2.2.4 Budgets

Question 1

define Budgets

Answer 1

A quantitative economic plan, prepared and agreed in advance. This will detail how much capital different departments have available to them for a time period.

Question 2

The purpose of budget

Answer 2

Planning ​

Forecasting​

Communication-allow objectives of the business to be communicated to the workforce​

Motivational tool – acts as a motivator to the workforce

Question 3

Benefits of Budgeting

Answer 3

To aid communication throughout a business​
To aid co-ordination of activities​
To make managers consider expenditure decisions in advance​
To motivate staff (through communication, delegation and target-setting)​
To help persuade potential lenders to invest money​
To allow variance analysis and tracking

Question 4

Drawbacks of budgeting

Answer 4

They are based on historical data and human judgement​
It is time consuming​
Departments may have to compete for funds​
Those not involved in the planning process may feel left out & become demotivated​
Budgets can be manipulated​
Sometimes managers may be too rigid with them & this could lead to unhappy customers​
Managers may be too focused on the current budget and not consider future impacts