Budgets and the benefits
A budget is a financial plan for a business, prepared in advance. They can be income or expenditure budgets. The cash budget combines noth income and expenditure, estimating what will happen to the bank balance during the time period of the budget. Budgetary control is where actual results can be monitored against the budgets.
- Assists planning - a business can ensure it's plans are achievable. It will be able to decide what is needed to produce the output of goods/services.
- Communicates and co-oridinates - all the managers and staff will be working towards the same end. Anticipated problems can be found and resolved.
- Helps with decision making - planning ahead using budgets means a business can make decisions on how much output can be achieved The cost of output can be planned and changes can be made where appropriate.
- Used to monitor and control - use budgetary control to monitor and compare the actual results and change the budget if it is unachievable
- Motivate - it can motivate managers and staff to achieve business objectives and gives people a target to move towards.
Limitations of Budgets and budgetary control
- The benefit of the budget must exceed costs - small businesses may find it a burden in terms of time and resources with limited benefits. It needs to exceed the cost to make it worth while.
- Budget info may not be accurate - the more inaccuate it is, the less use it is to the business. Great care needs to be taken when estimating sales and costs as they need to be achievable.
- Demotivate - if people haven't been included in the process then they feel less empowered.
- May lead to disfunctional management - if production over achieves its budget, it can cause problems for the sales department if they can't sell all the goods and they may underachieve.
- Budgets set at a low level - if it is too easy to achieve, it could lead to lower levels of output and high costs. Budgets need to be set at realistic levels
Budgets that can be prepared
purchases budget - what the business needs to buy to make/supply the goods it expects to sell
Sales budget - what the business expects to sell
Production budget - how the business will make/ supply goods to sell
Labour budget - the cost of employing people who make/supply the goods
Trade recievable budget - how much the business will recieve from credit sales
Trade payable budget - how much the business will pay for credit purchases
Cash budget - How much money will be flowing in/out the bank account - this is the budget looked at in unit 2.
Cash budget layout
Jan Feb March
from trade receivables x x x
cash sales x x x
Total receipts for month ------- ------ -----
x x x
to trade payables x x x
expenses x x x
non current assets x x x
------ ------ -----
Total payments for the month x x x
Net cash flow (receipts - payments) x x x
Add bank balance at beginning of month x x x
----- ---- -----
Bank balance (overdraft) at end of month x x x
- receipts for month - Show the amount of money expected to be received from cash sales, trade receivables, sale of NCA, capital introduced/ issues of shares, loans received etc
- payments for month - How much money is expected to be paid from cash purchases, trade payables, expenses, loans etc
- summary of bank account - net cash flow, total receipts less total payments andded to the bank balance at the beginning of the month. This gives a bank balance at the end of the month which can be an overdraft
Advantages of a cash budget
- Identify possible bank overdraft in advance and take steps to minimise borrowings
- Rescheduling payments to avoid borrowings,
- Arrange any possible bank finance well in advance
- Identify possible cash surpluses in advance to invest the durplus on a short term basis to earn interest