Budgets

The budgets section of A-Level Business. Topics covered include: the purpose of budgets and the types of budget, variance analysis and the difficulties in budgeting. 

Budgets are a key part of financial planning. They help a business plan for the future, control its finances, and assess performance.

Purpose of Budgets

A budget is a financial plan that sets targets for income and expenditure over a specific period (usually monthly, quarterly, or annually).

Main Purposes:

• Control and monitor spending
• Coordinate departments or teams
• Set targets and objectives
• Motivate staff through clear financial goals
• Assess performance by comparing actual figures with budgeted amounts
• Aid decision-making with more accurate financial planning

Effective budgeting improves financial discipline and helps identify potential problems early.

Types of Budget

Historical Budgets

Budgets based on past performance or previous year’s figures. Adjustments may be made for inflation, market changes, or growth plans.

Advantages:

• Simple to create
• Based on real data

Disadvantages:

• May not reflect future conditions
• Past inefficiencies may be repeated

Zero-Based Budgets

All income and expenditure must be justified from scratch for each new period – no automatic carry-over from previous budgets.

Advantages:

• Encourages efficiency and justification of all costs
• Helps identify wasteful spending

Disadvantages:

• Time-consuming and resource-intensive
• Can be difficult for departments to forecast accurately

Variance Analysis

Variance analysis involves comparing budgeted figures to actual outcomes, identifying differences (called variances) and their causes.

Types of Variance:

• Favourable Variance: Actual income is higher or costs are lower than budgeted
• Adverse Variance: Actual income is lower or costs are higher than budgeted

Example:

• Budgeted sales = £50,000
• Actual sales = £55,000
• Variance = +£5,000 (favourable)

Variance analysis helps managers understand performance and take corrective actions where needed.

Difficulties of Budgeting

While budgets are useful, businesses may face several challenges:

• Uncertainty – Unexpected changes in the economy, costs, or customer demand can make budgets inaccurate.
• Time-consuming – Budgeting (especially zero-based) can take considerable time and resources.
• Lack of flexibility – Rigid budgets may prevent businesses from adapting to changes quickly.
• Poor communication – If teams are not involved in setting the budget, they may feel demotivated or under pressure.
• Inaccurate data – Poor forecasting or assumptions can lead to unrealistic budgets.

Summary Table