Budgets

• what is budgeting?

  the form of financial planning involving the setting of financial targets such as costs, revenues and profits
• what is variance?

  the difference between budgeting and the actual figure
• what is adverse variance?

  the difference between a budgeted figure and an actual figure that makes a business worse off
• what is favourable variance?

  the difference between a budgeted figure and an actual figure that improves businesses profits
• what is zero based budgeting?

  a system of budgeting where budgets are worked out from scratch rather than simply basing budgets on figures from the previous year
• how do businesses start constructing a budget?

  estimating sales, then working out the costs involved to achieve these sales
• what are the factors likely to make the budgeting process effective?

  -being in a predictable, stable market

  -good market research

  -having market experience

  -collabortaing with many functions when discussing budgets
• what factors can cause budgeting to be inaccurate?

  -being in an unpredictable, unstable market

  -having bad market research

  -having no market experience

  -collaborating with no functions when constructing a budget
• what are the benefits of budgeting?

  -sets targets that can motivate employees

  -helps to identify resource requirements

  --materials

  --labour

  --capacity

  --loans

  -helps businesses measure success

  -helps to monitor and control performance
• what are some of the limitations of budgeting?

  -hard to predict the future in a very changeable market

  -may need to update frequently

  -time consuming, particularly zero based budgeting

  -costly as finance teams can be employed to do this