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
2
Q
Budgets can be
A
Income
Expenditure
Profit
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
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
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
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
7
Q
What are the two types of budgets
A
Historical and zero
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 %
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
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
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
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
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
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?
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