Finance- Using budgets

Using budgets

a budget is an agreed plan established in 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 the money alloctated to support the organisation of paticular functions, they also include targets for revenue and output or sales volume.

Main types of budgets

income budget-

this shows the agreed and planned income of a business over a period of time also known as sales budget.

expenditure budget-

this shows the agreed, planned expenditure of a business over a period of time

profit budget-

this shows the agreed, planned profit of a business over a period of time.

Benefits of using budgets-

• To establish priorities by indicating the level of importance attached to a division in the business
• To provide direction and coordination by ensuring that spending is put towards the firms main aims
• To assign responsibitly by identifying the person who is directly responsible for any succes or failure
• To motivate staff by giving them greater responsibilty and recognition when targets are meet, also if staff are able to participate in creating the budget then they will be more motivated to meet them
• To improve efficiency by investigating reasons for failure and succes
• To encourage foward planning by studying possible outcomes.

Drawbacks of using budgets

• Incorrect allocations. a budget that is to generous may encourage ineffiecency. a budget that is insufficient will demotivate staff and hinder progress through a lack of money
• External factors. changes outside the budget holders control may affect their ability to stick to the plan
• Poor communication. budgets must be agreed between people who understand the area in question and also other factors that might influence budgets