2.2.4 : Budgets Flashcards
What is a budget ?
It is a financial plan for the future concerning the revenues and cots of a business.
What is the budgeting process ?
Budgets for revenues and costs are prepared in advance and then compared with actual performance to establish any variances. Managers are responsible for controllable costs within their budget. Managers take remedial action if the adverse variances are regarded as excessive.
What is the budgeting process ?
Budgets for revenues and costs are prepared in advance and then compared with actual performance to establish any variances. Managers are responsible for controllable costs within their budget. Managers take remedial action if the adverse variances are regarded as excessive.
What uses do budgets have in management ?
Establish priorities + set targets
Turn objectives into practical reality
Provide direction + co-ordination
Assign responsibilities
Allocate resources
Motivate staff
Improve efficiency
What are the principles of effective budgeting ?
Managerial responsibilities are clearly defined.
Performance is monitored against the set budget corrective action is taken if results offer significantly from the budget
Departures from budgets are only one after permission from senior management
What are historical budgets ?
Uses last year’s figures the basis of the budget
Realistic I that it is based on actual results
However circumstances may have changed
Does not encourage efficiency
What are zero-based budgets ?
Budgeted costs + revenues are set to zero
Budget is based on new proposals for sales and costs
Makes budgeting more complicated and time-consuming, but potentially more realistic
What are the three main types of budgets ?
Revenue budget - expected revenue + sales , broken down into more detail
Costs budgets - expected costs based on sales budget , overheads and other fixed costs
Profit budget - based on the combination of revenue and costs budget , of great interest to stakeholders
How is a profit budget constructed ?
Analyse market - market size + growth , market share , market prospects
Draw up sales budget - sales forecast , new products , pricing changes
Draw up cost budget - based on sales budget , allow known changes in suppliers prices
What are the two key sources of information for a budget ?
Financial performance in previous periods - particularly for established businesses , lots off relevant data to be available
Market research - trends in market size, growth, segmentation , competitor activity , customer feedback
What difficulties are there in budgeting accurately ?
Sales forecasting - harder when market experiences rapid change , startup firms find it harder to predict first sales and costs , competitor actions difficult to predict
Costs - always likely to be unexpected costs , will vary depending on sales budget , changes in external environment will impact costs (e.g. taxes + exchange rates)
What is the definition of variance analysis ?
Calculating and investigating the difference between the actual results and he budget
What are the two different types of variances?
Positive / Favourable - better than expected
Adverse / Unfavourable - worse than expected
What are possible causes of favourable variances ?
Stronger market demand than expected = higher actual revenue
Selling prices increased higher than budget
Cautious sales and costs assumptions
Competitor weakness leading to higher sales
Better than expected productivity or efficiency
What are possible causes of adverse variances ?
Unexpected events lead to un-budgeted costs
Over-spends by budget holders
Sales forecasts prover overly optimistic
Market conditions ( competitor actions ) mean selling prices are lower than budget
