Using Budgets

Advantages Provide direction & coordination Motivate staff Improve efficiency Enable forecasting & realistic planning

Limitations Difficult to monitor fairly Allocations may be incorrect Savings may be sought that are not in the interests of the firm May be inflexible, despite changing external factors

Good budgets should be … Consistent with the aims of the business Based on the opinions of as many people as possible Setting challenging but realistic targets Monitored at regular intervals flexible

Variance Analysis The process by which the outcomes of budgets are examined and then compared with the budgeted figures. The reasons for any differences (variances) are then found Favourable When costs are lower than expected or revenue is higher than expected Adverse When costs are higher than expected or revenue is lower than expected (sometimes termed ‘unfavourable’)