Budgeting AS Business Studies

Content What are budgets Purposes of budgets Problems with budgets Advantages and disadvantages Calculating variances Zero budgeting

What is a Budget A Budget is a forecast of costs and / or incomes Costs and Incomes must relate to a particular purpose Individual budgets must be based on a variety of different elements Individual budgets are brought together into a master budget which is for the organization as a whole

Purposes of Budgets To plan - they help businesses control their finances as they plan expenditures over a period of time To control - help to ensure that businesses don’t spend more than they should

Problems of budgeting Incorrect allocations External factors Poor communication These problems can be overcome by flexible budgeting Some firms adopt zero budgeting to ensure allocations are not excessive

Advantages of Budgeting It indicates priorities It provides direction and co-ordination It assigns responsibility It can act as a motivator It should improve efficiency

Disadvantages of Budgets Training requirements – staff need to be trained to set budgets and manage them Allocation of funds – managers may find it hard to allocate funds fairly and in the businesses best interests Short term vs. Long term planning – budgets usually only look at an annual plan therefore may fail to take a longer term view

Variance Analysis Adverse (or unfavourable) variances – when actual performance is poorer than budgeted performance Favourable variances – where variance represents a better performance than planned Identification of the cause of a variance can allow a company to: Identify the responsibility Take appropriate action

Variance If revenues are greater than budgeted – Favourable variance If revenues are less than budgeted – Adverse variance If costs are greater than budgeted – Adverse variance If costs are less than budgeted – Favourable variance

Variance analysis If businesses regularly analyse variances it allows them to notice if financial plans are inaccurate If businesses fail to analyse variances on a regular basis they will not be aware of their financial performance compared to what is budgeted

Zero Budgeting This is where the budget is stet at zero and budget holders have to bid for any monies and justify the reasons why These can be good for new businesses / new ventures

Summary Budgets are financial plans showing expected costs and revenues over a period of time Purposes of budgets – they help the business plan and control finances Problems with budgets – external factors, poor communication, incorrect allocations Advantages – allows to prioritise, provides direction, can motivate Disadvantages – need to train staff, can be short term not long term Calculating variances – look at costs and revenues if they are adverse (negative) or favourable (positive) Zero budgeting – all areas start off with nothing and have to bid for money