Unit 5-Budget Flashcards
Budget
A financial plan concerning revenues and costs of a business
3 types of budget
Income-target of revenue to be achieved in a time period
Expenditure-limit of costs to be spent in a time period
Profit-difference between income and expenditure budget
Key sources of info for budgets required (2)
Financial performance in past
Market research
2 approaches to budgeting
Historical-use last year figures as basis for budget
Zero-setting budgets at zero, get approval to spend money and justify it
Historical budgeting (2,1)
+realistic
+quick and simple
-circumstances change
Zero budgeting (1,1)
+Realistic, more accurate than historical if done properly
-complicated+time consuming e.g hard to predict how much resources you need, so expenditure is uncertain
Pros of budgets (4)
Provides target-spending discipline
Inform decision making-control income/expenditure
Motivates-increased responsibility (delegated budgets)
Attract investors
Cons of budgets (3)
Conflict for resources
Can be restrictive-opportunities missed just to maintain budget
Time consuming-lose focus on core activities
Can be demotivating if overambitious and forced not negotiated-based on senior management
Problems in setting budgets (3)
Costs subject to change e.g inflation etc
Managers may lack experience
Risk of bias (spend more on functions they favour
Start ups may struggle to gather data-so may be inaccurate
Behavioural implications of budgets (4)
Demotivating if imposed rather than negotiated
If unrealistic-demotivating
Departmental rivalry
Use it or spend it mentality. Fear budget for next year will be lower so spend it unnecessarily
Overall budgeting thoughts
Vital for startups where cost control is vital
Should not get in the way of business plan
Fixed budget pros cons (1,1) and whens it good
Provide discipline and certainty, important for firms with liquidity problems or where cashflow is vital
Unflexible to market changes, prevent reacting to opportunities or threats, lose C.A
Why variances can be bad even if good
May mean budget is not difficult enough, and so not meeting potential/encouraging workers to do even better
Small variances vs large variances
Can motivate.
Large favourable variances means people may not see need to work hard. Large adverse is demotivating-feel task is impossible
Problems with changing the budget (2)
Too much=removes certainty
Less motivating as they change budget rather than change performance
