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Business Studies-Section 3- Budgeting

Key Terms:

  • Income Budget - This shows the predicted and planned income of a business over a period of time.
  • Expenditure Budget - This is the agreed, planned cash outflows of a business over a period of time.
  • Profit Budget - This is the predicted amount the business expects to make over a stated period of time.
  • Variance - The process of investigating any difference in the forecast data and the actual figures.

What is the budgets role?
- Control financial matters of the firm.
- Limits the risk to the business.

Budget Benefits and Drawbacks:

  • Established priorities, provided direction and coordination, assigns responsibility, motivates staff, improves efficiency, encourages forward planning 
  • There could be incorrect allocations, may not take full account of external factors, will not work as well if there is poor communication within the business.

Favourable Variance:
- When the difference between the predicted and the actual results in higher profits for the firm.
- Could result from: actual wages being lower, costs being lower, economic boom which has resulted in higher sales growth throughout the economy.

Adverse Variance:
- When the difference between the predicted and the actual result in lower profits for the firm.
- Could result from: Economic down turn, competition introducing a new product or having a successful marketing campaign, unaccounted for fule prices increasing.

Ways to try and resolve adverse variance:
- If sales revenue was less then planned:
- Improve company image.
- Cut prices (depends on the PED)
- Seek new, currently untapped markets at home and abroad.
- Expand or update the product range.
- Increase advertising and promotion

- If expenditure was higher than planned:
- Cut wages/increase labour productivity.
- Seek cheaper raw materials.
- Reduce waste.

Ideas for analysis:
- Show the implications of the budget variance (good and bad)
- Explain the benefits to a firm of producing a budget.
- Highlight the difficulties and issues associated with budgeting.
- Asses the extent the limit put on budgets as a result of them being a prediction of what is to come.

Ideas for evaluations:
- Identify the key cause of variance (good and bad)
- Asses the best solutions to adverse variance.
- Judge the usefulness of budgeting and the difficulties associated with predicting.
- Discuss the feasibility of fixing problems, for example cutting jobs, although this would decrease costs, it may also decrease moral and may lead to a reduction in productivity which may lead to a decrease in out put and may end up pushing up prices again.
- Budgets imply control - you may want to assess the type of manager needed to support these issues.

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