- BUDGET- An agreed forward financial plan
- INCOME BUDGET- The agreed, planned income for a business over a period of time
- EXPENDITURE BUDGET- The agreed, planned expenses of a business over a period of time
- PROFIT BUDGET- The agreed, planned profit of a business over a period of time
- ZERO-BASED BUDGETING- A situation in which a department/business starts their budget from zero and has to justify every item they want before funds are allocated
Methods of setting a budget
Budgets might be set accordingg to the following issues:
1. Company Objectives- What are your spending priorities for the forthcoming year?
2. Competitor Spending- Attempting to match your budgets to those of rival businesses
3. Last year's allocation- Looking at what was allocated last year and simply adding a percentage on to account for inflation
4. As a percentage of sales revenue- Deciding upon how much money to allocate depending upon the value of previous sales
5. Zero-based budgeting- Starting at zero and having to justify every penny that they require. This is used to control spending and improve efficiency
The budget setting process
Set Profit Budget...
Set Expenditure Budget...
Set Income Budget...
Set Functional Budgets... ...Control and Review
Problems with the setting of budgets
- INEXPERIENCE- new business owners lack experience of the market and the likely costs and revenues for the business = inaccuracy!
- POOR RESEARCH- competitors will not provide you with any data so a lot of the figures might be guess work!
- UNFORESEEN CHANGES- the market is continously changing.
reasons for setting budgets
- TO ESTABLISH PRIORITIES- which areas of the business are you going to spend mnore money on and why?
- TO GAIN FINANCIAL SUPPORT- as part of a business plan, lenders will want to see that you have gone through the budgeting process
- TO AVOID OVERSPENDING- careful controls should help to improve financial efficiency
- TO MOTIVATE STAFF- budget holders might be motivated by the extra responsibility