budgeting

• budget

  a spending plan that shows the amount allocated to spending or expected to be earned
• why do businesses need budgets?

  help control finances

  helps ensure businesses do not spend more than they should
• 3 main types of budget

  income

  expenditure

  profit
• zero budgeting

  when each departments budget is set at zero and they have to justify every pound they ask for
• advantages of zero budgeting

  encourages thorough planning

  helps to identify changes in an organisations needs

  helps to save money by cutting costs where managers are unable to justify their spending
• disadvantages of zero budgeting

  time consuming

  better negotiators may acquire bigger budgets despite needs of other departments
• why can setting budgets be difficult?

  if sales budgets are too high and unachievable, they can demotivate staff

  production budgets set too low may be ignored

  simple to achieve budgets will not motivate or improve performance
• how can we monitor budgets

  variance analysis
• favourable variances


  when the difference between actual and budgeted will result in the business enjoying higher profits than shown in the budget
• causes of favourable variance

  wage rises lower than expected

  economic boom leads to higher than expected sales

  rising value of pound so imported raw materials are cheaper
• adverse variances

  when the difference between the budgeted and the actual figures will lead to the firms profits being lower than planned
• causes of adverse variables

  competitors introduce new products winning extra sales

  gov increase business rates by an unexpected amount

  fuel prices increase as price of oil rises
• how to get a favourable sales variance

  cut prices - if product is elastic

  improve company image

  increase advertising

  update or extend product range
• how to get a favourable cost variance

  cheaper suppliers

  reduce marketing

  redundancies

  find cheaper location
• advantages of budgeting

  assists in the control and monitoring of finances

  can have motivational effect

  departments over budget are easily recognised and corrective action can then take place
• disadvantages of budgeting

  based on predictions and assumptions

  time consuming

  can't plan for unexpected events

  can be demotivating

  managers with influence may achieve a higher budget