2.2.4 Budgeting Flashcards
budget
target for revenue or costs in a future time period
for a particular aspect of a business
must be reached over a given period of time
enable a business to run efficiently and effectively
individual budget (brand) or master budgets (company)
- aware of government forecasts (inflation increase in price, or deflation decrease in price)
- interest rates affect budgets
3 main types/parts of budget:
- revenue/income budget:
- cost/expenditure budget
- profit budget
- interest to stakeholders e.g. bank = bad reputation
- basis for performance bonuses and motivate staff
process of budgeting/profit budgeting is constructed by:
3 steps
considerations?
- analyse market
- draw up sales budget
- draw up cost budget
considerations?
external factors: gov estimates inflation, interest rates, wages rises– link to inflation
variance analysis
difference between budgeted and actual figures
5 purposes of a budget
- focus expenditure on company’s main obj for time period
- expenditure budgets - no department/person spend more than expected
- measure performance (aims/objs)
- spending power delegated - understand local conditions = decide how to spend
- motivate staff to hit targets
how can budgets be set?
- historical budgeting: last years figures = guide = spend this year
common to add inflation
common in public sector (incremental) - zero budgeting: start from budget of 0 and work up
-based on strength of case presented. by manager,
-one off events,
(budgets based on new proposals for sales and costs i.e built from bottom up)
1 pros and 3 cons of historical budgeting
pros
1-realistic based on actual results
cons
1-changed circumstances
2-doesn’t encourage efficiency
3-expected to spend certain amount/ complacent
1 pros and 3 cons of zero budgeting
pros
1-potentially more realistic
cons
1-more complicated and time consuming
2-bias if you pitch well
3-tight budget if manager only interested in profit
5 causes of favourable variances
- stronger demand than expected =higher revenue
- selling prices raised
- cautious sales and cost assumptions
- competitor weakness = higher sales
- better than expected productivity or efficiency
4 causes of adverse variances
1-unexpected events = unbudgeted costs
2-over spending by budget holders
3-sales forecasts prove over optimistic
4-market conditions (e.g. competitor actions) = selling prices are lower than budgeted
what should managers do as a result of variances ?
- act/investigate the variance is outside an agreed margin
- small = no action
- consider was it avoidable or unavoidable
- act to remedy the problem if appropriate
7 benefits of budgeting
- help foresee unexpected
- allows efficient allocation of resources
- gives direction/coordination
- motivate staff (targets) = work harder, increase productivity
- improve efficiency
- assist in forecasting & future planning
- confidence in SHs
7 limitations of budgeting
1-inaccurate allocation (inexperience)
2-force short term in decision making
3-time consuming dynamic/fast moving market
4-overspending
5-changes not allowed for when reviewed
6-unforeseen changes = difficult to predict
7-government and public body decisions e.g. interest rates
adverse variance
variance is negative for business
e.g. costs higher and revenues lower than budget
favourable variance
variance is positive for business
e.g. costs lower and revenues higher than budget
