Role of Budgets
A Budget - is a financial plan for the future concerning the revenues and costs of the business.
Budgetory control - is the process by which financial control is exercised within an organisation
- Budgets for income/revenue expenditure are prepared and then compared with actual performance to look for variances.
- managers are responsible for controlling their costs within their budgets and are required to take action if excessive variances occur.
Uses of Budgets
- control income and expenditure
- set targets and establish priorities
- provide practical objectives
- asign responsibilities to budget holders and allocate resources
- communicate targets between employees
- motivate staff
- improve efficiency
- monitor performance
Principles for an effective budget system
- Mangerial responsibilities clearly defined
- Individual budgets lay down a plan of action
- Performance always measured against the budget
- Action taken if dramatic variances occur
- Budgets from different departments are only permitted after approvial from senior management
- All unaccounted for variances are measured
Historical budgeting is when last years figures are used to set the budget
Zero-based budgeting is when revenues are set at zero and budget is based on new proposals for sales and costs
A Variance - occurs when there is a difference between actual figures and budget figures.
- Positive (favourable) - better than expected
- Negative (Adverse/unfavourable) - worse than expected
'management by exception' - is the name given to the process of focusing on activities that require attention and ignoring those that appear to be running smoothly.
Variances highlight areas in a business that are not in line with its expected performance.
- Causes of favourable variance include costs lower than expected in the budget or sales revenue higher than expected.
- Causes of adeverse variances include costs being higher than expected or sales revenue lower than expected.
Problems and limitations of using budgets
- Only as good as data used to create them.
- They can lead to inflexibility in decision making.
- Budgets have to be constantly changed as circumstances change.
- Time consuming to make
- Can result in short-term decisions to keep in the budget that affect the long-term budget.
- Managers become to occupied in creating them
- Affect the motivation of staff
- Unrealistic targets add to de-motivation
- Cause battles over allocation of budgets