budgeting

• what is a budget ?

  • A budget forecasts future earnings and future spending’s. It is a financial plan of action normally covering a specific time period, for example, six months or one year.
  • A budget will describe expected levels of expenditure and revenues of a business. 
  • Large businesses will prepare budgets on a departmental basis or in relation to business functions for e.g. marketing, purchasing and human resources department.
• what should budgets aim to be ?

  • All budgets should be objective driven. 
  • This means that the expected revenues and expenditures of each department will be ultimately based on what the business is trying to achieve. 
  • Therefore, if a business has the objective of increasing sales by 20%, then the overall budget and departmental budgets should reflect this. 
• key features of a budget ?

  • Budgets are plans for how much money should be spent on various items
  • They normally cover a 12 month period
  • They are broken down into weekly or monthly intervals
  • They are set for each department in a firm
  • The departmental manager is responsible for ensuring that money spent is within budget limits
  • The manager is called the budget holder
• Income Budgets

  Forecast the amount of money that will come into the company as revenue

  • a target set for the amount of revenue to be achieved in a specific time period
  • can be split by products, services or departments
  • may be translated into individual sales targets for staff
  • informed by market research and sales forecasts
  • informs predicted cash inflows in the cash flow forecast
• Expenditure Budgets

  Predicts what total costs will be for the year (takes into account both fixed and variable costs)

  • a limit placed on the amount to be spent in a given period of time
  • can be split by department, function or product
  • responsibility can be passed to individual managers
  • a separate expenditure budget may be set for running costs and start up costs
  • informs predicted cash outflows in cash flow forecast
  • allows for monitoring of under spending as well as overspending
• Profit Budget

  Uses the total from income and expenditure budgets to calculate expected profit will be.

  • a target set for the surplus between income and expenditure in a given period of time
  • calculated based upon the income and expenditure budget
  • may be set for the business as a whole or for individual departments, products or branches
  • will be used to inform decision making on products to include in the businesses portfolio as well as where cuts may need to be made
• benefits of budgets ?

  • Improved financial control
  • Allows managers to be aware of their responsibilities
  • Improved management control of the business (staff)
  • Budgeting ensures resources are used efficiently
  • Allows heads of departments to delegate to budget holders
  • Motivates managers (review their activities)
  • Improves communication systems
• problems of budgets ?

  • Budgets may cause conflict between managers (compete for money)
  • Managers may overstate their budget
  • Lack of historical data
  • Predicting the future is not easy because of external factors
  • They can be time consuming
  • Budgets can be inflexible
  • Workers who have no input to the budget process can feel demotivated
• Feedback on Performance

  • Shortly after the end of the month (or week), the budget holder is given a list of actual expenditure on each item
  • The budget holder compares this with the budgeted amount
  • If there is a major overspend, action must be taken to try to solve the problem
• The Importance of Budgets

  • Budgets help businesses manage their finances.
  • Budget holders are senior employees within a department of a business. They are the only employees allowed to spend money.  Having people in different departments with this authority helps a business ensure they do not spend too much
  • Budget holders can stop the business from spending money on pointless items, such as very expensive cars for the sales managers.
  • Budgets stop fraud. For example, budget holders must make sure that employees do not buy items such as laptops for their personal use 
• Historical Budgets 

  • This years budget is based on a % increase or decrease from the last years budget. For example a firm expecting 10% growth may increase their marketing budget.
  • Quick and simple but assumes conditions stay unchanged every year. Not always the case as a business in the intro stage of the Product Life Cycle may need more money for advertising
• Zero Budgeting

  • Budget holders start with a budget of 0 and have to bid for money to spend on activities. 
  • They have to plan all the years activities 
  • They may need to justify their budget request and will need good negotiating skills for this
  • Takes much longer than historical budgeting
  • If done properly its more accurate
  • Used for start-up businesses
• Budgets can be fixed or flexible

  • Fixed budgets provide discipline and certainty; this is good for businesses with liquidity problems. Budget holders have to stick to their budget plans throughout the year.
  • Flexible budgeting allows for budgets to be altered in response to significant changes in the market or economy. Zero budgeting gives a business a bit more flexibility than historical budgeting
• Do you think a budget guarantees a business’ success?

  yes

  Allows the business to ensure that they only spend a certain amount → limiting costs will mean more profit → this money can be reinvested to fund expansion, helping to improve the business’ chance of success.
• Do you think a budget guarantees a business’ success?

  no

  Could limit opportunities as they may not pursue a course of action due to having to stick to the budget. → This means that they could fall behind competitors who may have allocated more to spend on marketing campaigns that sees their sales rise as a result.
• Do you think a budget guarantees a business’ success?

  yes

  • Can ensure that the firm does not go bankrupt → staying within budget means less overspending and going into debt.
  • Helps a business to stay on track as they can ensure that they are meeting targets and if not then take actions accordingly to reduce anything negative happening. 
  • If a fair budget and realistic then could lead to a more motivated workforce → greater productivity and potential profit margins.
• Do you think a budget guarantees a business’ success?

  no

  • The budget could be null and void if the manager has overstated the budget. → Figures used are unrealistic and therefore for fit for purpose. 
  • They can be inflexible so if a competitor were to make a new product the business may not be able to respond → might lose their market share to competitor.
  • Unrealistic budget could demotivate staff leading them to lower productivity or take time off. This wont help a firm to be successful.