget roles
H1a, 2a, 3a, 4a
H1b, 2b, 3b, 4b
H1c, 2c, 3c, 4c
Figure 1. Theoretical model and hypotheses
2.3.1. Strategic Role
The strategic budget-reason involves the use of budgets to facilitate the
implementation of a firm´s strategies and monitoring the alignment between budgetary targets
and long-term goals. The strategic role is also related to forecasting financial needs and
coordinating various operations since the budget can be designed to provide a forward-
looking view of the organization (Sponem & Lambert, 2016). First, the implementation of
budget revisions might support the performance of the strategic role especially because it
might help the firm to change the course of actions when needed, responding to
environmental changes. This repair capacity and flexibility is essential for coordinating
complex businesses and for developing emergent strategies during the implementation of the
plan (Henttu-Aho, 2016).
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Furthermore, we highlight that reforecasting and rolling forecasting practices support
the strategic budget role in the sense that they provide a reliable and consistent forward-
looking view of the organization, which as a consequence facilitate planning and coordination
activities (Henttu-Aho, 2018). Sponem and Lambert (2016) show that in an interactive budget
cluster (which involves among other characteristics a higher level of reforecasts), firms use
budget for strategic purposes. Finally, reforecasting and rolling forecasting might also support
agile and anticipated responses to risk that may affect business performance. The difference
between reforecasting and rolling forecasting relies on the time-horizon which for rolling
forecasts is constantly (usually 12 month). Based on this reasoning, we propose the following
hypotheses:
H1a,b,c: As higher the use of revisions (H1a), reforecasts (H1b) or rolling forecasts (H1c)
higher will be the importance of the budget performing an strategic role.
2.3.2. Managerial Role
A common criticism that is attributed to flexible budget mechanisms is that they might
not effectively stimulate the manager´s performance (Bhimani et al., 2018; Haka & Krishman,
2005). The reasoning is that flexible budget practices might involve a constant change of pre-
established targets which creates a bias in terms of evaluating managers performance and
contractualizing commitment, which characteristics define a managerial budget-role (Sponem
& Lambert, 2016).
Haka and Krishnan (2005, p. 6) suggest that by adopting flexible practices, which
involves continually updating and forecasting, “managers no longer have one specific distal
goal, and instead have multiple goals (quarterly proximal goals and the annual distal goal)”
what would result in lower goal commitment. Bhimani et al. (2018), for instance, indicate that
firms can use flexible budget practices, such as rolling forecast to evaluate managers.
However they should maintain the targets premises for compensation untouchable. Prior
studies also indicate that operational managers might prefer fixed targets as parameters for
their performance evaluation and compensation plans (Marginson & Ogden, 2005; Frow et
al., 2010). Therefore, we propose the following hypotheses:
H2a,b,c: As higher the use of revisions (H2a), reforecasts (H2b) or rolling forecasts (H2c)
lower will be the importance of the budget performing a managerial role.
2.3.3. Administrative Role
Flexible budget practices are expected to support the administrative budget-role
considering that an updated and forward-looking picture of the organization is very helpful for
managers to review the allocation of resources to different areas and to callibrate restrict
spending if necessary. Budget reviews might allow managers to re-establish the firm priorities
during budgeting execution, which supports an administrative budget use (Henttu-Aho, 2016).
In addition, reforecasts and rolling budgets are very useful for administrative purposes
since they increase the reliability of forecasts (which numbers are updated over sub-annual
periods), thus helping managers to manage budget resources, including reestimation and
authorizations in a proactive manner (Bhimani et al., 2018; Hansen, 2011). In a recent
exploratory study on budget practices, Sponem and Lambert (2016) indicate that in an
interactive budget profile (which involves higher levels of reforecasts), firms use budget for
administrative reasons in a large extent.
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H3a,b,c: As higher the use of revisions (H3a), reforecasts (H3b) or rolling forecasts (H3c)
higher will be the importance of the budget performing an administrative role.
2.3.4. External Reporting Role
Similarly, to the managerial budget role, the use of budget revisions might not benefit
an external reporting budget role, since it creates a bias to performance evaluations (being
managerial or organizational) (Sivabalan et al., 2009). On the contrary, reforecasting and
rolling forecasting might be relevant mechanisms to increase the level of predictability and
reliability of the firm´s future returns (Henttu-Aho 2018), and therefore might support the
external reporting budget role.
H4a: As higher the use of revisions lower will be the importance of the budget performing an
external reporting role.
H4b(c): As higher the use of reforecasts (H4b) or rolling forecasts (H4c) higher will be the
importance of the budget performing an external reporting role.
3. Method
3.1. Data collection
To address the aim of this study, we developed a survey with medium and large firms
that operate in Brazil. We ground our population on the Valor 1000 database, which includes
the name of firms but not the contact information of executives. Hence, we searched for those
target-respondents through the LinkedIn®. We contacted managers who work mainly in the
finance area. In total, we sent about 900 invitations from May 2018 to March 2019. Some of
these managers did not accept the invitation, so we sent the questionnaire to about 500
executives, from which we received 65 responses. In addition to this database, we had access
to a database of Chief Financial Officers (about 3,200 emails) which was built based on prior
studies. From this population we obtained additional 50 responses of medium and large firms
including multinationals. In sum, we received 115 complete questionnaires; however, as we
focused on medium and large firms, we excluded five firms from our sample which did not fit
to the number of employees’ criteria. Therefore, our final sample comprises 110 businesses
(see Table 1).
Our sample comprises mainly large firms with more than 250 employees (86%) that
operates in service (44%) and manufacturing (40%) industries. In addition, 36% of the firms
in our sample have an Operational Revenue between 300 million and 1 billion, and 39% have
it higher than 1 billion BRL per year. We also looked at the maturity stage of budgeting
systems considering firms that adopt estimations of budget premises (97%), develop
operational plans (91%) and forecast the financial statements (91%) (Frezatti, 2009). In
addition, 25% of the firms are listed in Brazilian stock exchange, and 28% have operations in
Brazil and abroad (multinationals). Finally, our respondents mostly work as a Finance
executive (74%) and occupy a high level of a firm´s hierarchy. In terms of respondents’
hierarchical level, 54% reports to shareholders or board of directors (Tier 1) and 37% report
to the Top Management Team (Tier 2).
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Table 1
Descriptive statistics n % n %
Panel A. Industry Panel D. Budget process maturity
Service 48 44% Estimation of budget premises 106 97%
Manufacturing 44 40% Operational plans 100 91%
Retail or Wholesale trade 8 7% Financial Statements estimations 100 91%
Missing 5 5% Panel E. Listed in B3 Panel B. Size (number of employees) Yes 28 25%
Between 51 and 250 15 14% No 82 75%
Between 251 and 500 17 15%
Between 501 and 2000 35 32% Panel F. Multinational firms
More than 2000 43 39% Yes 31 28%
No 79 72%
Panel C. Size (revenue millions BRL in 2017)
Less than 20 1 1% Panel G. Respondents area
Between 21 and 100 12 11% Finance 81 74%
Between 101 and 300 14 13% Management 8 7%
Between 301 and 1000 40 36% Other 17 15%
More than 1000 43 39% Missing 4 4%
3.2. Research instrument
Our model includes four independent variables related to budget roles which are
strategic role, managerial role, administrative role, and external communication role and
threedependent variables which are related to flexible budget practices (budget revision,
budget reforecasts and rolling budget).
Budget roles. We measure four latent variables for budget roles which were based on
the instrument developed by Sponem and Lambert (2016). In total, the scale comprises 12
items drawn from multiple studies such as Lyne (1988), Bunce et al. (1995), Ekholm and
Wallin (2000), and Hansen and Van Der Stede (2004). The strategic role (Strategic) is
composed of five items which are implementing strategy, forecasting, financial needs,
managing risks and coordinating business activities).The managerial role (Managerial) is
based on four instruments which are evaluating managers, incentivizing them, defining
responsibilities and contractualizing commitment). The administrative role (Administrative) is
based on two items which are authorizing spending and allocating resources. Moreover, the
role of communication with external stakeholders (external) is measured based on one item.
All these items were measured on a 5-point Likert scale.
Budget revisions. We collected budget revisions (Revisions) based on a one reversed
item which indicates the extent that “budget targets cannot be changed over the year.” This
item was validated by Sponem and Lambert (2016) and was reversed for analyses.
Budget reforecasts. We capture budget reforecasts (Reforecasts) based on an adapted
1-item, which indicates if “budgets are subject to regular revision to take into account changes
in the environment.” This item is based on Sponem and Lambert (2016).
Rolling budget. We capture rolling budget (Rolling) based a dummy variable (yes/no)
by asking “if budget forecasts are made for 1-year time horizon, independent on the moment
in which they are estimated” developed by Henttu-Aho & Järvinen (2013).
Control variables. We controlled for firm’s size, industry, listed status, and
multinational status. For instance, Sivabalan et al. (2009) suggest that the use of annual
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budgeting and rolling forecasting might be typical in larger and listed firms. Uncertainty was
measure based on the itens from Kruis et a (2016). Size was measured based the number of
employees which is a latent variable composed by the following categories: (i) between 51
and 250 employees (reference category); (ii) between 251 and 2000 employees (large); (iii)
more than 2000 employees (very large). We also controlled for firm´s industry based on the
following categories manufacturing, retail, and service (which is the reference category). We
finally control if the firm has a public listed status in B3 (Brazilian Stock Exchange), if the
firm is considered a multinational which operates in multiple countries and if it is a family
business. Both measures are introduced in the analyses as dummy variables, which were
respectively named listed, multinational and family firm.
3.3. Data analyses procedures
We developed the Structural Equation Modelling multivariate technique (SmartPLS
software) as the primary data analyses procedure to test our hypotheses. This technique has
some advantages in terms of the absence of data distribution assumptions and the reliability
levels for the estimation of complex models even if with few observations (Hair Jr., Hult,
Ringle, & Sarstedt, 2013; Hair, Jr., 2009; Nitzl, 2016). Following Nitzl (2016), we develop
the sensitivity test in the GPower 3.1.9.2 software (Faul, Erdfelder, Lang, & Buchner, 2007)
to appraise the power effect considering our sample size of 110 respondents. Hence, we
obtained a detection of medium relative effect (f2 higher than 0.15) taking in account the
following parameters: (i) statistical power higher than 0.8 (less than 20% type II error); (ii)
5% significance level (type I error); and (iii) having 8 predictors.
4. Results
4.1. Descriptive statistics
In Table 2, we present the descriptive statistics of the items from our constructs. First,
budget revisions have a lower mean score (2.90) if compared to reforecasting (3.45). In terms
of the adoption of rolling forecasts, 43% of our sample implements a rolling budget practice.
Regarding budget roles, firms are more likely to use budgets to serve for strategic and
administrative reasons. The items with higher mean levels of agreement were forecasting
financial needs (4.49), communicating between various levels of the reporting line (4.31),
allocating resources (4.29), authorizing spending (4.25), steering the firm’s different business
activities (4.19), deploying strategy (4.18).
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Table 2
Instruments and constructs
Construct Variable Instrument Obs Mean Std.
Dev. Min Max
Revision Revis1_in
ver
Budget targets cannot be changed over the year
* 110 2.90 1.64 1 5
Reforecast Refor1 Budgets are subject to regular revision to take
into account changes in the environment 110 3.45 1.32 1 5
Rolling
Forecast Rolling1
The reestimations are projected for the horizon
of a year, independent in the moment in which
they are developed.
108 0.43 0.50 0 1
Strategic Role BRStrat1 Deploying strategy 110 4.18 0.98 1 5
BRStrat2 Forecasting financial needs 110 4.49 0.80 1 5
BRStrat3 Managing risks 110 3.72 1.15 1 5
BRStrat4 Coordinating various operations 110 4.06 1.02 1 5
BRStrat5 Steering the firm’s different business activities 110 4.19 1.03 1 5
Managerial
Role BRMan1
Evaluating manager performance 110 3.89 1.30 1 5
BRMan2 Incentivizing operational managers 110 3.79 1.13 1 5
BRMan3 Defining responsibilities and contractualizing
commitment 110 4.06 1.12 1 5
BRMan4 Communicating between various levels of the
reporting line 110 4.31 1.02 1 5
Administrative
Role BRAdm1
Authorizing spending 110 4.25 1.10 1 5
BRAdm2 Allocating resources 110 4.29 1.04 1 5
Reporting Role BRShare1 Communicating with external stakeholders
(shareholders, creditors). 110 3.81 1.28 1 5
Note. Revis (revision), Refor (reforecasting), Rolling (rolling forecast), BRStrat (Strategic budget role), BRMan
(Managerial budget role), BRAdm (Administrative budget role), BRShare (External Reporting budget role).
Note. The instrumets are based on Sponen & Lambert (2016), expect for rolling forecast was develop by the
author Henttu-Aho & Järvinen (2013).
4.2. Measurement model analyses
The structural equation model analyses involve the validation of the measurement
model and the structural model (e.g., Hair Jr. et al., 2013; 2009). First, we evaluate the
measurement model in terms of convergent and discriminant validity and also composite
reliability, which are analyzed based on the following parameters: (i) Average Variance
Extracted (AVE) higher than 0.5; (ii) Composite Reliability (CR) parameter higher than 0.7;
(iii) the outer loadings higher than 0.7; (iv) Fornell-Lacker Correlation Matrix (Hair Jr. et al.,
2013). We present the Crossloadings Matrix in Table 3 and the Fornell-Lacker Matrix in
Table 4. As you can see in Table 3 the loadings of the items that were expected to measure
each latent variable (which are in bold) are higher than outer loadings, which indicates
convergent and discriminant validity. There are some latent variables which are measured by
just one indicator which are revisions, reforecasts, rolling forecast and external reporting
budget role. This is a limitation of the present study.
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Table 3
Crossloadings Matrix
Revision Reforecast Rolling
Forecast
Strategic
Role
Managerial
Role
Administrative
Role
Shareholder
Role
Revis1_inver 1.000 0.218 0.090 -0.099 -0.247 -0.054 0.017
Refor1 0.218 1.000 0.114 0.282 0.203 0.362 0.283
Rolling1 0.090 0.114 1.000 0.236 0.272 0.138 0.323
BRStrat1 -0.035 0.317 0.088 0.764 0.566 0.509 0.393
BRStrat2 -0.078 0.268 0.194 0.776 0.428 0.527 0.352
BRStrat3 -0.059 0.182 0.279 0.788 0.467 0.439 0.428
BRStrat4 -0.164 0.128 0.166 0.754 0.546 0.433 0.387
BRStrat5 -0.049 0.180 0.165 0.777 0.679 0.409 0.454
BRMan1 -0.181 0.137 0.227 0.490 0.847 0.292 0.312
BRMan2 -0.224 0.126 0.288 0.524 0.858 0.306 0.306
BRMan3 -0.210 0.186 0.203 0.605 0.796 0.315 0.414
BRMan4 -0.197 0.221 0.172 0.633 0.780 0.279 0.350
BRAdm1 -0.034 0.272 0.101 0.438 0.230 0.928 0.352
BRAdm2 -0.065 0.395 0.153 0.671 0.427 0.961 0.517
BRShare1 0.017 0.283 0.323 0.518 0.420 0.472 1.000
Controls
family_firm 0.301 0.128 0.157 0.025 0.046 0.005 0.046
listed_firm -0.007 -0.107 0.013 -0.011 0.025 -0.099 -0.195
multin_firm -0.123 0.152 -0.113 -0.049 0.069 0.102 -0.098
size_employee_large 0.018 0.014 -0.002 0.089 0.066 0.059 0.131
size_employee_verylarge -0.036 0.113 0.104 0.062 0.099 0.081 -0.018
Uncert1 0.023 0.252 0.081 0.316 0.265 0.177 0.195
Uncert2 -0.067 0.221 0.046 0.293 0.266 0.259 0.198
In Table 4, we present the Fornell and Lacker Matrix, which shows the correlations
between the latent variables, while in the diagonal there is the square root of AVE. In this case
we can see that the values of the diagonal are higher than the correlations below the diagonal,
which indicates discriminant validity (Hair Jr. et al., 2013). The correlation coefficients
between latent variables indicate a preliminary negative correlation between budget revisions
and budget managerial role, while reforecasting and rolling forecasting are positively
correlated with the four budget roles, except for the administrative role. Finally, budget
reasons are positively correlated to each other especially the strategic budget role since it
presents the highest levels of correlations with the other three budget roles. This preliminary
result might suggest that for our respondents those multiple roles might not conflict in the
organizations.
12 www.congressousp.fipecafi.org
Table 4
Fornell-Lacker Matrix 1 2 3 4 5 6 7
1. Revision - 2. Reforecast 0.218 - 3. Rolling forecast 0.090 0.114 - 4. StrategicRole -0.099 0.282 0.236 0.772 5. ManagerialRole -0.247 0.203 0.272 0.685 0.821 6. AdministrativeRole -0.054 0.362 0.138 0.604 0.363 0.944 7. ShareholderRole 0.017 0.283 0.323 0.518 0.420 0.472 -
Controls
8. familyfirm 0.301 0.128 0.157 0.025 0.046 0.005 0.046
9. listed -0.007 -0.107 0.013 -0.011 0.025 -0.099 -0.195
10. multinational -0.123 0.152 -0.113 -0.049 0.069 0.102 -0.098
11. size -0.023 0.168 0.134 0.204 0.220 0.187 0.158
12. uncertainty -0.024 0.253 0.068 0.326 0.284 0.234 0.210
Composite Reliability - - - 0.880 0.890 0.943 -
Average Variance Extracted (AVE) - - - 0.595 0.670 0.891 -
Note 1. Correlations greater than or equal to | 0.187 | are significant at 5% and correlations greater than or equal
to | 0.245 | are significant at 1%.
Note 2. The values on the diagonal are the square roots of the average variances extracted; because these values
are higher than the correlations between the latent variables (values outside the diagonal), there is discriminant
validity (Hair Jr. et al., 2013).
Note 3. Some variables do not have estimations for AVE and Composite Reliability since they are measured by
one item.
4.3. Structural model analyses
The structural model analyses consist of the following four steps, which results are
presented in Table 5. First, we look at the Variance Inflation Factor (VIF) to check if our
model and underlying conclusions face multicollinearity issues. As presented in Table 5, the
VIF values are lower than the parameter usually used in SEM analyses, which is 5 (Hair Jr. et
al., 2013). Second, we analyze the statistical significance of the path coefficients which for
social sciences the parameter is usually 5% significance level. Third, we evaluate the effect
size coefficients (f2), which considers the impact of an independent variable on the dependent
variable (Hair Jr. et al., 2013). Fourth, we estimate the coefficient of determination
(particularly the adjusted R square). We applied the bootstrapping procedure in SmartPLS
software, considering 5,000 repetitions and a two-tailed test (Hair Jr. et al., 2013). Overall, we
show some statistically significant relations between flexible budget practices and budget
reasons which partially support our hypotheses. Overall, flexible budget practices and our
control variables explain the following percentages of the variance for each budget reasons
which are: (i) 18.4% for the strategic budget role, (ii) 20.6% for the managerial budget role,
(iii) 13.9% for the administrative budget role, (iv) 20.5% for the external reporting budget
role. In the sequence we discuss each of our hypotheses, considering the results presented in
Table 5.
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Table 5
Structural Model Results
β
Standard
Deviation
|T
Statistics|
P
Values f2
R2
adjusted VIF
Revision -> StrategicRole -0.151 0.097 1.553 0.121 0.025 0.184 1.185
Reforecast -> StrategicRole 0.232 0.103 2.248 0.025 0.058 1.216
Rolling forecast -> StrategicRole 0.187 0.080 2.320 0.021 0.043 1.057
familyfirm -> StrategicRole -0.077 0.098 0.787 0.431 0.006 1.250
listed -> StrategicRole -0.045 0.084 0.542 0.588 0.003 1.078
multinational -> StrategicRole -0.139 0.086 1.623 0.105 0.022 1.154
size -> StrategicRole 0.117 0.106 1.111 0.267 0.016 1.125
uncertainty -> StrategicRole 0.269 0.123 2.192 0.029 0.084 1.132
Revision -> ManagerialRole -0.306 0.084 3.629 0.000 0.107 0.206 1.185
Reforecast -> ManagerialRole 0.167 0.102 1.635 0.102 0.031 1.216
Rolling forecast -> ManagerialRole 0.248 0.078 3.192 0.001 0.079 1.057
familyfirm -> ManagerialRole 0.036 0.092 0.392 0.695 0.001 1.250
listed -> ManagerialRole 0.014 0.079 0.181 0.856 0.000 1.078
multinational -> ManagerialRole 0.021 0.092 0.225 0.822 0.001 1.154
size -> ManagerialRole 0.119 0.102 1.171 0.242 0.017 1.125
uncertainty -> ManagerialRole 0.195 0.133 1.461 0.144 0.045 1.132
Revision -> AdministrativeRole -0.104 0.100 1.043 0.297 0.011 0.139 1.185
Reforecast -> AdministrativeRole 0.312 0.088 3.532 0.000 0.100 1.216
Rolling forecast -> AdministrativeRole 0.098 0.086 1.139 0.255 0.011 1.057
familyfirm -> AdministrativeRole -0.065 0.099 0.663 0.508 0.004 1.250
listed -> AdministrativeRole -0.096 0.097 0.991 0.322 0.011 1.078
multinational -> AdministrativeRole 0.011 0.082 0.139 0.890 0.000 1.154
size -> AdministrativeRole 0.127 0.106 1.198 0.231 0.018 1.125
uncertainty -> AdministrativeRole 0.142 0.096 1.485 0.138 0.022 1.132
Revision -> ShareholderRole -0.038 0.086 0.447 0.655 0.002 0.205 1.185
Reforecast -> ShareholderRole 0.214 0.101 2.125 0.034 0.051 1.216
Rolling forecast -> ShareholderRole 0.276 0.074 3.709 0.000 0.097 1.057
familyfirm -> ShareholderRole -0.110 0.084 1.300 0.194 0.013 1.250
listed -> ShareholderRole -0.232 0.082 2.848 0.004 0.068 1.078
multinational -> ShareholderRole -0.180 0.092 1.959 0.050 0.038 1.154
size -> ShareholderRole 0.106 0.100 1.057 0.291 0.014 1.125
uncertainty -> ShareholderRole 0.177 0.110 1.611 0.108 0.038 1.132
4.4. Test of hypotheses
4.4.1. Strategic Role
First, we partially support hypotheses H1 by showing that flexible budget practices
might support the budget´s strategic role. Particularly we show a positive statistically
significant association between reforecasts and rolling forecasts with budget strategic role,
respectively H1b (β=0.232, f2= 0.058, p= 0.025) and H1c (β=0.187, f2= 0.043, p= 0.021),
which both associations show a small size effect. These results are aligned with prior
literature which indicates that reforecasting and rolling forecasting are tools that provide a
reliable and consistent forward-looking view of the organization, which benefits the strategic
role of budgets (Henttu-Aho, 2018; Sponem & Lambert, 2016). Our results also indicate that
as higher the level of uncertainty higher is the use of budgets to serve to strategic purposes
such as the deployment of strategies and forecasting financial needs which findings are
aligned with prior literature (Bhimani et al., 2018; Ekholm, & Wallin, 2011).
14 www.congressousp.fipecafi.org
4.4.2. Managerial Role
Our results support hypothesis H2a, do not support H2b and contradict hypothesis
H2c. First, we show a negative statistically significant association between budget revisions
and budget managerial role (β=-0.306, f2= 0.107, p= 0.000). This result is aligned with our
hypothesis in the sense that constant revisions might create a bias to manager´s performance
evaluations expectations and might reduce managers commitment to those goals (e.g., Haka &
Krishman, 2005; Marginson & Ogden, 2005).
In addition, our results indicate, different from our hypothesis, a positive association
between rolling forecasts and budget managerial purpose (β=0.248, f2= 0.079, p= 0.001).
This finding is interesting since rolling forecasts usually do not involve the change of targets
that are used to evaluate and incentivize managers, mainly it is installed to enhance a forward-
looking view of the firm, considering the changes in the environment and their impact on a
specific constant periods (e.g., Hansen, 2011; Henttu-Aho & Järvinen, 2013). Hence, a
plausible explanation is that rolling forecasts might provide a more reliable future scenario of
the firm, supporting the quality of communication between organizational levels and also
informal performance evaluations, which are some functions related to budget managerial
role.
4.4.3. Administrative Role
As presented in Table 5, our results support hypothesis H3b, particularly show a
positive statistically significant association between reforecasts and budget administrative role
(β=0.312, f2= 0.100, p= 0.000). This finding indicates that by applying a systematic tool
which involves a sequential update of premises and underlying estimations (Hansen, 2011), a
firm can provide a more confident information that could drive the administrative use of
budgets in the day-to-day activities such as the authorization of spending and the allocation of
resources (Sponem & Lambert, 2016).
4.4.4. External Reporting Role
Finally, our results suggest that both reforecasting and rolling forecasting are
positively and statistically significantly associated with the external reporting budget role,
both as small effect sizes. As presented in Table 5, our results support hypothesis H4b
(β=0.214, f2= 0.051, p= 0.034) and H4c (=0.276, f2= 0.097, p= 0.000). These results indicate
that a forward-looking view which involves the update of premises and underlying
estimations (Hansen, 2011), might address the accountability expectations of shareholders,
which are usually built in the long term. We also show that the use of the budget to external
reporting reasons is lower for firms that are listed in Brazilian stock exchange and for
multinational firms. In those firms, there might be other mechanisms such as strategic
performance indicators that are a source of corporate reporting rather than the budget.
5. Discussion and Final Remarks
This study investigates the relationship between the design of budget flexible practices
such as budget revisions, budget reforecasts, and rolling forecast and the multiple budget-
15 www.congressousp.fipecafi.org
reasons. We considered the reasons debated by Sponem and Lambert (2016), which are the
strategic role, managerial role, administrative role, and external communication role.
Our results provide evidence that flexible budget practices might be adopted to serve
one or more of the multiple budget roles. First, our results show that budget revisions are
negatively associated with the use of budgets for managerial roles, which is aligned with prior
literature. The argument is that constant changes in pre-established targets are expected to
create bias in managers´ performance evaluating (Haka & Krishnan, 2005; Bhimani et al.,
2018). Our results also show that budget reforecasts are positively related to the use of
budgets for strategic, administrative and external communication role. Reforecasts and rolling
forecasts might be seen as a systematic practice that foster a forward-looking view about the
organization, facilitating planning and coordination activities, enhancing the proactive use of
resources in a manner and increasing the level of predictability and reliability of the firm´s
future returns to shareholders (Henttu-Aho 2018; Bhimani et al., 2018; Hansen, 2011).
Finally, we show that rolling forecast practice might support budget managerial role in the
sense that it provides a constant forward-looking perspective that benefits performance
evaluations on an organizational level.
Therefore, this study contributes to the budget literature in the following ways. First,
we investigate practices that were not uncovered by prior literature in Brazil such as budget
revision, reforecasts, and rolling forecasts, and particularly the association that each these
practices might have with the multiple facets of budgets. In addition, we contribute to the
multiple budget reasons literature (Henri, Massicotte, & Arbour, 2019; Hansen & Van der
Stede, 2004; Sivabalan, Booth, Malmi, & Brown, 2009; Mucci, Frezatti, & Dieng, 2016) by
showing that actually firms use budget to serve to multiple budget roles.
Despite the above-mentioned contributions, our study has the following limitations.
First, there are limitations related to the survey method approach, such as common method
variance issues (Podsakoff et al., 2012). We address it by using mainly validated instruments.
In addition, we used some one-item variables for flexible budget practices, and they might be
limited to capture the complexity that they have in terms of rituals.
There are several questions that could be further investigated by future studies (see
Henri, Massicotte, & Arbour, 2019; Henttu-Aho, 2018; Sponem & Lambert 2016; Bhimani et
al., 2018). They are: (i) do these multiple roles conflict or support each other; (ii) what budget
design practices stimulate each of the multiple budget reasons; (iii) what are the consequences
of multiple budget reasons to strategy implementation and managerial performance.
.
16 www.congressousp.fipecafi.org
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