Budgets 1 & 2&3 Flashcards
What is a budget?
A financial plan that lays out how much money will be spent and made, on what and when
Allows businesses to allocate finite funds among priorities
Often competitive among departments
Why would organization’s place so much emphasis on budget?
Need to deliver results
Businesses need to ensure owners/ shareholders make a profit
Not-for-profits cannot spend more than their donors/funders contribute
As conditions change, organizations re-assess what they will spend throughout year
Important for any goals that have financial impact be accounted for
AND project spending when it will happen
Why is timing of spending important?
Measure spending patterns
If variance to plan (budget) indicates more spending/less revenue may adjust future spending
If variance to plan indicates less spending may cause management to believe you don’t need what you said you needed
Knowing where you stand on your actual spending vs. your plan is important throughout the year
What is the importance of business budgets?
Creating profit for owners/shareholders is why businesses exist
Careful planning and actual spending of money AND
Careful planning and actual generation of revenue
Both critical to making sure that the business stays profitable
What is the difference between personal and business budgets?
Business budgets are not unlike personal budgets
Just more complex
Requires a parallel vocabulary
Definition of a plan
a projected set of activities or results. In business a plan is synonymous with budget
Definition of Cost
Cost – An expenditure, money spent, cash flowing out
Examples include salaries for employees, materials purchased, supplies, etc
Definition of Revenue
Revenue – Money coming into the business
Most commonly from sales, but also due to income from investments or royalties
Definition of profit
Profit – Revenue less costs (after taxes)
Technically taxes are a cost, but few business financial reports include taxes as they are generally calculated at the corporate not the department level
What is managerial accounting?
is a financial reporting process that informs managers of the impact of actual expenses and revenues achieved for their area compared to the budget created
Typically done through reports received from the financial control department
What is the important of managerial accounting?
Progress of actual spending vs. goals (plan, budget) helps track likelihood of achieving cost and revenue targets
Cost, revenue are the factors needed to determine profit
Provides accountability to owners or the managers they hire
Definition of rolling rate
a forecast of what will happen in the future if what has already happened continues to happen
In managerial accounting it is an indicator to help managers assess whether or not the full year plan will be achieved if what has happened year-to-date (YTD) continues for the rest of the year
Definition of Profit margin
Profit as a percentage of revenue
Used as an indicator of a businesses’ pricing policies and abilities to control costs
What does EBIT stand for?
Earnings before interest and taxes
Definition of Basis point?
a financial measure used particularly in very large companies that equals a hundredth of a percent
