2.2.4 Budgets Flashcards
Budget
A financial plan for the future agreed in advanced
Examples of budgets
e.g
S, E
Sales budgets - firms planned sales for the future (measured in volume/revenue)
Expenditure budgets - shows target spending/costs e.g promotion, labour, materials
Profit budgets - shows profit target
Purposes of budgeting -3
PMC
1) Planning - can help a businesses control their finances as they plan. Also by ‘budgeting planning’ - it ensures that you can anticipate budgeting problems in advanced e.g areas where you may have been overspending
2) Motivation - acts as a motivator for employees as it provides them with targets and standards
3) Coordination -budgets can help coordinate businesses with multiple different departments
Each department can have a breakdown of budgets - ensures that no one overspends
Main two types of budgets
Historical based budgeting
Zero based budgeting
Historical based budgeting
Using last years figures & prior data as a basis for budget with minor adjustments for inflation & future estimations
Pros of Historical based budgeting -2
- Realistic as it is actually based on actual results
- quick and simple
cons of hbb - 2
business conditions
- Assumes that a businesses conditions has stayed the same over the past year e.g product maybe declining/ lost customers ( can affect sales & profit budgets
- external influences can impact budgets
Zero based budgeting
- involves starting from scratch
Budget is based on potential performance rather than previous budgets/history
Pros of Zero based budgeting - 2
1) likely to be more efficient at minimising any potential unnecessary costs
2) Likely to be more accurate than historical based budgeting
Cons of Zero based budgeting - 2
1) Takes much more longer than historical based budgeting
2) Skilful decisions are required e.g by staff and they may lack experience
