Budget

• What are budgets used for in a business?

  To forecast options for the future
• What does an income budget represent?

  A target for revenue in a time period
• How can an income budget be divided?

  By products, services, or departments
• What informs the income budget?

  Market research and sales forecasts
• What does the income budget inform in financial planning?


  Predicted cash flow inflow
• What is an expenditure budget?

  A limit on spending in a time period
• What types of costs can an expenditure budget cover?

  Running costs and start-up costs
• What is a profit budget?

  A target for surplus between income and expenditure
• How is a profit budget calculated?

  Based on income and expenditure budgets
• For whom can a profit budget be set?

  For the business or individual departments
• What must a cost/expenditure budget include?


  • Cost budget should include contingencies for unexpected costs and factors within control, like supplier price changes
• what is disadvantage of budgeting?

  •challenges in sales forecasting when markets •change rapidly and uncertainties in demand

  •actions of competitors are unknown

  •Managers lack experience
• What is variance in financial terms?

  Difference between actual and budgeted figures
• What is an adverse variance?

  Bad for the business
• What are the indicators of an adverse variance?

  Higher expenditure, lower income, lower profit
• What is a favourable variance?

  Good for the business
• What are the indicators of a favourable variance?

  Lower expenditure, higher income, higher profit
• What steps should be taken once a variance is identified?

  1. Identify cause
  2. Determine the effect
  3. Find a solution (if needed) if it’s a favourable variance need to find out what they are doing right and set more difficult targets
• What are some causes of variance?

  Actions of competitors (Lower prices)

  internal inefficiency (poor management of a budget)

  actions of suppliers (change in prison)

  internal decision making ( change in supplier)

  change in the economy ( change in interese rate)
• One businesses detect a variance and change the budget what are three things they need to take into account ?

  • chopping and changing the budget too much

  • changing the budget remove certainty which is one of the biggest benefits of budgeting

  • make stuff for the motivated as they expect the management to just change the budget instead of actually changing the business performance
• What are advantages of budgeting?

  •Let heads of departments delegate authority to budget holders (authority is motivating)

  •allows departments to coordinate spending

  •persuade investors that the business will be successful
• What is historical and zero based budgets?

  Historical-budget is based on a percentage increase or decrease from last years budget but it does not take into account that market conditions may change

  Zero base-budget holder plans all the activities and ask money to spend on them and they have to be prepared to justify their request ,it takes a lot longer to complete, but it can be more accurate if done properly than historical budgeting(more flexible)
• What is flexible and fixed budgeting?

  Flexible budget allows budget to be altered in response to significant changes in the market or economy whereas fixed budgets mean that the budget holders have to stick the budget plan throughout the year