Managing a business

What is a budget?

A budget is an agreed plan establishing in numerical or financial terms the policy to be pursued and the anticipated outcomes of that policy.

Budgets are usually stated in terms of financial targets, relating to money allocated to support the organisation of a particular function. They also include targets for revenue and output or sales volume.

There are three types of budgets

·         Income budget –this show the agreed planned income of a business or division of a business over a period of time. It may also be described as a revenue budget or sales budget.

·         Expenditure budget-  this shows the agreed planned expenditure of a business or division of a business over a period of time.

·         Profit budget – this shows the agreed, planned profit of a business or division over a period of time.

Benefits of using budgets

Drawbacks of using budgets

To provide direction and co ordination by ensuring that spending is geared towards the firms aims

If budgets are too ridged things could go wrong

To assign responsibility for the success or failure

Incorrect allocations a budget that is too generous may encourage inefficiency.

To motivate staff and set targets

A budget that is insufficient could demotivate staff

To improve efficiency by investigating reasons for failure and success

Poor communication could lead to non compliance

To encourage forward planning by studying possible outcomes

To establish priorities

What is budget control

Budgetary control is the establishment of the budget and the continuous comparison of actual and budgeted results in order to ascertain variances from the plan and to provide a basis for he revision of the objective or strategy.

Variance analysis

This represents the difference between the planned standard and the actual performance. If the variance shows a poor performance is known as an adverse or unfavourable variance. If it does better it is known as a favourable variance.

Interpretations of variances

Identity of budget

Planned

Actual

Variance

Cost of sales

Materials

10,000

12,000

2,000 [A]

Wages

15,000

14,000

1,000 [F]

overheads

Admin staff

4,000

8,000

4,000 [A]

Rent and rates

5,000

7,000

2,000 [A]

Marketing

6,000

1,000

5,000 [F]

Other Costs

5,000

5,000

NIL

Total Costs

45,000

47,000

2,000 [A]

Analysis

Account for the other variances to the planned budgets shown I the budget table above, indicating apparent areas of efficiency and inefficiency what reason could there be for a £2000 adverse variance for materials.

Analysis may also take the form of showing the :

Implications of budget variances

Benefits of budgeting to the firm

Difficulties and problems of budgeting.

Evaluation

·         Identify the key cause of variances

·         Assess the best solutions to adverse variances

·         Judge the usefulness of budgeting, the difficulties of projecting and so on

·         Evaluate the pro and cons of  profit centre and cost centres

·         Discuss the feasibility of solving problems

Budgets imply CONTROL.

A MAJOR LIMITATION OF BUDGETS IS THE TIMEING. BUDGETS ARE SET BEFORE THE EVENT ANS SO PEOPLE ARE GUESSING WHAT WILL HAVPPEN INA THE FUTURE. VARIANCES ARE ASSESSED AFTER THE EVENT BY WHICH TIME THE PROBLEMS HAVE PASSED.