Budgets Flashcards
What is a budget?
A coward financial plan concerning the revenues and costs of a business
What does a budget do?
Provides a target for costs or revenue that a firm or department must aim to reach over a given amount of time
E.g cash flow forecasts (cash budgets)
Types of budget
- Sales revenge or earnings budgets
- Expenditure budgets
- Profit budgets
Sales revenue or earnings budgets
- Sets our expected sales revenue from selling its products
- Includes level of sales and likely selling price
- Start up business - low revenue budgets during first few months of trading but increase as business becomes more popular
Expenditure budgets
- Also called cost or production budgets
- Plan the expenditure on labour, materials, fuel etc
- Set out expected expenditure on monthly basis
Profit budgets
- By combining revenue and expenditure budgets possible to calculate profit/ loss
- New business- profit not likely to be made in first few months /years
Purpose of budgeting
- Helps achieve objectives
E.g if objective is to increase sales, budgets will reflect this with the revenue budget showing higher revenues but also higher costs in the expenditure budget
Process of creating budgets
- Analyse the market to predict likely sales and prices to plan revenue budget
- Research costs for labour, fuel, raw materials by contacting suppliers
- Consider government estimates for inflation, interest, wage rises incorporating into revenue and expenditure budgets
- No previous information to base data on
Historical budgets
- Use last years figures as the basis for the budget
- Realistic in that it is based on actual results
- However, circumstances may have changed (e.g new products, lost customers)
- Does not encourage efficiency
Zero based budgets
- Budgeted costs and revenues are set to zero
- Budget is based on new proposals for sales and costs I.e built from the bottom-up
- Makes budgeting more complicated and time- consuming but potentially more realistic
Why set up budgets?
- Helps a business control its finances by planning expenditure over a future period (usually a year)
- Targets for entrepreneurs- sales budget can encourage/ motivate employees to increase sales
- Helps co ordinate the decisions within the business
Why set up budgets? Continue
- Delegated budgets- asa business grows it becomes different for one person to manage the budget- budget then gets delegated to other employees- empowers employees and motivates them
- Allows entrepreneurs to think about the future of the business. Focuses on costs and how to reduce them to become more competitive
What is variance analysis?
Calculating and investigating the differences between actual results and the budget
Why is variance analysis needed?
A variance arises when there is a difference between actual and budget figures
Variances can be:
- Positive/ favourable (better than expected)
- Adverse/ unfavourable (worse than expected)
