Budgets

• budget? 


  financial plan that business set about costs and revenue
• reasons for using budgets:


  • planning and monitoring
  • motivation and efficiency
  • control
  • coordination and communication
• why use budgeting for communication and coordination?


  • parts of business operates as coordinated whole when in budgeting
  • provides framework for decision-making
• why use budgeting for control?


  • monitoring budgeting allows managers to have control
  • budgets support setting and review of company or department objectives
• why use budgeting for motivation and efficiency?


  • created target-setting and performance management: managers can use to measure success
  • allocation of budgets spreads decision making - acts as a motivator to managers who control them
• why use budgeting for planning and monitoring?


  • actively planning ahead
  • problems + solutions are considered and solved in advance
• why do businesses set budgets?


  to monitor financial performance of any aspect of the business
• types of budgeting?


  • historical figure budgeting
  • zero based budgeting
• historical figure budgeting:


  • based on historical data (sales + costs data)
  • other factors such as inflation and economic indicators
• zero based budgeting:


  • business makes decision to not allocate budgets
  • requires all spending to be justified
  • requires skilled + confident employees to make a persuasive cast to convince those making purchases decisions
  • time consuming - evidence needs to be collected
  • useful where a business needs to control cost
• budget variance?


  difference between budgeted figure and actual figure achieved
• variance analysis?


  seeks to determine reasons for difference in actual figures and budgeted figures
• favourable analysis?


  actual figure is better than budgeted figure
• favourable analysis in revenue/profit budget?


  actual figure > budgeted figure
• favourable analysis in cost budget?


  actual figure < budgeted figure
• adverse analysis? 


  actual figure is worse budgeted figure
• adverse analysis in revenue/profit budget?

  actual figure < budgeted figure
• adverse analysis in cost budget?


  actual figure > budgeted figure
• favourable variance = favourable analysis
• unfavourable variance = adverse analysis
• what should business do if adverse cost variance is identified?


  • seek alternative suppliers
  • improve efficiency
• what should business do if adverse sales variance is identified?


  • review its marketing activities to improve efficiency
• what should business do if favourable cost variance is identified?


  • review key quality indicators (volume of returns or wastage levels) to ensure that output standards are met
• what should business do if favourable sales variance is identified?


  • reward client-facing staff with performance based incentives
• difficulties in budgeting:


  • time consuming
  • competition/conflict may occur
  • skills required to set, monitor and review
  • inaccurate data=budget is useless
  • focuses on long-term not short-term
  • unachievable leaves employees demotivated
  • data must be up to date, accurate and free of bias
  • budget-setter have influences over setting budgets