Setting Budgets Flashcards
What is a budget?
A financial plan for the future
What does a budget forecast?
Future earnings and future spending
What does an income budget forecast?
The amount of money that will come into the company as revenue
How does a company set a income budget?
Needs to predict how much it will sell and at what price
How can managers estimate for an income budget?
Use their sales figures from previous years
Market research
What does a expenditure budget predict?
What a business’s total costs will be for the year - fixed & variable
How to calculate profit budget?
The income budget minus the expenditure budget
What does the profit budget calculate?
The expected profit or loss for the year
What does the expenditure budget forecast?
Total expenditure
Who are budget holders?
People responsible for spending or generating the money for each budget
Why are expenditure budgets split into departments?
For specific activities
To set a income budget what do businesses need to do?
Research and predict how sales are going to go throughout the sales revenue.
To set expenditure budget, what do businesses need to do?
Research how labour costs, raw materials costs and taxes are going to go up throughout the year
What does researching into labour costs, raw material costs etc help businesses figure out?
The costs of producing the volume of product that they think they’re going to sell
What are budgets influenced by?
A company’s objectives
How are annual budgets agreed usually?
By negotiation
Why must budgets be achievable?
Because unrealistic budgets can demotivate staff.
What is it called when budget holders keep checking performance against the budget?
Variance analysis
What are 2 advantages of budgeting?
Help achieve targets
Control money
What are 2 disadvantages of budgeting?
Time-consuming
Inflation is hard to predict
What is zero-based budgeting?
When start-up businesses have to develop their budgets from scratch
What is historical budgeting?
A budget based on a percentage increase or decrease from last year’s budget
What are 2 advantages of historical budgeting?
Quick and simple
More flexibility
What is a disadvantage of historical budgeting?
It assumes business conditions stay unchanged
What is 1 advantage and 1 disadvantage of zero-based budgeting?
More accurate than historical
Longer
What do fixed budgets provide?
Discipline and certainty
What do fixed budgets help control?
Cash flow
What does fixed budgeting mean for budget holders?
That they must stick to plans even if market conditions change
What does flexible budgeting allow?
Budgets to be altered in response to changes in market or Economy
