Settings Budgets

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  • Created by: amy
  • Created on: 15-05-13 19:25

Key Terms

  • 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
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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


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The budget setting process

Set Objectives...

Market Research...

Research Costs...

Set Profit Budget...

Set Expenditure Budget...

Set Income Budget...

Set Functional Budgets...             ...Control and Review

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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.
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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
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