Budgets

• budget?

  a financial plan that a business sets about costs and revenue
• reasons for using budgets:

  • planning + monitoring
  • control
  • coordination + communication
  • motivation + efficiency
• two methods of budgeting:

  • historical figure budgets
  • zero based budgeting
• historical budgeting?

  budgets are set on historical data
• zero based budgeting:

  • used where businesses need to control costs closely
  • all spending must be justified
  • time-consuming
  • requires skilled + confident employees
• businesses need to use budgets to monitor financial performance of any aspect of the business
• budget variance?

  a difference between a figure budgeted and the actual figure achieved by the end of budgetary period
• variance analysis seeks to determine the reasons for the difference in the actual figure and budgeted figures
• favourable variance?


  where actual figure achieved is better than the budgeted figure
• favourable variance in a revenue/profit budget?


  where actual figure is higher than budgeted figure
• favourable variance in cost budget?

  where actual figure is lower than budgeted figure
• adverse variance?

  actual figure achieved is worse than the budgeted figure
• adverse variance in a revenue/profit budget?

  actual figure is higher than the budgeted figure
• once variances have been identified, businesses should investigate why they have occurred and take action
• once adverse cost variance has been identified businesses may seek alternative suppliers + investigate ways to improve efficiency
• once adverse sales variance has been identified, a business may review its marketing activities to improve their effectiveness
• once a favourable cost variance has been identified, a business may review key quality indicators (volume of return/wastage levels) to ensure output standards are being met
• once a favourable sales variance has been identified, business may reward client-facing staff with performance based incentives
• budgeting requires significant expertise because there are several difficulties associated with their construction
• difficulties of budgeting:

  • competition/conflict between different business
  • managers may focus on short-term rather than long-term performance
  • unachievable budgets can have a negative impact on motivation
  • budget-setters have influence over setting + review of budgets
  • budget is only as good as data used to construct in