Budgeting Flashcards
What is a budget?
It is a forward financial plan.
Set targets for income ,expenditure, and profit
over a given period of time
Types of budget
Income budget
Expenditure budget
Profit budget
Why are budgets set?
Ensures they dont overspend
allocated where money is spent in certain departments
Provides good motivation on an individual level using clear targets.
Methods of setting budgets?
Looking into account objectives
Budgeting according to competitor spending
Setting budget as a percentage of sales revenue
Budgeting according to last years budget allocation
Methods of budgeting?
Historical and zero based
What is zero based budgeting?
Starts with £0
Need approval to spend money
They have to plan the year’s activities and justify
Need negotiating skills
Takes much longer
More accurate than historical if done properly
What is historical budgeting?
Based on a percentage of last years budget.
eg.if it expects a 10percent revenue increase, budget might go up by 10 percent.
advantages of historical based?
quick and simple
disadvantages of historical based?
assumes conditions stay unchanged
eg.a product at the start of its life cycle needs more spent on advertising
benefits of budgeting?
helps achieve targets
Control income and expenditure
helps review activity
helps focus on priorities
co ordinate spending
drawbacks of budgeting?
Can cause resentment and rivalry if they compete for money
can be restrictive
time consuming
inflation is difficult to predict
start up businesses have no data
What is variance analysis?
the difference between the actual and budgeted spend.
why can variances be bad?
if its better than expected, maybe one department is doing really well and this needs to be spread
also means that the targets aren’t difficult enough
