14: Setting budgets

Question 1

Budgets

Answer 1

Financial targets for the future covering revenue (income) and expenditure over a certain time period.

Question 2

Expenditure budgets

Answer 2

A fixed sum of money to be spent in a given time period by a department.

Question 3

Budget holder

Answer 3

A person who is accountable for seeing that a budget is kept to.

Question 4

Income budgets

Answer 4

The sales revenue target for a department or the whole business.

Question 5

Delegated budgets

Answer 5

Giving someone control in setting and spending of budgets to departments or individuals. (Gives employees some financial responsibility/motivation)

Question 6

Profit budget

Answer 6

The target profit for the business over a given time period.

Question 7

Setting budgets - how is it done?

Answer 7

1) Set clear objectives for the firm for the coming year. E.g. aim is to increase sales and this must be reflected in the sales budget.
2) Gather info, for example undertake market research to provide information to base sales on.
3) Construct a sales budget showing target revenues from each product of region.
4) Based on this sales budget, set budgets for major cost areas such as labour, material costs, energy costs, promotional spending.
5) Set a profit target based on the sales and cost budgets already established.

Question 8

Setting budgets for new businesses:

Answer 8

• Use spreadsheet software & update regularly.
• Set budgets for at least 12 months as most new businesses will be expected to make a loss in the first few months.
• Give great importance to monthly sales forecasts.
• Make sure ALL the costs of operation involved in producing and delivering the product to customers are included in the budget.
• Keeping a cumulative, month my month total of profits and lose.
• Monitor each major budget monthly and take corrective action as soon as possible.

Question 9

Monitoring budgets:

Answer 9

Keeping a check on progress towards achieving targets during the budget period.

Makes sure that:

• Money from each expenditure budget is being spent on the correct items and not being misallocated.
• All costs are being accounted for - an accurate record is being kept.
• Major cost ‘excesses’ are being reported to senior managers before the expenditure is agreed.
• Revenue and profits are meeting target levels - and senior managers informed f this is not the case.

Question 10

Problems in setting budgets:

Answer 10

• The future can never be certain, e.g. changes in external environment which can make budgets inaccurate - such as economic recession, technological change or inflation in raw material prices.
• Managers with delegated authority may try to pursued bosses to set spending budgets higher than they really need to be.
• Inaccurate budgets which may have been set by senior managers with no input from ‘people on the ground’ might be very demotivating for the manager and the department trying to keep to these inappropriate targets.
• Budgets that are too easy to achieve will not promote the motivational incentives that more challenging targets would.