Budgeting

Question 1

What is a budget ?

Answer 1

A budget forecasts future earnings and future spending usually over a 12 month period
There are 3 types of budgets; Income budgets, Expenditure budgets and Profit budgets.

Question 2

Income budget

Answer 2

Forecast the amount of money that will come into the business as revenue
A business needs to predict how much will sell and at what price
Make estimates from previous years and market research

Question 3

Expenditure budget

Answer 3

Predict the businesses total costs for the next year
Take into account fixed and variable costs

Question 4

Profit budgets

Answer 4

Uses the income budget minus the expenditure budget to calculate expected profit or loss for the next year

Question 5

Budgets advantages

Answer 5

• Can be motivating
• Help control income and expenditure
• Reviews activities and makes decisions
• Can be used as a communication tool to share information
• Helps persuade investors that business will be successful

Question 6

Budgets disadvantages

Answer 6

• Can cause rivalry between departments in the business to compete for money
• Can be restrictive
• Time consuming
• Inflation is hard to predict
  - May be inaccurate

Question 7

Zero based budgeting

Answer 7

Starting a budget from scratch ( usually a start up business)
Have to get approval for spending activities and start at £0
Based on potential performance
Have to make a plan
Take longer but can be more accurate than historical budgets

Question 8

Historical budgets

Answer 8

Based on a percentage increase or decrease from the last years budget
Quick and simple but assumes a businesses conditions stay the same

Question 9

Fixed budgets

Answer 9

Businesses have to stick to their budget plan throughout the year even if market conditions change
Can prevent a firm reacting to opportunities and threats
Provide discipline and certainty

Question 10

Flexible budgets

Answer 10

Allows a budget to be altered in response to significant changes in the market or economy