166 Int. J. Business Performance Management, Vol. 14, No.

2, 2013

Risk and budget in an uncertain world

Marika Arena* and Michela Arnaboldi

Politecnico di Milano,
Department of Management, Economics and Production Engineering,
Piazza Leonardo da Vinci, 32, Italy
Fax: 0039-02-23994083
E-mail: marika.arena@polimi.it
E-mail: michela.arnaboldi@polimi.it
*Corresponding author

Abstract: The ability of a company to deal with uncertainty and turbulence is

an issue which has attracted increasing attention in recent years, due to the
negative effects of the financial crisis. In this context, the paper has the aim of
exploring whether the consideration of risk in a budgeting process contributes
to improve its effectiveness. To this aim, the paper analyses two potentially
beneficial approaches to deal with uncertainty: the integration of information
concerning risk and the use of non-financial indicators and benchmarking as
early warning systems. On the basis of a survey of the largest companies in
Italy (with a response rate of 41.5%), the paper shows that the effectiveness of
the budgeting process increases when: 1) managers are required to produce a
risk map; 2) dashboards and balanced scorecards are used in relation to the
budgeting process. These results suggest the potential usefulness of integrating
risk and non-financial information in budgeting, in which financial accounting
information is, at present, still prevalent.

Keywords: risk; uncertainty; budget; performance management; non-financial

indicators; enterprise risk management; survey.

Reference to this paper should be made as follows: Arena, M. and

Arnaboldi, M. (2013) Risk and budget in an uncertain world, Int. J. Business
Performance Management, Vol. 14, No. 2, pp.166180.

Biographical notes: Marika Arena is an Assistant Professor at the Department

of Management, Economics and Production Engineering of Politecnico di
Milano.

Michela Arnaboldi is an Associate Professor at the Department of

Management, Economics and Production Engineering of Politecnico di Milano.

1 Introduction

Over the last decade, the studies of academics and practitioners have pointed out the
general dissatisfaction of managers and controllers with traditional budgeting processes
(e.g., Ekholm and Wallin, 2000; Neely et al., 2001; Hansen et al., 2003; Rickards, 2008).
In particular, much criticism has been related to the scarce ability of budgeting to answer
the increasing level of uncertainty and turbulence that characterises the economic context

Copyright 2013 Inderscience Enterprises Ltd.

 Risk and budget in an uncertain world 167

(Neely et al., 2001; Hansen et al., 2003; Bescos et al., 2003; Hope and Fraser, 2003;
Rickards, 2008). Budgeting has been accused of constraining the flexibility of companies
and their capacity to face unpredicted events, although it is still a central instrument of
planning and control processes (Libby and Lindsay, 2010).
This tension between planning needs and actual solutions has become even more
evident in recent years. First, the financial crisis has clearly demonstrated not only that
companies can fail in forecasting and controlling, but also that the concatenated
consequences of such failures can affect a large number of actors and the global market
as a whole. A clear example of this interdependency, and its negative effects, is provided
by the sovereign debt crisis, which was triggered by the 2008 financial crises and which
is now threatening European stability. Second, and a topic which is related to the
previous issue, the importance given to the evaluation of rating agencies has increased.
This has led companies to focus more attention on their ability to achieve the results
presented in prospective documents (e.g., strategic plan), and to develop tools to manage
the uncertainties, that have become part of the criteria considered by rating agencies
(Standard and Poors, 2008).
In the past, different alternatives were recommended to improve the ability of
budgeting to better adapt to uncertain contexts. On the one hand, researchers proposed
techniques to incrementally improve the traditional budgeting process (e.g.,
activity-based budgeting, zero-based budgeting) this stream of research is commonly
known as better budgeting (Neely et al., 2001; Rickards, 2008). On the other hand, a
different stream of research known as beyond budgeting suggested that companies
need to radically change their budgeting process, and in the end to abandon it (Hope and
Fraser, 1999, 2003).
In spite of these proposals, there is empirical evidence that most companies continue
to rely on traditional budgeting processes (Libby and Lindsay, 2010), and act as if the
surrounding context were simple and stable. Despite recognising the limitations that curb
the effectiveness of the traditional budgeting process, the solutions proposed in the
literature are often considered too complex (Singer, 2010) or ineffective (Hansen et al.,
2003; Rickards, 2008) by companies, as can be testified by the lack of empirical evidence
about their actual implementation.
In this context, researchers and practitioners started to look at other ways of
considering uncertainty in the process of budgeting, in order to improve its ability to
support the achievement of a companys objectives. Some authors have focused on the
exploitation of non-financial indicators and information about competitors positioning as
weak signals to improve the ability of the planning and control process in order to deal
with uncertainty, and to anticipate business evolutions (e.g., Hoque and James, 2000;
Ittner et al., 2003; Rickards, 2007). Other authors have focused on the explicit integration
of information about risk in the process of budgeting. In this stream, Collier et al. (2007)
analysed whether and how risks could be included in the budgeting process and in
documents. Palermo and Van der Stede (2011) discussed an alternative technique to
integrate risk and budgeting. At the same time, some scholars in the risk management
field also started to highlight the existence of potential synergies between risk
management and budgeting. Paape and Spekl (2012), in a recent survey of European
firms, have highlighted how the full implementation of enterprise risk management
systems is related to enterprise risk management becoming an integral part of the
(strategic) planning and control cycle. Arena et al. (2010) have instead analysed how
integrated risk management system can modify the budgeting process.
168 M. Arena and M. Arnaboldi

However, at present, only limited attention has been given to analysing the extent to
which the consideration of risk in the budgeting process affects its effectiveness i.e.,
whether this kind of approach is actually perceived as a better solution. In this context,
this paper aims at exploring whether the integration of risk (with reference to both
information explicitly related to risk and to weak signals) in the budgeting process
actually improves its perceived effectiveness, which is measured through the level of
satisfaction of process coordinators. To this aim, the research hypotheses were defined
according to the state of the art in the literature (see next section) and they were tested
through a questionnaire, which was sent to 270 Italian companies, with a response rate of
41.5%.
The paper is structured as follows. Section 2 contains the research hypotheses.
Section 3 presents the research methodology, defines the main variables, and how to
measure them, and also explains how the survey was conducted. Section 4 describes the
main results. Finally, Section 5 discusses the results and their implications.

2 Hypothesis development

As mentioned in the introduction, this paper has the aim of analysing to which extent the
consideration of risk in the budgeting process affects its effectiveness. To this aim, this
work has analysed two potentially beneficial approaches to deal with uncertainty and has
tested whether they contribute to improve the level of satisfaction of budgeting
coordinators. The two approaches are: the integration of information that explicitly deals
with risk in the process of budgeting and the use of non-financial performances and
benchmark data as weak signals of the changing environment. The relationships between
the two approaches and the level of satisfaction of budgeting coordinators is represented
in Figure 1. On the basis of the literature analysis, which is discussed in the following
sub-sections, a positive impact of these two approaches is expected on the level of
satisfaction of budgeting coordinators.

Figure 1 Conceptual model

Integration of information that

explicitly deals with risk

+ Level of
satisfaction
towards the
+ budgeting process

Integration of non-financial indicators

and benchmark data

2.1 Information that explicitly deals with risk

In recent years, increasing attention has been paid to risk management in different
business sectors and research fields. Although risk has always been part of business
activities, in this century companies have had to face several large-scale events that were
 Risk and budget in an uncertain world 169

once thought unlikely, such as the credit crunch, energy supply volatility, climate
changes and the overhauls of technology (Price, 2008; McGinn, 2009). This situation has
determined renewed interest in the need to develop adequate managerial tools that can
help companies to deal with risk. This is particularly relevant for budgeting, which has
always been subject to the search for better ways of predicting risks and reducing
uncertainty (e.g., Lewis, 1952; Greer, 1954; Hofstede, 1967; Holthausen and Assmus,
1982). There is, in fact, a growing body of literature that highlights the importance of
integrating risk with the process of budgeting: some authors have focused on the
integration of risk with budget documents and processes (Collier and Berry, 2002); other
authors have proposed new integrated tools such as risk scorecards (Scholey, 2006;
Calandro and Lane, 2006), key risk indicators (Scandizzo, 2005; Lam, 2006), and
risk-based approaches for cost evaluation (Juras, 2007); other authors have instead
discussed the need to integrate the risk management process and the planning process
while also indicating normative guidelines for integration (McWhorter et al., 2006;
Beasley et al., 2006; Beasley and Frigo, 2007). Finally, Collier et al. (2007) have offered
empirical evidence of current practices, with a survey of organisations in the UK.
The inclusion of risk information in budgeting processes influences the interpretation
and the performance of budgeting itself. In their study of budgeting in four
organisations, Collier and Berry (2002) found that managers saw risk not only in
financial terms but also in terms of operational, political and personal domains; by
excluding some risks and considering others, the budget process was also considered
different, and needed to be interpreted separately from the content of the budget in which
there was little evidence of any risk-modelling or the use of probabilities (Collier and
Berry, 2002, 2008). Many professional and academic papers suggest that the integration
of risk information has a potentially positive effect on the planning and control process,
and, in the end, on the achievement of a companys objectives (e.g., PWC, 2009;
Paladino, 2008; Ow, 2008). Integration ideally helps organisations relate targets and risks
and monitor the achievements of these targets against strategy. However, it is worth
noticing that very few contributions exist that provide empirical evidence of the positive
effects of the integration of risk-related information in the process of budgeting. Some
evidence in this direction has been provided in relation to the technical processes
associated with capital budgeting (Kalu, 1999; Verbeeten, 2006) and to project planning
(Jaafari, 2001). Focusing specifically on budgeting, Arena et al. 2010 discussing the
implementation of an enterprise-wide risk management system in an automation
company, have highlighted how risk managers can support managers in the budgeting
process, and guide them in reflecting on the relationship between risks, performance and
their possible trade-offs. Accordingly, we posit the first research hypothesis:
H1 The integration of information that explicitly deals with risk in the budgeting
process improves the perceived effectiveness of the budgeting process.

2.2 Weak signals as an early warning system

Since the early nineties, criticism has been growing against traditional performance
measurement systems, which are generally focused on financial performances. Such
approaches have been deemed to be past-oriented and unable to support companies in
responding to the changing business environment (Johnson and Kaplan, 1987; Lynch and
170 M. Arena and M. Arnaboldi

Cross, 1991; Eccles, 1991; Ittner and Larcker, 1998; Kennerley and Neely, 2003; Bourne
et al., 2003). In particular, they have been criticised for not reflecting, and being
inconsistent with the customer-focus factors of quality and flexibility, the process-focus
factors of productivity and delivery, and intangible factors, such as intellectual capital
and learning capabilities, which have become more and more critical for the success of a
firm (e.g., Perera et al., 1997). Continued emphasis on cost and financial-based measures,
which are essentially short term, have been argued to be counter-productive in that they
provide little incentive to improve long term factors and may even prejudice the pursuit
of those factors (Dent, 1990).
This situation has fostered the rise of non-financial indicators and dashboards of
indicators [e.g., balanced scorecards (BSC) and tableau du board], which have the aim of
overcoming the shortcomings of traditional financial indicators when used to monitor the
long-term success factors of a company such as customer satisfaction, efficiency, human
resources and innovation. Non-financial indicators are considered to be more
forward-looking and better able to predict future performance than historical accounting
measures, and should be used to supplement financial measures in management
accounting systems. The idea behind these instruments is to implement a system of early
warnings to detect weak signals, from both the external environment and internal
processes, and provide a more timely view of the business (Lynch and Cross, 1991; Ittner
and Larcker, 1998; Hoque, 2005; Rickards, 2007). For instance, the level of customer
satisfaction is considered a leading indicator of accounting performance, because it can
provide evidence of future-period retention and revenues that are obviously higher for
more satisfied customers (Ittner and Larcker, 1998). Hence, by monitoring the level of
customer satisfaction, the company can obtain earlier information about its future
financial results and, in the end, obtain in more timely information. The positive
contribution of non-financial indicators is confirmed by the academic and professional
literature which provides consistent evidence that the firms that make more extensive use
of a dashboard of financial and non-financial measures than firms with similar strategies
or value drivers have higher measurement system satisfaction (Ittner et al., 2003).
Complementary to the use of non-financial indicators, benchmarking has been
proposed as a tool to improve the performance and competitiveness of organisations in
business life. Its definitions and classifications vary from scholar to scholar according to
the time and criteria they focus on Kyr (2003). It was originally proposed as a process to
measure performance against best-in-class companies, then using the analysis to identify
and understand the practices needed to reach new goals, but it is also used as a
goal-setting process, an aid to set performance objectives in order to achieve performance
improvements (Venetucci, 1992). From this point of view, it focuses on analysing
forward looking, predictive and future performance comparisons (Anderson and
McAdam, 2004), hence becoming a useful instrument to deal with the turbulence of the
economic context. It allows information about competitors to be integrated in budgeting
and decision-making processes. As far as the budgeting process is concerned, this
integration is believed to improve the target setting process, because it allows companies
to take into account potential sources of variation determined by the external
environment, in which the competitors play a relevant role (Bauer et al., 2004; Groot,
2007). On the basis of these considerations, the second research hypothesis was
formulated:
 Risk and budget in an uncertain world 171

H2 The integration of information concerning non-financial performances and

benchmark data about competitors, as weak signals from the changing environment,
improves the perceived effectiveness of the budgeting process.

3 Research method

3.1 Survey design

The data collection was based on a survey of the largest companies in Italy. The initial
sample targeted 270 Italian companies that were selected from the list of top Italian
companies (Mediobanca, 2008)1, through a stratified sampling procedure. A
questionnaire was sent to the selected companies, targeting the person in charge of
coordinating the budgeting process (generally the controller). The survey design was
based on questions that could be easily answered by the target-respondents and which
would limit possible framing effects. Furthermore, the questionnaire was tested on some
companies before being distributed to the whole sample; the pilot test led to a few
changes to make the questions more understandable. Before delivering the questionnaire,
telephone calls were used to confirm who was the person that had to be contacted. The
respondents had the option of answering an e-mailed electronic copy of the questionnaire
or a hard copy, received via fax. After the first contact, the researchers made two
reminders. One hundred and twenty five questionnaires were collected, with an overall
response rate of 46.3%. Due to missing responses, there were 112 usable questionnaires,
with an actual response rate of 41.5%. The respondents distribution, in terms of size, and
its comparison against the sample frame is presented in Table 1. Two procedures were
used to assess the non-response bias. First, a control on the reasons for non-response
was performed (see Krumwiede, 1998). The most frequent motivation for the lack of
response was related to the lack of time or the confidentiality of the information
requested. Only a few companies indicated that they were not interested in the project or
did not consider the questionnaire suitable for their company. Second, as suggested by
Oppenheim (1966), the existence of the non-response bias was tested by comparing the
responses of the early and late respondents. The existence of statistical differences
between the two groups of companies was tested applying the chi-square test (categorical
variables) and the t-test (continuous variables). There was no significant evidence of a
response bias. Finally, a possible source of bias could have been related to the choice of
the sample frame (the list of the top Italian companies) and some caution should therefore
be taken when extending these results to other countries.
Table 1 Sample frame and size of the respondents

Sales [Mln] Mediobanca (sample frame) Respondents

Less then 500 17.0% 20.8%
5001,000 42.0% 41.6%
1,0002,500 25.8% 21.6%
More then 2,500 15.2% 16.0%
Overall 600 125
172 M. Arena and M. Arnaboldi

3.2 Measures and statistical analysis

The dependent variable, i.e., the effectiveness of a budgeting process, was measured as
the level of satisfaction stated by the process coordinator (which was, in most of cases,
the controller/accountant). A five-point Likert type item was adopted for this purpose
(SAT). Although this measure suffers from some limitations, as it is potentially subject to
a type of bias, as it reflects the opinion of the process coordinators, the choice appears
consistent with the objectives of this paper. Given the overarching role of the budget
coordinators, it was considered that an overall evaluation of the perceived effectiveness
of this process could be achieved surveying budget coordinators.
The list of independent variables and descriptive statistics is presented in Table 2. The
independent variables include two sets of items concerning:
1 the integration of information explicitly related to risk in the process of budgeting
2 the integration of information concerning non-financial performances and
benchmark data, as weak signals of the changing environment.
In order to measure the extent to which information explicitly related to risk was included
in the budgeting process, reference was made to three items. First, the request to
managers involved in the budgeting process to produce a risk map (RISKMAP), which
emerged from prior research to be a relevant point of intersection between budgeting and
risk management processes (see, for instance, Arena et al., 2011). The variable was
measured through a five-point Likert type item (where the variable was given the value of
1 when managers are never required to produce a risk map and 5 when managers are
always required to produce a risk map in conjunction with the budgeting process).
Second, the existence of formal coordination mechanisms between the coordinator of the
budgeting process and the figure in charge of the risk management process was
considered. Prior research highlighted that the establishment of coordination mechanisms
between the two process owners can play an important role in supporting managers
awareness of risk as well as the actual consideration of potential variations in targets
(Arena et al., 2010, 2011). The variable was given a value of 1 when some forms of
coordination exist and a value of 0 otherwise. Finally, the third item dealt with the use of
scenario analysis, in the meaning of formally analysing target variations on the bases of
the simulation of different scenarios. As far as this issue is concerned, Palermo and Van
der Stede (2011) highlighted how scenario budgeting can encourage a better integration
of risk and performance management. The variable was given a value of 1 when the
budgeting process is linked to scenario analysis and a value of 0 otherwise.
The second set of items refers to the use of weak signals to provide a forward-looking
view of the business. Here, two items were adopted: the use of dashboards and BSC as
part of the budgeting process, and the use of benchmark data pertaining to the
competitors in the budgeting process (BENCH). From the 1990s onwards, dashboards
and scorecard-like reporting instruments, containing financial and non-financial
indicators, have been introduced into the planning and control cycle of companies in
order to provide weak signals concerning the changing environment. Apart from which
label is used (e.g., balanced scorecard and tableau de bord), these instruments emphasise
the use of non-financial performance measures, clustered into different perspectives, and
linked to corporate strategic objectives (Bisbe and Otley, 2004). The variable BSC was
given a value of 1 when tools such as BSC and dashboards are used in relation to the
 Risk and budget in an uncertain world 173

budgeting process and a value of 0 otherwise. Second, benchmarking is related to target

setting and treated as a component of the formal planning process (Camp, 1989).
According to Groot (2007), when uncertainty is higher, internal and external
benchmarking have more weight in the budgeting process. Hence, the last variable is
BENCH, which was given a value of 1 when benchmarking is used in the target setting
process and a value of 0 otherwise.
Finally, a few control variables were included in the model in order to verify the
relevance of the contextual factors that could influence the results of the analysis. The
control variables were the companys size, the length of the budgeting process, and the
maturity of the budgeting process. The size of the company was measured according to
the annual turnover. A logarithmic transformation of the annual turnover (lnSIZE) was
employed. The length of the budgeting process (LENGTH) was measured through a
numeric variable that represented the number of months necessary to develop the budget.
Finally, the maturity of the budgeting process was measured through a dichotomous
variable (AGE), which was given a value of 1 if the budgeting process, as it is now, was
introduced more than five years ago and 0 otherwise. Table 2 presents the descriptive
statistics.
Table 2 Descriptive statistics

1 0
Variable N.
N. % N. %
Coordination between COORD 113 22 19.47% 91 80.53%
budgeting and risk
management coordinators
Use of scenario analysis in SCENARIO 113 20 17.70% 93 82.30%
relation to the budgeting
process
Use of dashboards and similar BSC 113 21 18.58% 92 81.42%
tools in the budgeting process
Variable N. Min Max Mean Std. dev
Size LnSIZE 113 100 38,513 1,450.32 3,704.83
(= Natural logarithm of sales)
Length of the budgeting LENGTH 113 1 10 3.81 1.52
process (months)
Use of benchmarking BENCH 113 1 5 2.78 1.05
Risk map RISKMAP 113 1 5 3.28 1.21

3.3 The model

A linear regression model was adopted in order to explore the research hypotheses. This
choice can be justified since the dependent variable is a Likert-scale item, and Likert-type
categories are assumed to constitute an interval-level measurement (Kerlinger and Lee,
2000). An OLS regression model was run. Standard tests were performed to verify the
reliability of the model and these provided acceptable results concerning the underlying
assumptions (Coakes and Steed, 2002). A sensitivity analysis was also performed, to
check the effects associated with the removal and replacement of some model variables.
The tested model was:
174 M. Arena and M. Arnaboldi

SATi = b0i + b1 RISKMAPi + b2 COORDi + b3 SCENARIOi + b4 BSCi

+ b5 BENCH i + b6 LENGTH i + b7 ln SALEi + b8 AGEi + ei

The dependent variable is the level of satisfaction towards budgeting, stated by the
process coordinator (SAT). The independent variables refer to the request to managers
involved in the budgeting process to produce a risk map (RISKMAP), the existence of
formal coordination mechanisms between the coordinator of the budgeting process and
the figure in charge of the risk management process (COORD), the use of scenario
analysis (SCENARIO), the use of dashboards and BSC as part of the budgeting process
(BSC), and the use of benchmark data concerning the competitors in the budgeting
process (BENCH). The first three variables refer to the testing of H1 and the last two
variables refer to the test of H2. Finally, LENGTH, lnSALE and AGE refer to control
variables.

4 Findings

Table 3 presents the results of the regression analysis that was carried out on the level of
satisfaction of the budgeting coordinators towards the budgeting process. The regression
model is statistically significant, as shown by the proportion of the variation in the
dependent variable explained by the model itself (F = 3.35; p < .00, R2 = 0.23). Among
the independent variables, two items, RISKMAP and BSC, resulted statistically
significant, as shown by the P-values of their coefficients. Since the coefficients are less
than the conventional value of 0.05, the corresponding independent variables can be said
to exert independent effects on the level of satisfaction of the budgeting coordinators. In
addition, a control variable, AGE which refers to the maturity of the budgeting process,
resulted to be a significant driver of the level of satisfaction of budgeting coordinators.
On the basis of this evidence, the previously formulated hypotheses can be said to be at
least partially validated by the regression analysis.
As far as the first research hypothesis is concerned, the statistical analysis shows the
existence of a positive relationship between the integration of information that explicitly
deals with risk and the level of satisfaction towards the budgeting process. In particular,
when managers involved in the budgeting process are required to produce a risk map, the
level of satisfaction is higher, suggesting an improved ability of the budgeting process to
deal with uncertainty. On the contrary, the analysis does not show any relationship
between the use of scenario analysis in relation to budgeting and the establishment of
coordination mechanism between the owners of the two processes. The second research
hypothesis is related to the integration of information concerning non-financial
performances and benchmark data, as weak signals from the changing environment in the
budgeting process. In this case, the regression analysis highlights a positive relationship
between the use of dashboards and BSC and the level of satisfaction of the respondents.
The data analysis, instead, does not show any link between the level of satisfaction and
the employment of benchmarking in target setting. Even in this case, the research
hypothesis was only partially confirmed. As regards the control variables, the data
analysis shows that only the age of the budgeting process positively affects the level of
satisfaction of the respondents.
 Risk and budget in an uncertain world 175

Table 3 Regression model

Unstandardised Standardised
Collinearity statistics
coefficients coefficients
t Sig.
Std.
B Beta Tolerance VIF
error
Constant 2.206 0.516 4.276 0
RISKMAP 0.149 0.05 0.273 2.973 0.004** 0.895 1.117
COORD 0.131 0.151 0.079 0.867 0.388 0.907 1.103
SCENARIO 0.221 0.162 0.129 1.364 0.175 0.851 1.175
BSC 0.307 0.152 0.182 2.022 0.046** 0.931 1.074
BENCH 0.036 0.058 0.058 0.621 0.536 0.875 1.143
LnSIZE 0.02 0.065 0.027 0.306 0.76 0.955 1.047
LENGTH 0.056 0.04 0.127 1.395 0.166 0.907 1.103
AGE 0.265 0.122 0.197 2.174 0.032** 0.919 1.088
2
Note: F = 3.35; p < .00, R = 0.23.
A sensitivity analysis was performed introducing and removing different items in order to
verify the reliability of the regression model. First, the regression model was run adding
the early/late respondent variable, in order to further verify the existence of a response
bias. This variable did not result to be significant in determining the level of
satisfaction of the respondents. Second, the use of different budgeting techniques (such as
activity-based budgeting, zero-based budgeting...) was added, and again, no relevant
differences were highlighted.
To conclude, the data analysis showed that the level of satisfaction towards the
budgeting process increases when:
1 managers are required to produce a risk map
2 dashboards and BSC are used in relation to the budgeting process.
The first result could suggest that companies can improve their ability to deal with
uncertainty by encouraging managers to identify and evaluate the risks that impinge on
their areas/processes. The budgeting process actually represents a good opportunity to do
so, because at this stage managers are already required to consider targets and objectives,
thus it could be easier for them to do a step further and map those events that could have
an impact on the ability of the company to actually reach their targets (see also Arena
et al., 2010). The second result suggests that companies can integrate financial and
non-financial indicators in the budgeting process for ensuring the explicit consideration
of potential sources of variations, not only in financial terms. The use of non-financial
indicators as means of anticipating financial results is consolidated in the accounting and
management literature, since this idea was first introduced in the early nineties (Johnson
and Kaplan, 1987; Lynch and Cross, 1991; Eccles, 1991). Here, it can be stated that the
combination of financial and non-financial information could also be exploited in
budgeting where financial accounting information still predominates.
176 M. Arena and M. Arnaboldi

5 Conclusions

In recent years, the financial crisis and the failures of several large corporations in
different parts of the world, has led to increasing attention being increasingly focused on
risk management as an instrument to predict risks and help organisations achieve their
goals. The awareness of the issue of risk is not new in relation to budgeting, and this
process has been permeated by the desire to deal with uncertainty for more than forty
years. Unfortunately, the solutions and techniques proposed by academics and
practitioners for this purpose do not appear very diffused among companies (e.g., Libby
and Lindsay, 2010). This situation has recently fostered the emergence of a new stream of
literature explicitly dealing with how companies can manage uncertainty in the budgeting
process (Collier and Berry, 2002, 2008; Collier et al., 2007; Arena et al., 2010; Palermo
and Van der Stede, 2011).
Starting from this consideration, the paper compared two potential approaches to deal
with uncertainty (i.e., the integration of information concerning risk and the use of other
weak signals non-financial indicators and benchmarking), investigating whether they
contribute to improve the level of satisfaction of process coordinators towards budgeting.
The data collection was based on a survey of the largest companies in Italy. One hundred
and twelve usable questionnaire (with a response rate of 41.5%) were collected. The test
of the hypotheses showed that the level of satisfaction towards the budgeting process
increases when
1 managers are required to produce a risk map
2 dashboards and BSC are used in relation to the budgeting process.
The first result has shown that the involvement of managers in trying to understand the
risk profile of a company contributes to the overall improvement of the budgeting
process. In particular, requesting managers to think in terms of risk, when dealing with
targets, and to produce a risk map, results in a higher level of satisfaction of the process
coordinator. This approach may have a positive impact on both line managers, who can
obtain more awareness of potential threats in relation to their areas of responsibility, and
the overall budgeting process, which is grounded more on complete information, and
which somehow integrates risk. This result confirms what has been pointed out by Arena
et al. (2011), based on a qualitative research. The second result highlights the relevance
of complementing financial information with non-financial indicators, even in the
budgeting process and not just in other control tools (e.g., BSC). Non-financial indicators
make it easier to obtain a better understanding of potential sources of variations, and
result to be particularly useful in industries characterised by rapid change.
From an academic point of view, our research could help contribute to the state of the
art literature in two ways. First, it explores the effectiveness of some approaches that
have recently been proposed to improve the budgeting ability to deal with uncertainty,
which has become a hot topic in the current economic climate. Second, the paper builds
on the recent debate about the convergence between risk and performance management.
Although practitioners literature is already rich in works that illustrate the possible
integration of risk and performance management (e.g., Sobel and Reding, 2004; Beasley
et al., 2006; Lam, 2006), this issue is still the subject of investigation in academic
literature. As far as this issue is concerned, our paper contributes by highlighting some
potential points of contact between these two processes. From a practitioner perspective,
 Risk and budget in an uncertain world 177

the research indicates that two specific solutions (risk map and non-financial indicators)
can help managers when they redesign their budgeting process.
The discussion on the results points out the main limitations of the study. First, the
analysis of the results shows that the data used in this research are too aggregated to
obtain a clear understanding of certain issues. A first point concerns the type of risk
information that can be integrated in the budgeting process. As this study confirms the
opportunity of integrating information about risk in the budget preparation, future studies
could provide a clear framework of the kind of information (type of risks, risk
evaluation...) that could be used for this purpose, in order to understand which
information is the most critical. Similarly, this study has generally referred to the use of
dashboards and balanced scorecard to highlight the usage of financial and non-financial
indicators; again, it could be interesting to examine in more details the type of
non-financial information in more detail. Finally, as far as the external validity of the
research is concerned, it is worth noticing that a great deal of attention has been paid to
ensure the generalisability of the results (in terms of sample selection, test of the response
bias...), however, the study has been carried out in Italy, hence some caution should be
applied when applying these results to other countries where the characteristics of the
context are significantly different.

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180 M. Arena and M. Arnaboldi

Notes
1 Mediobanca is the leading investment bank in Italy and its Research Department is a highly
specialised financial analysis and research centre. The annual editions of the Top Italian
Companies constitutes the most authoritative and complete classification of the main
corporations in Italy.

Appendix

Questionnaire

Section 1: Companys profile

1.1 Name
1.2 Type of industry
1.3 Sales
1.4 Number of employees
1.5 Organisational role of the budgeting coordinator

Section 2: Budgeting process

2.1 When (i.e., time of the year) does the budgeting process start?
2.2 When (i.e., time of the year) does the budgeting process finish?
2.3 How many months does the budgeting process last?
2.4 When was the budgeting process, as it is now configured, introduced
in your organisation?

Yes No
2.5 Do you use dashboards and/or balanced scorecard to integrate
non-financial indicators in the budgeting process?
2.6 Do formal coordination mechanisms exist between the budgeting
coordinator and the CRO (or equivalent position)?
2.7 Are the budgets linked to different scenarios?
1 2 3 4 5
2.8 How frequently are managers (involved in the budgeting process)
required to produce a risk map (1: Never, 2: Infrequently, 3:
Sometimes, 4: Frequently, 5: Always)
2.9 How frequently do you use benchmark data about competitors in
the budgeting process? (1: Never, 2: Infrequently, 3: Sometimes,
4: Frequently, 5: Always)

1 2 3 4 5
2.10 Overall, how much are you satisfied about the current budgeting
process (1 Not at all; slightly; somewhat; very; extremely)