3.5.2 Analysing financial performance Flashcards
What is a budget
a spending plan
it shows the amount allocated to be spent or expected to earned
Why do businesses need to create a budget
helps control finances
helps ensure businesses do not spend more than they should
3 main types of budget
income budget
expenditure budget
profit budget
What is zero budgeting
this is when each department’s budget is set at zero and they have to justify every pound they ask for
Advantages of zero budgeting
encourages more through planning
helps to identify changes in an organisations needs
helps to save money by cutting costs where managers are unable to justify their spending
What are the disadvantages of zero budgeting
time consuming
better negotiators may acquire bigger budget despite needs of other departments
How can setting budgets be difficult
if sales budgets are too high and unachievable they can de-motivate staff
production budgets set too low might be ignored
simple to achieve budgets will not motivate or improve performance
How can you monitor budgets
variance analysis- looks at differences between forecast data and actual figures
What is favourable variance
when the difference between actual and budgeted will result in the business enjoying higher profits than shown in the budget
eg actual sales more than budgeted
Causes of favourable variance
wage rise lower than expected
economic boom leads to higher than expected sales
rising value of pound so imported raw materials cheaper
What is adverse variance
when the difference between the budgeted and the actual figures will lead to the firms profits being lower than planned
eg actual sales less than budgeted
causes of adverse variance
competitors introduce new products winning extra sales
govt. increase business rates by unexpected amount
fuel price increases as price of oil rises
To get a favourable sales variance, what might a business do
cut prices- if consumer demand is sensitive to price changes (elasticity)
seek new markets- at home or overseas
product range- update or extend as appropriate
increase advertising and/or promotions
improve company image- PR donations to charity
To get a favourable cost variance, what might a business do?
cheaper suppliers
reduce marketing
find cheaper locations
redundancies
Advantages of budgeting
assists in the control and monitoring of finances
variance analysis can be conducted that informs decision making
departments over budget are easily recognised and corrective action can take place
income budgets can provide targets to exceed
budgets can have motivational effect
