Budgeting Flashcards
Budgeting
The finance department is in charge of keeping track of how much money comes in and goes out of the business. They’ll be in charge of all financial aspects of the business, including paying suppliers, paying salaries, and accepting payments from customers.
A Budget
A budget is a financial plan of action that usually covers a certain period of time, such as six months or a year. A budget would outline a business’s planned revenues (income), expenditures (costs) and profits.
Functions of a budget
Preparing budgets,Raising finance,Preparing final accounts,Business performance
preparing budgets
the finance department can also use past records from various departments to make budgets and forecast future revenue, expenditure and profits.
Raising Finance
the finance department must ensure a business has enough money to pay bills. To do this, they may be required to raise extra finance. This can be done through internal or external sources of finance.
preparing final accounts
the finance department will be responsible for:
Cash flow - it’s important to keep track of the amount of cash in the business, and to predict how much cash will be available in the future, to ensure it doesn’t run out.
Profit and loss - when making business decisions, it’s important to know if the business is profitable or not.
Business performance
assessing a business’ performance will help guide potential decisions on what needs to be improved.
purpose of a budget
control revenues and expenditures to help a business make a profit
direct and coordinate business aims and objectives so that they can be achieved
assign responsibilities to budget holders (managers) and allocate resources (mainly money)
create a list of objectives and numerical goals for the business, which will help to motivate workers and managers
communicate targets from management to subordinates, which will again help to motivate workers
improve efficiency as management try to control costs but maintain standards of work - for example, a business may reduce production costs but aim to produce the same quantity of goods
monitor performance to ensure budgets are met
Advantages of Budgeting
A means of controlling income and expenditure. * Regulate the spending of money and highlight losses, waste and inefficiency. * They act as a review and allow time for corrective action to take place. * They allow delegation without loss of control - subordinates can be set their own targets. * They help in the co-ordination of a business and improve communication between different sections of the business. * Budgets provide clear targets to be met and should help employees to focus on costs. * Can act as a motivator for staff if budget is met
drawbacks of budgeting
drawback of budgeting- can demotivate workers?
Workers not involved in the budgeting process may lack commitment, leading to lower performance levels and unmet budgeted revenues or expenditures.
What are the consequences of setting unrealistic budgets for the sales team?
Setting unachievable targets for the sales team can result in unmet budgeted figures and potentially unfavorable variances.
Why can rigid budgets be problematic?
Rigid budgets cannot accommodate changes in the economy or market conditions, leading to unmet budgeted figures and unfavorable variances.
How can exaggerating budgetary requirements affect budget quality?
Exaggerating budgetary requirements can lead to a lack of control and inefficient resource allocation, compromising budget quality.
What is a drawback of the time spent on budgeting?
The time-consuming nature of budgeting can divert resources from other business activities like marketing, impacting revenue generation.
What kind of decisions can budgets lead managers to make?
Budgets can lead managers to make rash short-term decisions to stay within the budget, rather than effective long-term decisions that benefit the business.
impact of budgets on managers
positive impact of budgets on managers
budgeting helps managers to improve efficiency. Budgets can help managers minimise costs and allocate resources more efficiently. This may lead to favourable variances and therefore improved profits for a business. As a result, managers may be rewarded financially for exceeding the targets (objectives) set.
negative impact of budgets on managers
the resources allocated may not be not sufficient for the managers to run the business/department efficiently. Perhaps the set budget is inflexible and as a result the management may not be able to meet certain objectives, such as sales targets. For instance, the current budget may restrict the ability of the business to respond to increased competitor actions. Therefore, the managers may fail to achieve the targets set.
positive impact on employees
the employees may be rewarded financially because the budgeted figures will act as a motivator. For example, employees may set sales targets to achieve the overall sales revenue budget. This will lead to increased job satisfaction due to financial incentives. Therefore, the employees will enjoy their job roles. This will have an added benefit to the business as the workers are motivated and perform better.
negative impact of budgets on employee
setting unrealistic figures (targets) may have a negative impact on employee motivation. This will lead to underperforming workers, which will therefore impact the business’ ability to achieve budgeted figures. This may lead to adverse variances
impact of a budget on suppliers
positive impact of budgets on suppliers
suppliers are more likely to be paid on time and in full because budgeting helps a business to control its revenue and costs. This should mean that the business will be better able manage its working capital (cash flow) and therefore be able to pay expenditures.
negative impact of budgets on suppliers
a budget is only a prediction. The data may be inaccurate or external factors may cause adverse variances, and this may meant that a business is unable to pay expenditures. This may lead to suppliers not receiving payments on time or in full. Therefore, budgets cannot be totally reliable as a means of ensuring that suppliers receive payment.
budget variance
Budgetary Control: Variances
Definition: A variance is any unplanned change from the
budgeted figure. They occur when an actual figure for
sales or expenditure differs from the budgeted figure.
Variances can be favourable (F) or adverse (A):
* A favourable variance exists when the difference
between the actual and budgeted figures will result in
the business enjoying higher profits than shown in the
budget. For example, when:
- expenditure is less than expected
- revenues are higher than expected.
* An adverse variance occurs when the difference
between the figures in the budget and the actual
figures will lead to the business’ profits being lower than
planned. For example, when:
- expenditure is higher than expected
- revenues are lower than expected
reasons for changes in budget
Reasons for Changes in the Variances
Favourable sales variances might be caused by numerous
factors, including:
* an effective bonus scheme for salesmen
* a successful advertising campaign
* favourable weather
* the demise of a competitor.
Adverse sales variances might be caused by several
factors, including:
* the successful activities of competitors
* they may have lost an important contract
* ineffective advertising
* logistical problems that meant that stock did not arrive
with the customer on time
* bad weather
* general economic conditions (recession)
* changes in consumer tastes.
Favourable cost variances might have been caused by
several factors, including:
* workers may have been better trained/motivated
leading to improved labour productivity
* reduced costs of imported components due to a
strengthening of Sterling
* raw material costs may have fallen.
Adverse cost variances might have been caused by several
factors, including:
* a strike by workers
* bad weather in the growing region for crops such as
sugar or coffee
* a devaluation of Sterling
* unexpected price rises from suppliers
