Budgets

• purpose of a budget = to plan, control and monitor the business
• Historical figures (budget type) = involves using previous figures on revenue and expenditure to determine a budget for the upcoming financial year.
• zero bases (budget type) = means no budget is set and no money is allocated to cover costs.
• Variance analysis = method of assessing the difference between estimated budgets and actual numbers.
• variance analysis (equation) = actual - forecasted
• difficulties of Budgeting =

  • not all businesses have the same level of sales
  • not all businesses have the same level of expenditure
  • Inaccurate or unreasonable assumptions can quickly make a budget bad
  • take time
  • lead to conflict and tension between different business functions
• Reason for budgeting:

  • Planning & monitoring
  • control
  • coordination and communication
  • motivation & efficiency
• Planning & monitoring

  • Businesses that use budgets are actively planning ahead
  • Problems and their solutions may be considered and solved in advance
• Control

  • Frequent monitoring of budgets allows managers to precisely control their functional area
  • Budgets support the setting and review of company or department objectives
• Coordination & Communication

  • Budgeting requires different parts of a business to operate as part of a coordinated whole
  • Budgets may be communicated throughout the organisation to provide a framework for decision-making and communication
• Motivation & Efficiency

  • Budgets play an important role in target-setting and performance management which can be used by managers to measure success
  • The allocation of budgets spreads decision making across the organisation acting as a motivator to the managers who control them