2.2.4 - Budgets

Question 1

What is a budget and what are its primary purposes in a business?

Answer 1

A budget is a future financial plan concerning the revenues and costs of a business.

Its primary purposes include planning, forecasting outcomes, communicating targets, assigning responsibilities, allocating resources, controlling expenditure, and motivating employees.

Question 2

Why is budgeting important for startups?

Answer 2

For startups, a budget is a key element of a business plan and helps in obtaining finance by demonstrating how funds will be managed and allocated.

Question 3

What types of budgets might a business have?

Answer 3

A business may have various budgets, including revenue budgets, expenditure budgets, profit budgets, marketing budgets, and budgets for research and development.

Question 4

What is historical budgeting, and what are its advantages?

Answer 4

Historical budgeting uses last year’s figures as the basis for the budget, considering future changes. Its advantages include realism, as it is based on actual past results.

Question 5

What is zero-based budgeting and how does it differ from historical budgeting?

Answer 5

Zero-based budgeting starts with all costs and revenues set to zero and builds the budget from the ground up based on new proposals. In contrast, historical budgeting relies on previous years’ data.

Question 6

What is variance analysis in the context of budgeting?

Answer 6

Variance analysis involves calculating and investigating the differences between actual results and the budget, identifying whether variances are favorable (better than expected) or adverse (worse than expected).

Question 7

What are some limitations of budgets?

Answer 7

Limitations of budgets include:
1. reliance on the quality of data
2. potential inflexibility in decision-making
3. significant time required for preparation
4. the need for adjustments as circumstances change
5. short-term focus leading to suboptimal long-term decisions
6. managerial preoccupation with budgets rather than customer focus.

Question 8

What behavioral challenges can budgets create in a business?

Answer 8

Behavioral challenges include demotivation from imposed budgets, unrealistic target setting, departmental rivalry over budget allocations, the mentality of “spending up to the budget,” and the emergence of a blame-and-shame culture.