Budget

• Purposes of budgets

  1. Planning
  2. Forecasting
  3. Communication
  4. Motivation
• Planning

  • To help them plan for any expenses in the year e.g Tax
  • For small business it can help identify where and when they may run into finance problem
  • Business budget runs on a monthly basis with regular review to help planning
• Forecasting

  • Sales/revenue forecast are typically combination the business sales history and how effective they expect their future trading to be
  • They can prepare projected profits for the next 12 months
  • To analyse their margins and other key ratios such as their return of investment
• Communication

  • To communicate their objectives of the business in a financial plan
  • Require department to report back on progress on a regular basis to their spending and income can be monitored
• Motivation

  • Motivate staff to be more careful with the finances
  • If staff are involved in the setting of budgets they are more likely to cautious when spending company money on items like stationery
  • If the budget is tied to perks and benefits of the business the employees are much more likely to keep their costs in line with the budgeted amounts
• Zero based 


  budget is based on a prediction of performance usually for a start up
• Historical figure

  budget is based on previous performance of sales and costs
• Variance analysis is the difference between the budgeted and the actual figure
• Budget is a financial plan used to estimate the business income or expenditure for a set period of time
• Two types of variance

  • Favourable variance - underspent
  • Adverse - overspent
• Difficulties of budgeting

  • Often fixed for a year and as such can be inflexible. This can be difficult when a business is in a dynamic market
  • Tendency for managers to spend up to the limited
  • Time consuming to prepare monitor and control
  • Unrealistic budgets can be demotivating
• Limitation of budgeting

  • Cause inter-departmental rivalry as some departments get more money than others
  • Can make managers short term and short sighted, they become budget driven rather than customer driven
  • In some industries it's difficult to plan ahead because of large unplanned charges.
• Adverse (bad) - overspent

  Favourable (good) - underspent