Probabilistic budgeting
Probabilistic budgeting considers budget outcomes with probabilities reflecting uncertainty in assumptions. A plan can compare possible sales, costs or cash outcomes and their likelihoods instead of relying on one certain figure. Probabilities must be stated, justified and internally consistent; expected values can summarise the distribution but do not describe its spread or guarantee an achievable result. Consider scenarios, downside exposure, correlations and practical funding needs alongside any average.
Worked example
A budget assigns a 25% chance to sales of $80,000 and a 75% chance to sales of $120,000. Expected sales are 0.25 × $80,000 + 0.75 × $120,000 = $110,000. Management also considers whether it can operate under the $80,000 outcome.
Common mistake
Using expected sales as a guaranteed minimum or assigning scenario probabilities that do not sum to one.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | PM | Supporting | September 2026–June 2027 |