Budgets

• A budget is a financial plan for the future; it forecasts future incomes and expenditures usually over a 12 month period
• Main purposes for budgeting:

  • Forecasting - Anticipate problems and develop solutions before they arise
  • Comparison - Compare budgeted objectives against actual figures
  • Communication - Forces departments to report back on progress regularly
  • Motivation - Managers feel responsible + accountable for savings as well as expenditures
  • Decision making - Gives power to make financial decisions
• Historical budgeting - Using past financial figures to proportionality award money to different departments
• Advantages of historical budget - Quick & simple, Can be used for all departments, Usually fairly accurate
• Disadvantages of historical budget - Doesn't take into account changes in market conditions or new opportunities, No incentive to improve performance, Departments may not have enough resources to achieve targets
• Zero based budgeting - Each department has to justify its spending from scratch every year and every single expenditure is accounted for
• Advantages of zero-based budgeting - Encourages managers to think about how best to use available funds, Enables businesses to identify areas where costs can be cut, Allows business to respond quickly to changing circumstances
• Disadvantages of zero-based budgeting - Time consuming, Difficult to implement, May lead to underestimation of costs, Requires high level of management commitment, difficult to implement on all staff
• Overall difficulties on budgeting are that this may lead to inter-department rivalry, it can be time consuming, budgets are fixed which isn't helpful for flexible businesses, can make managers short-sighted