budgets Flashcards
what is a budget?
financial plans over a given period that describes the expected levels of expenditure and revenue. Most common time spans are between 6 months and a year.
what are sales revenue budgets?
set out a business planned revenue from selling its products. Includes expected levels of sales and price of products.
what is an expenditure budget?
sets out businesses planned expenditure, on labour, raw materials, duel and other items needed for production.
what is a profit budget?
based on combined sales and cost budgets, may form basis of performance.
what is the purpose of a budget?
- Assign responsibilities to budget holders and allocate resources.
- Create list of numerical goals and objectives for the business.
- Communicate targets.
- establish priorities and set targets.
- forecast outcomes.
- motivate staff.
- provide direction and co-ordination.
- monitor performance.
why may a budget be used?
A budget is a guide that keeps you on the path to reach your financial goals. Budgeting keeps your finances under control, shows when you need to adjust your spending, and helps you decide where your money goes instead of wondering where it all went.
what are the advantages of budgets?
Controlling income and expenditure
Regulate the spending of the business and highlight losses, this will improve efficiency and reduce waste.
Act as a review, can be used to monitor the business and identify their targets
Allow responsibilities to be passed onto others, without losing control, others can set their own targets
Can motivate staff, if budget is met
Provide clear targets, helps employees focus on costs and help them
what are the disadvantages of budgets?
Time consuming to make, this time can be spent elsewhere in the business where needed
poor motivation as employees feels as if they had no part in constructing the budget
If the figures are very different than expected, the budget will lose its significance
Budget must not be inflexible as this can cause there to be business opportunities to not be met.
May be poorly made, so it will result in poor decision making.
Some factors are out of the businesses control (competitors or economy) making the budget not useful.
how is a budget constructed?
analyse the market.
- market share
- market size and growth
- market prospects
draw up revenue budget.
- sales forecast
- new products
- pricing changes
draw up cost budget.
- based on sales budget
- allow for known changes in supplier prices.
- include contingencies (changes)
what is revenue?
the total amount of money brought in by a company’s operations, measured over a set amount of time. money that a business makes from selling its goods and services. Sales revenue, turnover.
what are costs
- Fixed costs are costs that do not change with a change in output such as rent and salaries for permanent staff.
- Variable costs vary directly with the level of output such as raw materials used in production. Direct cost is supplies and production staff.
- Indirect costs are all other costs not involved in production, e.g.) marketing, admin, transportation.
what is profit?
the money a business pulls in after accounting for all expenses. revenue- cost = profit
what is loss?
occurs when your business has more expenses than earnings during an accounting period.
how will budgets effect supplier?
advantage-They are more likely to get paid on time, the correct amount and gain repeat purchases. It also improves communication.
disadvantage-May not get paid on time, or the incorrect amount could lead to the supplier no longer trusting or wanting to supply the business anymore, due to the lack of budgeting.
how will budgets effect shareholders?
advantage-Having sales targets and keeping costs down will maximize profits and help cash flow, this will result in higher dividends.
disadvantages-They may desire a higher dividend than they got, making them want to take away their share or reduce the price of it
