Budgets Flashcards
What is a budget?
a financial plan for the future concerning revenues and costs of a business
How are budgets prepared and compared?
budgets for revenue and costs are prepared in advance and then compared with actual performance to establish any variances
How do managers manage a budget?
managers take remedial action if the adverse variances are regarded as excessive.
What is a favourable variance?
a variance in a budget that leads to a higher than expected profit based off of the actual performance and budgeted figure
What is an adverse variance?
a variance in a budget that leads to reduced profit and the actual budget is more than the budgeted figure.
How is a budget useful?
used to measure success/performance used to motivate staff used to prevent over-spending set targets/objectives/aims minimum target in revenue for employees to meet clear spending decisions used in cash flow forecasts improve efficiency allocate resources assign responsibilities Justify spendable
How do you construct a budget?
Historical
Zero-based
What are the types of a budget?
Revenue
Expenditure
Profit
What is a historical budget?
positive and negative?
Treating last year expenditures and budgets as a main determinant of this years budget
+ more realistic
- accuracy as circumstances may have changes (ie inflation rates)
What is a zero-based budget?
positive and negative?
When each department has a budget of zero and managers must justify each pound they require/spend.
+ realistic, up-to-date (proposals)
- time consuming, slow and complicated
What is a revenue budget?
A forecast of sales revenue and expenditure which will be generated.
What is the expenditure budget?
A budget that keeps track of purchases and operating costs within a business and general overhead fixed costs
What is a profit budget?
Based on the sales/revenue and costs budget
= revenue-costs
Of great interest to stakeholders
may form the basis of performance budget.
What are some issues with constructing an accurate budget?
- consumer trends -> sales figures
- market fluctuations -> dynamic
- competitor actions -> innovation
- availability of raw materials
- External factors: P.E.S.T.L.E
inflation, costs, economy - unforeseen costs
- industrial action (trade union)
- staff retention
What is PESTLE?
Political Economic Social Technology Legal/Legislation Environment External factors that impact any business decision.
What does a budgeting system give a company?
- measure success
- track current spend
- provide direction
- delegate power in spend
What is a yardstick?
a standard which can be used to judge success or value of something
How can a yardstick be used?
used to motivate staff and measure success and eliminate problems
What does a zero-based budget allow a business to do?
flexible, realistic, disciplined, efficiency, justify spending
How do businesses set next years budget?
By using historical and zero-based budgets.
Looking at the market and likely figures
Research potential costs
P.E.S.T.L.E
What are budget holders and why are they important?
budget holders are members in an organisation that has been empowered with the task to allocate funds to resources and justify reasons for getting assets
How may a firm respond to a adverse cost?
make staff efficient
invest into machinery
reducing wages
making staff redundant
How may a manager improve the sales accuracy?
identify trends
factor in PESTLE
consult with staff
improved technology
How do businesses create budgets?
1) analysis of market fluctuations to predict future into revenue budget
2) research costs labour, fuel and supplies and contracting suppliers - useful for expenditure budget
3) consider government estimates for :
inflation, interest, wage rises incorporating into revenue and expenditure budgets.
What is variance analysis?
Calculating and investigating the differences between actual results and the budget.
When do variances arise?
variances arise when there is a difference between an actual figure and budgeted figure.
What are the types of variances?
positive / favourable (better)
adverse / unfavourable (worse)
What is common between the revenue, expenditure and profit budget?
They are all prepared in advance and then compared with actual performance to establish any variances.
What do adverse and favourable budgets depend on?
Whether the process was a cost or revenue
What are budget holders?
is a member of staff who has been assigned a budget for a particular activity
What is budgetary control?
is the process by which financial control is exercised within an organisation.
Why should budget holders have a say in setting budgets?
There experience and knowledge about the department in general
Easily allocate funds and resources in the required places.
How are variances calculated?
By comparing the actual data to the forecast data.
