2.2.4 Budgets Flashcards

1
Q

What are budgets

A
  • Budgets are forecasts or plans for the future finances of a business
  • These can be for the business as a whole or set for specific functions e.g. a marketing budget
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2
Q

Budgets can be

A

Income
Expenditure
Profit

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3
Q

What is the purpose of setting budgets

A
  • Provides a quantifiable target, that can be communicated to interested parties, against which actual outcomes can be measured
  • Helps with planning and forecasting to inform decision making

Motivates budget holders due to increased responsibility

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4
Q

Describe income budgets

A
  • a target set for the amount of revenue to be achieved in a set time period
  • can be split by products, services or departments
  • may be translated into individual sales targets for staff
  • informed by market research and sales forecasts
  • informs predicted cash inflows in the cash flow forecast
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5
Q

Describe expenditure budgets

A
  • a limit placed on the amount to be spent in a given period of time
  • can be split by department, function or product
  • responsibility can be passed to individual managers
  • a separate expenditure budget may be set for running costs and start up costs
  • informs predicted cash outflows in cash flow forecast
  • allows for monitoring of under spending as well as overspending
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6
Q

Describe profit budgets

A
  • a target set for the surplus between income and expenditure in a given period of time
  • calculated based upon the income and expenditure budget
  • may be set for the business as a whole or for individual departments, products or branches
  • will be used to inform decision making on products to include in the businesses portfolio as well as where cuts may need to be made
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7
Q

What are the two types of budgets

A

Historical and zero

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8
Q

Describe historical budgets

A
  • Setting budgets based on previous year’s
  • Can be adjusted in line with actual outcomes e.g. if a budget was underspent should it be set lower this year?
  • Can be linked to the ability to meet objectives
  • Can be incremental i.e. last year plus a %
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9
Q

Describe zero based budgets

A
  • Setting a budget of zero
  • All departments have to justify any requests for expenditure
  • Time consuming but flexible and can reduce waste
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10
Q

What is variance

A

The difference between the actual income expenditure profit or income budget compared to the figure that has been budgeted

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11
Q

Describe adverse variance

A
  • An adverse variance is one that is bad for the business
  • Expenditure higher than budget
  • Income lower than budget
  • Profit lower than budget
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12
Q

Describe favourable variance

A
  • A favourable variance is one that is good for the business
  • Expenditure lower than budget
  • Income higher than budget
  • Profit higher than budget
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13
Q

Possible causes of variances

A
•Action of competitors
Lower prices
Introduce a new product
Close a store
•Action of suppliers
Change prices
Offer a discount
•Changes in the economy
Change in interest rates
Increase to minimum wage
•Internal inefficiency
Poor management of a budget
Demotivated sales team
•Internal decision making
Change suppliers
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14
Q

Having identified variances managers now need to decide how to respond by

A
  • Change budgets?
  • Staff training?
  • Reward staff?
  • Change suppliers?
  • Reallocate budgets?
  • New marketing tactics?
  • Review product portfolio?
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15
Q

What are the difficulties on budgeting

A
  • Dependent upon predictions and forecasts
  • Costs are subject to change
  • Actions of competitors are unknown
  • Managers may lack experience
  • May be subject to bias
  • Take time and effort which itself has an associated opportunity cost
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