A budget is a forward financial plan.
Budgets AS Edexcel
The purpose of budgets:1. A planning tool.Setting a budget forces managers to think ahead.2. Forecasting.A business can work out future income and expenditure.3. Communication.Budgets are widely discussed within a business. Managers have a clear framework within which they operate.4. A motivational tool.Budgets provide a target for employees to aim for.Meeting targets is seen as a measure of success.There may be financial rewards if budgets are achieved.
A business sets a budget based on the previous years figures.
A very quick way of setting budgets.
It may not act as way of improving business performance.
Managers tend to spend all the money allocated in a particular budget.
Zero based budgeting
Every expenditure budget is set at zero.
Managers have to justify every £ of spending.
The purpose is to control costs.
May involve considerable management time.
Budgeting video 1:
Variance analysis:
The 'variance' is the difference between the budgeted figure and the actual (real life) figure.
If the figure is not favourable for the business it is known as 'adverse' and the letters adv. would be written next to the number.
Adv:
If actual revenue or profit figures are higher than the budgeted figure or actual expenditure is lower than the budget this would be favourable (fav).
Fav:
Budgeting video 2:
Budgets must be realistic and flexible enough to cope with changing circumstances.
