Budgets (2.2.4) Flashcards
What is a Budget?
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. Its a financial plan that a business sets costs and revenue and is closely aligned with business objective
What are the reasons for using budgets?
-Planning and Monitoring-Actively plan ahead and so problems and their solutions may be considered in advance
-Control-Frequent monitoring of budgets allows managers to precisely control their functional area
-Coordination + Communication- Budgeting requires diff parts of business to coordinate as a whole and provide a framework for decision-making and communication
-Motivation + Efficiency- Play an important role in target-setting and performance management, which can be used by managers to measure success
What are the advantages of Budgets?
-Keeps costs down
-Measure of managerial performance
-Measure of staff performance
-Sets targets to increase innovation
-Local spending power
What is the time period like for a budget and how often are the usually monitered?
They are usually set annually and then monitored on a monthly basis
What are the two types of budgets?
Historical Budgets and Zero-based Budgets
What is a Historical Budget?
Copy and pasting last year’s budget with minor adjustments for inflation, expansion or market forces
What’s good and bad about a historical budget?
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
What is a Zero-based budget?
Budgets are set to zero and budget holders have to justify every pound they spend
What’s good and bad about a Zero-based budget?
Good:
-Good in dynamic markets
-Accounts for external influences
Bad:
-Time-Consuming
-High skill involved in making one
What is a budget variance?
Is a difference between a figure budgeted and the actual figure achieved by the end of the budgetary period
What’s the equation for a Budget Variance?
Actual Spend- Budget Spend (Spend is interchangeable for Revenue etc..)
What does the Budget Variance equation actually mean?
Its the difference between what you actually spend and what you planned to spend. This is how to measure performance.
What is Variance Analysis?
Seeks to determine the reasons for the differences in the actual figures and budgeted figures
What is a favorable variance (F)?
Is where the actual figure achieved is better than the budgeted figure
What is an adverse variance (A)?
It’s where the actual figure achieved is worse than the budgeted figure
