Which are the Roles of the Flexible Budget Practices ...

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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.


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.


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


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


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).


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:


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.



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).


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


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).


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.


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.


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.


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).


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-


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.

.


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