Post-Shock Budgeting: A Methodological Framework

Abstract

Traditional budgeting approaches have been criticised and called into question as not being able to adapt to management dynamics and context-specific planning needs. This is especially the case when major crises occur, with increased forecast uncertainty as a result. Adaptive techniques such as rolling and continuous budgeting have been developed to address such concerns, though trade-offs between the resulting optimisation of the planning, control and performance evaluation functions exist. A key, though not exclusive, effect of crises is the likely nonlinearity of effects of unit prices which will tend to revert to the mean, or in other words, rebound and gradually converge to pre-shock levels or to a steady state. Aiming to fill this research gap, this study presents a methodological framework, framed within a survival analysis paradigm, which can be used for post-shock budgeting. Following a description of the mathematical properties and steps required for application, the framework is illustrated using a stylised example of operational budget with results being compared between linear and nonlinear price rebound trajectories. The presented framework is a relatively simple and flexible solution to the issue of post-shock budgeting which can be readily developed and adapted, therefore lending itself to a widespread use.