Budgets

• The main purpose of budgets is so a business can monitor all incomings and outcomings.

Planning

• Budgets can assist the business in reaching its aims, for example if the business plans to reduce electrticity bill by ensuring the lights are turned off when the room is empty.

Forecasting

• Budgets can also help with forecasts, for example if a business is predicting low funds in one month when a loan is due they can use budgets in order to save money so that they have despensible cash to pay these bills.

Communications

• Some firms use budgets in order to inform the employees the aims it must achieve.

Motivation

• Once budgets are implemented the employees will work more carefully this means they will have to perform better increasing motivation.

Historical budget

• Historical figure budgets- This type of budget uses previous data in order to create a new budget.
• It is a quick budget to create because firms can base their budgets off previous years.
• Another advantage is that
• Zero-based budgets- This type of budget clears all budgets at a certain period e.g. every year or month and the manager of each department must create a proposal explaining the amount of money they need and why.
• Advantage of zero based budgets is that it stops businesses from creating unecessarily large budgets, in addition to this it that the departments can prove a genuine reason why they want something avoiding spending of large amounts of money.

Historic budgeting

• Departments may not need as much money as they did last year which means money is tied up in one department.
• If departments get a large budget they may feel the need to spend otherwise the budgets may decrease next year, this could lead to uncessecery spending by departments.

Zero based budgeting

• It takes a long time to implement which means it costs the business itself money.
• Budget proposals can be very short-sighted: if a business is only looking at profit, it may be intrested in only improving profit and not the department.