Budgeting Essay Example | Topics and Well Written Essays - 1750 words

Budgeting - Essay Example (Davis & Davis, 2012) Industry context determines the particular risks that affect the budgeting process and outcomes in certain businesses. In the airline industry, fuel price volatility constitutes an external risk that significantly affects the budget of airlines. Fuel hedging is a strategy practiced in the airline industry to stabilize the budget and offset risks involved in changing prices. Fuel hedging can result to benefits and/or downsides relative to the budget of airlines. Fuel hedging does not ensure absolute positive results for all firms and in all circumstances. Budgeting is a complex process influenced by various factors that could lead to different outcomes. There are lessons to be learned by considering budgeting in the context of fuel hedging in the airline industry. The succeeding discussion focuses on the issues involved in budgeting by taking the case of the airline industry. Lessons on budgeting are drawn and practical applications are identified. Main Issues in Budgeting Budgeting should be realistic and based on a thorough analysis of a firm’s financial needs, current and expected revenue generation, and business objectives (Davis & Davis, 2012). ... An accurate estimate would result to a budget that is very close to the actual amount of resources used. Among airline companies, fuel cost constitutes a significant expense comprising around one-third of the overall budget for a certain period. Airlines need to estimate the expected fuel cost in a given period to be incorporated into the overall budget for that period. Estimation involves uncertainties because of unexpected factors. An unexpected factor is change in the cost of fuel. Airline companies do not have any control over the price of fuel since many factors, from both the demand and supply side can affect the price. The extent of change in fuel prices are also beyond the full control of airline companies. (Karp, 2008) In 2000, fuel prices increased by an average of 18 percent between the second and third quarter to represent a 45 percent increase in the same period of the past year. Estimates of many of the airline companies in the U.S. were not able to approximate the actu al price increase. As a result of the wide gap between the estimated change in fuel prices and actual fuel prices, U.S. Airways incurred losses while America West achieved profit levels much lower that its projections. (Trottman & Carey, 2000) While estimation is wrought with uncertainties, managers and decision-makers lessen the gap between expected and actual expenses by learning from repeated experience of the estimation process given different price situations. Fuel hedging involves an estimation of the rate of change in fuel prices over a given period and entering into an agreement for the supply of fuel at a particular price within that period. The contract represents a price where