A Budget is a forecast of costs and / or incomes
- Costs and Incomes must relate to a particular purpose
- Individual budgets must be based on a variety of different elements
- Individual budgets are brought together into a master budget which is for the organization as a whole
Purpose of Budgets
- To plan - they help businesses control their finances as they plan expenditures over a period of time
- To control - help to ensure that businesses don’t spend more than they should
Problems with Budgets
- Incorrect allocations
- External factors
- Poor communication
- These problems can be overcome by flexible budgeting
- Some firms adopt zero budgeting to ensure allocations are not excessive
Advantages of Budgets
- It indicates priorities
- It provides direction and co-ordination
- It assigns responsibility
- It can act as a motivator
- It should improve efficiency
Disadvantages of Budgets
- Training requirements – staff need to be trained to set budgets and manage them
- Allocation of funds – managers may find it hard to allocate funds fairly and in the businesses best interests
- Short term vs. Long term planning – budgets usually only look at an annual plan therefore may fail to take a longer term view
Zero Budgeting
- This is where the budget is stet at zero and budget holders have to bid for any monies and justify the reasons why
- These can be good for new businesses / new ventures
Variance Analysis
Adverse (or unfavourable) variances - when actual performance is poorer than budgeted performance
Favourable variances – where variance represents a better performance than planned
Identification of the cause of a variance can allow a company to:
- Identify the responsibility
- Take appropriate action
