2.2.4 Budgets
Cards (8)
- Budget : financial plan for the futureAdvantages:
- help to control income & expenditure
- motivating to have a goal to work towards
- focus on priorities
- communication tool
- helps to persuade investors
Limitations:- restrictive
- time-consuming to do
- inflation can make it hard to predict
- may have inaccurate data
- unforeseen changes
- Problems of setting budget:
- Imposed budgets : budgets imposed by those higherup the hierarchy with less knowledge of the department may be unrealistic or overly optimistic which can demotivate staff
- Research problems & accuracy : it can be difficult for firms to gain accurate and current research to inform their forecasts
- Unforeseen changes : external factors such as changes in legislation may mean they need to change their budget accordingly
- Fixed budget: a budget that is set in advance and cannot be changed.
- Flexible budget : A budget that allows the government to change its spending plans depending on the economic situation.
- Variance Analysis:
- favourable variance : the manager has underspent in their department, this would often be seen as a success as any costs cut will have an impact on profit
- adverse variance : the manager has overspent in their department & it would depend on the reasons, perhaps they needed more staff than was budgeted for & has to hire during the year
- Historical Figures Budget: a budget set for the business using current financial figures
- realistic as based on last years sales
- for a dynamic business, figures may be inaccurate due to rapid growth/change
- Zero-based Budget : a budget set by a business by using figures based on potential performance
- takes away all historical assumptions
- may be used for start-ups with no historical data
- managers must justify the level of expenditure based on the number of customers they are likely to see in the next year
- Calculating variance:A) actual incomeB) budgeted expenditureC) -11,000D) adverseE) favourableF) variance