2.2.4 - Budgets Flashcards
What are budgets?
Forecasts or plans for the future finances of a business
What 3 areas are budgets used for?
Income
Expenditure
Profit
What’s the purpose of setting budgets?
- provides a quantifiable target, that can be communicated to interested parties, against which outcomes can be measured
- helps with planning and forecasting to inform decision making
- motivates budget holders due to increased responsibility
What are income budgets?
A target set for the amount of revenue to be achieved in a set time period
What are expenditure budgets?
A limit placed on the amount to be spent in a given period of time?
What are profit budgets?
A target set for the surplus between income and expenditure in a given period of time
What are the benefits to a business of setting budgets?
- targets for the departments
- informs predicted cash inflows or outflows in the cash flow forecast
- separate budgets for each department
- monitors under spending and overspending
- decision making
What is used to set budgets?
Market research and sales forecasts
What are the two types of budgets?
- historical figures
* zero based
What are historical figures?
Setting budgets based on previous year’s
What are zero based figures?
Setting a budget of zero
What are the features of a zero based budget?
- all departments have to justify any requests for expenditure
- time consuming but flexible and can reduce waste
- can save a business money
How can budgets be used to monitor performance?
Can compare the budget to the actual
What is a variance?
The difference between the actual income, expenditure or profit and the figure that had been budgeted
What is variance analysis?
The process of calculating and interpreting these variances
