Accounting and finance Budgets and budgeting

Accounting and finance Budgets and budgeting

Budgets a budget is a plan of action expressed in quantitative terms in effect, it is a forward financial plan showing forecast sales and forecast costs budgeting is the process by which budgets are drawn up

Classification of budgets budgets normally apply to functional areas within a business (e.g. production department, purchasing department) a revenue centre is responsible for generating budgeted income (e.g. sales department) a cost centre must ensure that the costs of an activity remain within a budget (e.g. purchasing department) a profit centre is required both to generate income and to control costs (e.g. a branch of a supermarket)

Aims of setting a budget to establish priorities to provide direction and co-ordination to assign responsibility to motivate staff to improve efficiency to assess forecasting ability budgets provide a means of measurement

Example of a budget a simple sales budget: Feb (units)Mar (units)Apr (units) Product 1100 Product these are the sales targets in terms of numbers of units to be sold targets can also be set in terms of £s revenue or £s costs

Problems with budgeting if the budgeting process is poor or if incorrect allocations are made, then the importance of budgets will be lost if budgets are seen to be imposed then this may lead to resentment and de-motivation if budgets are too inflexible then the business may suffer external factors may affect performance

Zero based budgeting most budgets are based on historic figures which are used as the starting point to predict next years figures zero based budgets set all the coming years budgets at zero and managers have to bid for funding each time they want to spend some money a justification for spending on each individual project must therefore be given