Finance Using Budgets

Starter

Objectives Understand key features of a budget Understand key features of a budget Calculation of variances Calculation of variances Use variation analysis to inform decisions Use variation analysis to inform decisions

Key features of budgets Budgets are plans for how much money should be spent on various items Budgets are plans for how much money should be spent on various items They normally cover a 12 month period They normally cover a 12 month period They are broken down into weekly or monthly intervals They are broken down into weekly or monthly intervals They are set for each department in a firm They are set for each department in a firm The departmental manager is responsible for ensuring that money spent is within budget limits The departmental manager is responsible for ensuring that money spent is within budget limits The manager is called the budget holder The manager is called the budget holder

Creating a budget Forecast level of activity, eg sales, for the next year Forecast level of activity, eg sales, for the next year Each department then produces a suggested budget based on the forecast Each department then produces a suggested budget based on the forecast Suggested budgets are discussed with senior management, modified and agreed Suggested budgets are discussed with senior management, modified and agreed The ‘budget year’ begins and managers receive regular feedback on spending. The ‘budget year’ begins and managers receive regular feedback on spending.

Main Business Budgets Sales budget Breakdown of how many products business aims to sell & how much revenue it will get from those sales Marketing budget Describes how business intends to achieve budgeted sales (e.g. how much advertising, sales promotion) Production budget Volume of production (units) and production costs to achieve it Used to help schedule work, order raw materials and manage capacity Departmental cost budgets Cash flow budget Ties all other budgets together Helps understand what money is coming in (sales) and what money is going out (production and departmental)

Benefits Budget - a non-money motivator Budget - a non-money motivator Provides a focus and a sense of achievement when it is reached Provides a focus and a sense of achievement when it is reached Rewards in form of bonuses can be linked to achievement of budgets Rewards in form of bonuses can be linked to achievement of budgets Encourages employees to contribute more towards overall profitability of business Encourages employees to contribute more towards overall profitability of business

Drawbacks Using planned figures Using planned figures Time Time Conflict Conflict

Budget plan PRODUCTION DEPARTMENT BUDGET MARCH FEBRUARY 2004 ItemMonthly expenditure £ Sheet aluminium Wheels Tyres Wages Maintenance Electricity Moulds 12,000 8,900 9,500 16,500 4,000 1, Total53,500

Budgets and variances The difference between the planned and actual figures is called a variance. The difference between the planned and actual figures is called a variance. A minus sign before the variance shows it is an overspend A minus sign before the variance shows it is an overspend A favourable variance leads to higher than expected profit and visa versa A favourable variance leads to higher than expected profit and visa versa Budgeted amount: £200 Actual spending: £250 Variance:– £50

Budget report with variances PRODUCTION DEPARTMENT BUDGET REPORT MARCH 2003 ItemMonthly expenditure £ Actual expenditure £ Variance £ Sheet aluminium Wheels Tyres Wages Maintenance Electricity Moulds 12,000 8,900 9,500 16,500 4,000 1, ,250 9,000 9,500 14,000 6,500 1, –250 – ,500 –2,500 –50 50 Total53,50053,850 –350