Budgeting Flashcards
what is cash?
money in the bank or physical cash at one point in time and is available to spend
what is profit?
paper calculation looking at a long period of time (a year) to see what the surplus of revenue over expenditure is
what will profit not include?
income received from sources other than trading
what are some examples of things not included in profit?
Loans
some non-cash expense
what is profitability?
the ability for a business to earn a profit
method used to see a companies profit in relation to business size
measurement of efficiency
what is liquidity?
how easily assets can be converted to cash
what does liquidity measure?
extent to which a person or organisation has cash to meet immediate and short-term obligations
what is working capital?
comparing the ability of current assets to meet current liabilities
Capital used in day to day running of the business
how can working capital be calculated?
current assets – current liabilities
what is a budget?
an agreed plan establishing, in numerical or financial terms to meet anticipated outcomes in alignment with business goals
what will a shorter time frame budget need to be?
will need to be more detailed
what are the accepted time frames for budgets?
short term
medium term
long term
what is the length of a short budget?
up to 12 months
what is the length of a medium term budget?
1-3 years
what is the length of a long term budget?
more than 3 years
what are the aims of setting a budget?
to establish priorities
to prove direction and co-ordination
to assign responsibility
to motivate staff to improve efficiency
to assess forecasting ability
how do budgets establish priorities?
money allocations indicate importance to a particular policy or division
how does producing a budget provide direction and coordination?
ensure spending is geared towards business aims rather than individuals
how do budgets assign responsibility?
budget holder is identifiable and is directly responsible for success or failure
how do budgets help motivate staff?
teams/ individuals get responsibility to meet budgetary targets and gain recognition for successful outcomes
linking rewards to achievement
how do budgets improve efficiency?
monitoring and control
establish standards and investigate failures
use this info for future decisions
working to a limited budget promotes efficient spending
how can budgets assess forecasting ability?
encourages careful evaluation of future
realistic planning
Can be compared against actual figures
what reasons might management use budgets?
planning
communication
decision making
co-ordinating
controlling
how will a manager use a budget for planning?
managements task to plan the future
how does using a budget increase communication?
encourages communication between departments as well as from management to staff
how can managements use budgets for decision making?
completing a budget requires information such as how much is going to be produced or forecast sales meaning certain decisions need to be made to meet predictions
how can management use budgets for co-ordination?
allows different departments in the business to coordinate for the same goals
how can management use budgets to control?
actual results compared to budgeted figures and corrective action will be taken
what is the budgeting process?
agree objectives
collect data on past event/ future trends
decide functional budgets
compile overall company budget
monitor and review performance
adjust aims and strategies as appropriate
what are revenue centres?
responsible for generating a budgeted income
what are cost centres?
must ensure costs of an activity remain within a set budget
what are profit centres?
required both to generate revenue and control costs
what are the budgets in order?
sale budget
production budget
purchases budget
labour budget
cash budget
master budget
what is incremental budgeting?
use previous figures as a base for future budgets
when is incremental budgets good?
good if you have fairly stable conditions because they are quick easy to do and relatively accurate
what is an example of a stable market that could use incremental budgeting?
selling Teabags
what are some problems associated with incremental budgeting?
doesn’t think about why changes happen
if economy is changing might become inaccurate
tend to spiral upwards often spend more than you need to
what is the main method of budgeting used by businesses?
incremental
what is zero-based budgeting?
budget will be set to zero at the start if each period and every budget holder will have to ask and justify the money they need
why would you use zero-based budgeting?
keeps spending low
only spending what you need
those that need budget more likely to get it
more motivating (more staff involved)
what are problems associated with zero-based budgeting?
time consuming
can cause conflict as not everyone will get what they ask for
when would a business use zero-based budgeting?
if they are at risk of going out of business
what are the benefits of budgeting?
individuals may be in harmony with long term business objectives
planning takes place
coordination and communication
responsibility
motivator
resources used as efficiently as possible
control of finances
prioritise spending
monitor performance
how do budgets help control finances?
ensures overspending doesn’t occur
how do budgets help prioritise spending?
extra funds can be directed into important area of the business
what is an example of prioritising spending?
if a businesses product isn’t selling well they can spend money on market research and development
can can budgets be used to monitor performance?
compare with actual figures with the budget and corrective action can be taken
what are the limitations of budgeting?
complacency
wasteful exercise
too inflexible
resentment among some staff
external factors
training
fair allocation
short term thinking
poor communication
misleading
how can budgeting lead to complacency?
if its easy to meet their budget and there is no incentive to improve performance
how can budgeting be a wasteful exercise?
if not carefully planned and actual result different from budget
too generous may lead to inefficiency (spend more than they need to get same in the future)
how is inflexibility of budgets be a limitation?
could lead to lost opportunities
how can budgeting lead to resentment amongst staff?
if they haven’t been involved in the process
how can external factors affect a budget?
might make it difficult to keep to the plan
how can training be a limitation of budgeting?
might be substantial if they want to make individuals manage budgets
could be teething problems
what is delegating budgeting?
when a significant proportion of employees manage budgets
how is fair allocation of budgets a limitation?
some people may be better negotiators so area that actually need budget might be missed
how is short term thinking a limitation of budgeting?
normally only relates to the current financial year
how can budgets lead to poor communication?
might miss areas of business that need budget/ miss efficiency
misunderstanding of the needs of that area
can budgets be misleading?
only as accurate as the data used to compile them much of which is estimates
what is a master budget?
the end result of the individual budgets for specific areas and brings them all together to produce a budgeted income statement, statement of financial position and cash budget
what is a sales budget?
estimates sales in units and revenue
start point for whole budgeting process
what is the link between the sales budget and the labour, purchases and production budget?
production- how much you need to make/ how much it will cost
purchases budget- how much it costs to purchase the materials
labour- how long it will take/ how much staff need to be paid
what is accuracy important with the sales budget?
want it reliable as possible so you don’t spend too much on purchases and production
expense could end up higher than revenue
what are info sources used to produce a sales budget?
look at competitors
trends within the market
talk to sales team and find out customer feedback
what is a production budget?
level of production in units that are needed to meet expected demand
what do you do with opening and closing inventory in the production budget?
minus opening inventory
add closing inventory
what external factors need to be considered when setting a production budget?
availability of workers - how many, skills
availability of goods
reliability of machines
market trends
what is the link between the production budget and two other budgets?
sales budget- need to how much to make to make a profit
purchases- need to know how much materials need to be bought to produce the product
why is it important to consider the inventory level at the start and end of each period for the production budget?
will affect final production figure
opening inventory- got it don’t need to make it
closing inventory- don’t get caught out if demand increases
what is a purchase budget?
contains the amount of inventory that a company must purchase during each budget period. The amount stated in the budget is the amount needed to ensure that there is sufficient inventory on hand to meet customer orders for products.
what is the link between the purchase budget and another budgets?
production- need to know how much material to buy to make goods
what is a labour budget?:
controlling how much labour is needed to meet production schedule
what other than labour hours is considered in a labour budget?
amount of workers- how easy you can get workers in
skill level
productivity rates
what implications might arise from an inaccurate labour budget?
too much or too little of the good may be produced
pay workers if they’re not actually working
not have enough stock to meet demand
why is identifying a surplus or shortage of labour hours useful?
a surplus of one period can be used to combat a shortage in another
can add or reduce the amount of workers
What is a cash budget?
Forecasting the movement of money (cash and bank)
Month to month basis
What does a cash budget help identify?
Surplus of cash
Deficit of cash
What is the issue with surplus cash?
Cash sitting around is unproductive
What is the issue with a cash deficit?
Not enough cash to do what we want
But can prepare in advance (take action avoid it)
When would you record something in the cash budget?
Record it when cash changes hands
What is the link between the cash budget and 2 other budgets?
Labour- need to know how much we are paying workers (change in wage level or overtime)
Purchases- need to know how much it cost to buy materials
What external factors need to be considered when setting a cash budget?
Tax rates
Inflation
Interest rates
Wage rates
Why is a high level of accuracy important in a cash budget?
Don’t want too spend too much
Don’t want too spend too little and miss opportunities
What are some issues that might arise from an inaccurate cash budget?
Might become overdrawn so might not have prepared by taking an overdraft
What are some sources of information used to compile a cash budget?
Receipts
Trade payables
Trade receivables- provision for doubtful debts
Previous years cash budgets and actual cash figures
How are sales treated in the cash budget?
Income from sales is entered as it is received or when it is reasonable to expect it will be received
How will you treat sales in the income statement?
Applied to the period in which the sale occurs
How are expenses treated in the cash budget?
Entered as paid
How are expenses treated on the income statement?
Provision is made in accounts for expenses incurred but these would not necessarily have been paid yet
How is depreciation treated in the cash budget?
Not shown as it is not actual expenditure
How id depreciation treated on the income statement?
Shown as a business expense
How are capital inflows shown on the cash budget?
If capital is injected that is not from trading then its shown as a type of income
How are capital inflows shown on the income statement?
Will only show inflow of capital that has arisen as a result of trading activity
What is the master budget made up of?
Forecast income statement
Forecast statement of financial position
Forecast cash flow statement sometimes included
What is the master budget?
The use/ compiling of all budgets into one place
what is budgetary control?
the establishment of budgets and the continuous comparison/ assessment of budgeted and actual results to ascertain differences from the plan and to provide a basis for corrective action, revision of the objective or strategy
how would you work out any differneces in budget and actual figure?
budgeted cost,revenue or profit- actual cost, revenue or profit= variance
what are the two classifications for variances in budgets?
favourable (good for the business)
adverse (bad for the business)
what are some examples of favourable variations?
- actual revenue is higher than budgeted revnue
- actual costs are lower than the budgeted costs
- actual profit is higher than budgeted profit
what are some examples of adverse variances in budgets?
- actual revenue is lower than budgeted revenue
- actual costs are higher than the budgeted costs
- actual profit is lower than budgeted profit
whose responsibility is it to investigate variances?
budget holders
why do budget holders need to investigate variances?
so corrective action an be taken with adverse variances and so that cause of favourable variances can be identified with the view of prolonging it
what variances are most likely to be investigated by management?
significant ones that are outside pre-agreed tolerance levels
How are tolerance levels measured?
may be an amount or a percentage
