Budgets

Definition A budget is a plan for a business organisation for a future specified time period, covering specific business activities and expressed in financial terms

Advantages Allows an organisation to control both their income and their expenditure Can highlight areas where the organisation is not performing efficiently A way of clarifying roles and responsibilities of management Helps to coordinate the activities of an organisation

Advantages Can improve the communication between departments Help to ensure that scarce resources are used as efficiently as possible Performance can be measured against set targets

Disadvantages Dependent upon the quality of the information provided Can become very inflexible Can be demotivating if the users have not been involved in the budgeting process Danger of management becoming over dependent on budgets at the expense of managing

Types of Budgets Fixed –Budget is not changed, even when the actual activity levels differ from those set Flexible - changed to allow for the behaviour of variable costs at different levels of activity Zero based - often used in a new or unstable business and each time a new budget is drawn up it is not based on the previous year, but is based on entirely new costings and projections

Fixed Budgets Advantages Based on historical data and the current financial state of the business Straightforward to prepare Disadvantages Not amended at any time during that year, even if there are changes in the level of business activity

Flexible Budgets Advantages Relatively straightforward to prepare Allow a comparison of like with like Disadvantages Generally prepared for evaluation and control purposes rather than for planning purposes

Advantages of Zero Budgeting Some departments no longer require budgets and this helps identify them Is a method in which budgets can be generally cut for the whole business

More time has to be spent by management on the budgeting process Does not help in identifying managers that try to increase a budget when they do not actually require it Disadvantages of Zero Budgeting

Criteria for Setting Budgets Make sure everyone has clear objectives and a strategy for achieving them Make sure staff are aware as to how budgets are set Involve as many staff as possible in the process

Advantages of Budgeting Can control and monitor costs Can have a motivational effect It can be used as departmental targets and for performance measurement Can tell you a lot about how a company operates

Disadvantages of Budgeting Not perfect because it is based on assumptions and predictions If it is set incorrectly at the outset it can de- motivate departmental staff If you have a lot of spending power it is easy to do well