Budgets (2.2.4)

Question 1

What is a Budget?

Answer 1

It’s a spending cap. You make a judgment on Revenue and Costs and allocate spending allowances to each area of the firm. Budgets will be set at the top and allocated around regions and branches and everyone will be responsible for keeping to their budget.

Question 2

What are the advantages of Budgets?

Answer 2

-Keeps costs down
-Measure of managerial performance
-Measure of staff performance
-Sets targets to increase innovation
-Local spending power

Question 3

What are the two types of budgets?

Answer 3

Historical Budgets and Zero-based Budgets

Question 4

What is a Historical Budget?

Answer 4

Copy and pasting last year’s budget with minor adjustments for inflation, expansion or market forces

Question 5

What’s good and bad about a historical budget?

Answer 5

Good:
-Quick and easy
-Low skill
-Good in stable markets

Bad:
-Have to adjust for inflation
-Doesn’t take into account dynamic markets/Social Trends

Question 6

What is a Zero-based budget?

Answer 6

Budgets are set to zero and budget holders have to justify every pound they spend

Question 7

What’s good and bad about a Zero-based budget?

Answer 7

Good:
-Good in dynamic markets
-Accounts for external influences

Bad:
-Time-Consuming
-High skill involved in making one

Question 8

What’s the equation for a Budget Variance?

Answer 8

Actual Spend- Budget Spend (Spend is interchangeable for Revenue etc..)

Question 9

What does the Budget Variance equation actually mean?

Answer 9

Its the difference between what you actually spend and what you planned to spend. This is how to measure performance.

Question 10

What are the difficulties with budgets? (What affects it?)

Answer 10

-External Influences
-Fluctuating Demand
-Competition
-Technology