4 - Developing a Business Plan - Budgeting Flashcards
What is a budget?
Report that gives a financial description of one part of a business’s planned activity
Why should we budget?
- Introduces discipline and order to the planning process
- Provides an opportunity to recognise and avoid potential operating problems
- Quantifying plans
- Creating a benchmark for evaluating the business’s performance
How does a budget add discipline?
Before implementing planning decisions, effective businesses think carefully about what is likely to happen as a result of their decisions. The more complete and detailed the planning process of a business, the easier it is for an entrepreneur to foresee what might happen.
Having a document that outlines projected performance creates guidelines for a business to operate within. As such, budgets add discipline because of their orderliness and detail.
How does a budget provide an opportunity to recognise and avoid potential operating problems?
Budgeting gives a business forewarning and allows them to uncover potential problems before they occur, and to spot omissions or inconsistencies in the plans. The budgeting process helps the business to see and evaluate how changes in plans affect different parts of a business’s operations.
How does a budget quantify plans?
A budget quantifies or expresses in numbers the operating activities and goals of a business plan. Budgeting also quantifies the resources that the business expects to use for its planned sales and purchasing activities.
How does a budget create a benchmark for a business?
The business periodically compares the results of the business’s actual operating activities with the related budget amounts. These comparisons measure the business’s progress towards achieving its goals and help the entrepreneur to evaluate how efficiently the business is using its resources.
The comparisons also help the business to focus on what changes should be made to bring the business’s operating activities more in line with its goals. Businesses should focus on both the favourable and unfavourable differences so they can capitalise on opportunities as well as locate problem areas.
What is management by exception?
Management principle where an entrepreneur or manager focuses on improving the activities that show significant differences between budgeted and actual results.
What is an operating cycle?
The operating activities of a business make up what is called the business’s operating cycle, which is the average time it takes the business to use cash to buy goods and services, to sell these goods to or perform services for customers, and to collect cash from these customers. The order of activities, and the cash receipts and payments associated with these activities, influence how a business organises its budget.
What is the operating cycle of a retail business?
The average time it takes a retail business to use cash to buy goods for sale (called inventory), to sell these goods to customers, and to collect cash from its customers.
What is the operating cycle of a service business?
The average time it takes a service business to use cash to acquire supplies and services, to sell the services to customers, and to collect cash from its customers.
What is the master budget?
Set of interrelated reports showing the relationships among a business’s goals to be met, activities to be performed, resources to be used, and expected financial results.
What is included in a master budget for a retail business?
- Sales budget
- Purchases budget
- Selling expenses budget
- General and administrative expenses budget
- Cash budget (projected cash flow statement)
- Projected income statement
- Projected balance sheet
What is a projected balance sheet?
Statement summarising a business’s expected financial position (assets, liabilities, and owner’s equity) at the end of a budget period
What is a sales budget?
A budget showing the number of units of inventory that a business expects to sell each month, the related monthly sales revenue, and the months in which the business expects to collect cash from these sales.
What is a purchases budget?
A budget showing the purchases (in units) required in each month to make the expected sales in that month (from the sales budget) and to keep inventory at desired levels.
