A budget is a financial plan for the future operations of the business. Business plan their earnings and revenues using budgets.
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What is a sales budget?
These set out the businesses expected sales revenue from selling it's products.
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A business uses a sales budget to work out their expected sales, what will their expected sales tell them?
Tells the business the amount of products it needs to produce or supply. This will also has implications for the number of staff that are employed and how much the activity will be taking part throughout major parts of the organisation.
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Why are sales budgets difficult to forecast?
Because the amount a company will sell in the future is affected by consumer tastes and fashions as well by the actions of competitors.
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What data do companies go off to predict sales?
1. Historical data 2. Trend analysis 3. Market research 4. Plus own experience/knowledge of market and their customers
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What is the difficulty for predicting sales for multi-product company?
The forecast sales may be different for each product, so they may need to create a budget for each product they sell.
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What is an expenditure budget?
Businesses need to plan their expenditure on labour, raw materials, fuel and other items which are essential for the process of production.
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Outline the steps a business takes when planning expenditure budgets...
Ensure it has enough supplies to satisfy forecast sales > Manages decide on what employees and how many they need (too little > not enough staff available, too many > wasting money on unproductive staff).
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What happens if a business budgets for too many goods?
It risks purchasing goods which cannot be sold (especially for perishable items like food products) or incurring high storage costs.
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What happens if a business budgets for too few goods?
A company could lose customers, sales and profits.
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What regular and expected costs does a company forecast?
Rent and rates, distribution, repairs, utility bills, stationary, miscellaneous or sundry items.
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What is a master budget and what does it show?
A forecasted profit and loss account complied from the individual budgets and it gives the managers an idea of how budget decisions are likely to impact on profitability.
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What are the benefits of budgeting?
1. To aid communication throughout a business 2. To aid coordinating of activities 3. To make managers consider expenditure decisions in advance (proactivity) 4. To motivate staff 5. To help persuade potential lenders to invest money
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How can budgeting help with monitoring business performance?
You can see: Did the business perform as expected? Did some areas perform better or worse than planned? Were costs/revenues higher or lower than anticipated? And, why did these variations occur?
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What is variance analysis?
Compares actual performance with forecast performance.
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What is the purpose of variance analysis?
To highlight areas of good and poor performance. This allows managers to build on areas of strength and remove areas of weakness.
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What does variance analysis involve?
It involves placing the forecast side by side with the actual figures, working out the difference between the two and trying to determine why it occurred. Managers can determine why poor performance occurred and take preventative actions.
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What is a favourable variance?
A favourable variance occurs when results are better than expected.
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What is an adverse variance?
An adverse variance occurs when results are worse than budgeted.
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What should the examination of variances hopefully do for the future?
It should show the business how to become more efficient and profitable in the future.
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What are the difficulties in setting budgets?
1. Difficult to forecast sales accurately (tastes constantly changing) 2. May be unexpected changes (e.g a rise in fuel costs) 3. Decisions by the government (e.g. interest rates up) 4. Entrepreneurs may spend too little/too much time setting budgets
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Other cards in this set
Card 2
Front
What is a sales budget?
Back
These set out the businesses expected sales revenue from selling it's products.
Card 3
Front
A business uses a sales budget to work out their expected sales, what will their expected sales tell them?
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