Budgeting Flashcards
What is a budget?
quantitative expression of a plan for a defined period of time (planned sales, volumes, revenues, resource quantities, expenses, assets, cash flows)
What are the main benefits of a budget?
Control- a budget helps to control the organisation by making it create a plan
Responsibility- a budget will identify who is responsible for what
Integration- a budget will ensure that activities of the different parts of the organisation are integrated together (comms and coord)
Motivation- help motivate staff
Evaluation- evaluate actual results
What is the PBF?
limits the activities of an undertaking- starting point of the budgeting process (most often this is sales)
What are the steps of budgeting?
- Sales budget (if PBF)
- Production Budget
- raw materials, labour and production overhead
- cost of sales budget
- selling and distribution and general/admin cost budget
- master budget (statement of profit/loss, cash budget, statement of financial position)
- maybe Capital expenditure budget
What is a cash budget?- this is for NON-CURRENT ASSETS
Everything that enters or leaves the bank account (includes everything in production, revenues, capital items)
manage liquidity
How do payments and receipts work?
receipts should be higher than payments otherwise loss(cash shortage)
What to do if there is a cash shortage?
Short term- -organise overdraft -offer customer a discount to pay early -Delay paying suppliers Long term: -raise other finance (loans)
Cash surplus?
- offer more generous terms to customers
- arrange to pay off some finance (loans)
- organise to put surplus on deposit on money markets
What is a capital expenditure budget?
different from a cash budget as it takes into account current assets expenditure (ie new buildings) as can have big impact on cash flow and profitability
What is a depreciation budget?
usually told by how much the asset depreciates (number of months held divided by total months in the year, then times the % depreciation, then times the cost of the asset)
be aware of how much of the year we held the asset!
What is a budget committee?
co-ordinates the preparation and admin of budgets
budget period?
time period for which a budget is prepared
budget manual?
set of instructions that spending officials are expected to follow
Budgetary slack?
managers try to overestimate expenses or under estimate revenues to try and make sure budget meets targets
periodic budget?
shows costs and revenues for a period of time is updated each period
Rolling budget?
having been established at the beginning of the period, it is then constantly updated/amended/extended
What are the uses of rolling budgets?
- at times of uncertainty surrounding resources/prices, regular revisions help with more control
- encourages staff to continually be looking at external and internal variables
What are the issues with rolling budgets?
- involves time and effort
- concept not readily understood by managers
- continually changing the goals posts ban be de-motivating
What are incremental budgets?
base budget on last years budget and make adjustments for known variables such as inflation and growth
What are the uses of incremental budgets?
- budget is stable and gradual
- everyone treated the same
- easy to coordinate
- can see impact quickly
- managers can operate on a consistent basis
Issues with incremental budgets?
- no incentive to reduce cost
- encourages spending up to the budget
- no incentive for new ideas
- assumes organisations continue to work in the same way
- budget may become out of date
- priority for resources may have changed since budget set
- budgetary slack built in may not be reviewed
what is a zero- based budget?
Opposite of incremental
requires managers to justify every item of expenditure (even if that item had been accepted previously)
uses of zero-based budgets?
-very responses to changes in econ activity
-very efficient
-removes all budgetary slack
-encourages managers to improve processes, improves motivation
-eliminate wastage
-increased communication and coordination
creates culture of questioning
Problems with zero based budgeting?
- very time consuming
- who gets priority?
- R&D for example suffer as cant show short term benefit
- necessary to train managers
- difficult to administer
- volume of data may be unmanageable
- incentive for budgetary slack
- may prevent managers reacting to changed circumstances once budget set
What is a top-down (imposed) budget?
overall corporate objectives by senior management and then working down through levels of organisation
What is bottom up budget
individual and departmental objectives set by local management- lower, appropriate budgets set
What is the first decision regarding the budget?
first establish what type of budget and then who sets it
What are advantages of bottom up budgeting?
- budgets formed by those close to the action
- staff take ownership of budget
- greater motivation and participation
- doesnt take up senior management time
- encourages inter departmental communication
What are disads of bottom up budgeting?
- can create disfunctional behaviour- budgets fit local rather than company objectives
- more scope for staff disagreements
- lack of coherence
- more time consuming and costly
- budgetary slack may be built in
- may be inaccurate if less experienced managers are in place
