1. PowerPoint presentation
Unit 320 (B&A 59): Principles of business
Handout 12: Budgets

2. What are budgets?
A budget is an itemised statement of finances available over a specific period.
Budgets are either:
capital
operational.
Capital budgets relate to planned spending on fixed assets such as equipment or machinery.
Operational budgets relate to the planned income and expenditure of a specific activity over a period of time.
All organisations need to operate within the financial resources available to them now and in the future.
In this respect, financial resources need to be planned and allocated to departments and teams in the form of a budget.

3. Overall purpose of budgets
To plan, monitor and control spending throughout the organisation.
To manage financial resources effectively.
To authorise and delegate authority for decision-making based on finance.
Budgets for individual departments or activities are included in an overall ‘master’ budget and can therefore be used to prepare a set of final accounts for the organisation and to predict the potential profit- and loss-making activities.

4. Functions of budgets
Investing in necessary equipment (capital)
Ensuring sufficient resources for operation (operational)
Managing cash flow
Allocating resources
Establishing priorities
Managing financial resources effectively
Authorising and delegating authority
Co-ordinating and controlling activities
Motivating management and staff
Providing a framework for responsibility and control
Accountability and evaluation of performance
Translating aims and objectives into financial terms

5. Types of budget Business start-up Corporate Event management Sales
Production
Project
Marketing
Business start-up budgets must consider necessary capital purchases of equipment as well as fixed and variable operational costs against revenue forecasts over an initial period.
Corporate – deals with the budget for the whole organisation based on estimates from its various departments/functions.
Event management – such as product launches, conferences, training events are all allocated an amount of finance which may be based on priority.
Sales – the sales budget contains details of projected numbers of units to be sold and their selling prices, based on quantitative estimates and qualitative views of managers and market research.
Production – considers the forecast in the sales budget against current stocks held, stock requirements and calculations of labour, materials and overhead needed to match it.
Project – discrete projects such as implementation of a new IT system will be allocated budget funds based on estimates of time and staff required for the number of activities it encompasses.
Marketing – forecasts the amount of finance required to promote and advertise the produce/service in order to achieve the sales forecast.

6. The stages in preparing a budget are:
Preparing budgets
The stages in preparing a budget are:
agree and define the purpose of the budget
agree the source of income – define the limiting factor
identify possible costs involved
research the costs
present the budget
negotiate and amend.
Agree the source of income – define the limiting factor – in private organisations the limiting factor will be revenue from sales; in public organisations it will be determined by the funds allocated by central government plus any additional forms of revenue, eg from hiring of premises.

7. essential and non-essential expenses priorities key elements.
Forecasting
Identify:
essential and non-essential expenses
priorities
key elements.
Estimations of costs should be researched for accuracy.
Base estimations on recent past experience, allowing for inflation and contingencies.
A contingency is an allowance that is built in to deal with any unforeseen rise in costs and is usually formed of a percentage amount added on to the budget.
When developing a budget, it is important to provide as accurate a forecast of expenditure and required resources as possible.
Consideration should be given to essential and non-essential expenses, priorities and key elements of the budget to make the best use of resources.
Estimations can be made using breakdowns on, for example, a task-by-task or person-by-person basis.
Quotations obtained from external and internal sources and calculations on recent past experience are useful in making estimations.
The most useful tool when planning a budget is a spreadsheet: what if formulae can be entered to show best- and worst-case scenarios.

8. Effect of time, priorities and resources on a budget
The tighter the timescales, the more money and resources will be required in order to achieve them.
Cutting the budget will mean fewer resources are available, and therefore the timescales will increase.
Effect of time, priorities and resources on a budget
When preparing a budget, it is important to identify and understand the relationship of the three main factors involved – the timescales, priorities and resources available.