budgeting Flashcards
what is a budget
budgets are financial plans over a certain period of time. they include expected inflows- revenue and outflows- costs.
budgets are based on the businesses objectives, and are often divided into budgets for each department which also have their own objectoves which thy base their budget on.
exprected revenues and costs will be based on what the business is trying to achieve
e.g. gain more loyal customers e.g. need to impliment a reward sceheme, which will reuqire a larger budget but this in the long term is likely to increase revenue.
what is the process when deciding on a budget
1- aims and objectives of the business as a whole are identitifed, e.g in terms of profit, marker share, growth etc
2- main fucntional departments set own budgets- operations, marketing and finance
- operations considers costs only- how much raw materials, machinery is needed and how much this will cost
- marketing will consider both revenues and costs, how much their marketing activities will cost the business and how much return these activiities will bring to the business
- finance will consider cash flow forecast and whether income will be able to cover costs of departments, if not other methods of sourcing finance may need to be considered
what are the advantages of budgeting
- allows resources to be allocated to areas of the business which are needed to achieve the businesses objectives
- helps business monitor performance, highlight issues in areas/ departments e.g. overspending- can take action to correct this and avoid business spending unnceccisary costs - increasing efficiency - increasing profit margin- costs are minimised
- variance anaylysis can help uncover the causes and issues which can be adressed immediately increasing chances of success as business remains responsive to internal and external environment- avoid getting stuck behind in the market due to low sales
increase accountability of functional managers making it more likely managers will be aware, conscious and respobsible for actions and activity- planning their actions and considering if cost is neccissary
better planning is facilitated by budgeting anticipating futture events meaning bsuinesses may be better prepared to respond to events
communication across the organisation is improved as budgets helps the coordination of activities
what are the disadvantages when budgeting
budgets can be unrealistic which could then lead to poor financial operations and decisions being made increasing chances of failure
- effective budgeting DEPENDS ON the skills and experience of managers, if managers manipulate budget for their own depatrtments gain then budgeting will not be successdul and may lead to underachievenment- and lack of efficiency and misallocation of valuable resources
- budgeting can make a business rigid and reluctant to change or repsonf to their internal and external environments, espiavially in realibity when dynamic makrets are constantly changing a fixed and tight budget doesnt allow businesses to respond to changes and competitor actions and growth/ immbation which are significant for success
- cant guarantee sucess, other factors such as customer demand , and id the budget is used approapriately, eco situation- key to sucess
-thoes who feel excluded from budgeting process may not be comitted and feel demoivated
what id variance anaylisis
identifying any differences from budgeted figure and actual spending
budgeted figure- actual figure
this could be favuourable- + figure where more revenue than cost
or adverse where there is less revenue than costs- need to take action if this occurs
why do f/a variances occur
favourable- this can occur where less has been spent than predcited, higher sales revenue than predicted, higher productivity
adverse, where more money has been spent than budgeted for, of where less revenue has been collected then bugeted for or prehaps unexprected outcomes have occured, too optimidtic sales forecast
what is historical budgeting- a/d
using budgets from previous years to formulate new budget following time period
+ realistic to the business and their trends ins ales
+ easy too do
+ good for sectors with seasonality/ predictable demand
+ able to track performance and growth over time
- lack flexibiliy- e.g. unexpected changes to the market
- may not account for higher costs e..g inflation
- business may grow
- businessses objectives may have chnaged
what is zero based budgeting a/d
this is where businesses start from the beggining- clean sheet and must justify expenditure ensuring in line with objectices
+ ensures no uncessiary costs
+ more control able to adapt to current market conditions
+ motivates workers to look for alternative options as have to justidy may find that there is other ways at a cheaper cost
- very time consuming
- may overlook essential costs
- may sacrafice quality,
