1. Setting Budgets

2. Lesson Objectives Income, expenditure and profit budgets The process of setting budgets Problems in setting budgets

3. Income, expenditure and profit budgets Income budgets – a target set for the amount of revenue to be achieved in a set time period – can be split by products, services or departments – may be translated into individual sales targets for staff – informed by market research and sales forecasts – informs cash inflows in the cash flow forecast

4. Income, expenditure and profit budgets Expenditure budgets – a limit placed on the amount to be spent in a given period of time – can be split by department, function or product – responsibility can be passed to individual managers – a separate expenditure budget may be set for running costs and start up costs – informs cash outflows in cash flow forecast – allows for monitoring of under spending as well as overspending

5. Income, expenditure and profit budgets Profit budgets – a target set for the surplus between income and expenditure in a given period of time – calculated based upon the income and expenditure budget – may be set for the business as a whole or for individual departments, products or branches – within a business plan will be used to highlight the potential and feasibility of the business BUSS1.14 Setting Budgets

6. The process of setting budgets Set clear objectives Carry out market research Produce a sales forecast Set expenditure budget Set income budget Set profit budget Set divisional targets Review against objective

7. Sample budget JanFebMar Income Budget 50006000 Expenditure Budget 25003500 Profit Budgets 15002500

8. Problems in setting budgets Dependent upon predictions and forecasts Costs are subject to change Actions of competitors unknown New entrepreneurs may lack experience May be subject to bias Take time and effort which itself has an associated opportunity cost

9. Setting a budget - activity One of the biggest challenges to new businesses is developing a customer base. They need to get customers to know about their product or service yet promotional budgets are often limited. Nihal is setting up a Sri Lankan cook in sauce business offering specialist sauces to deli’s and small food outlets across the north east of England. After careful research he has estimated his income to be £100,000 and has read that on average promotional budgets tend to be between 1 and 5% of income. He is however keen to keep his expenditure budget to a minimum and has therefore decided his promotional budget should be just 2.5%.