Name the 3 types of budgets
- Income Budget
- Expenditure Budget
- Profit Budget
What is Income Budgets?
A target set for the amount of revenue to be achieved in a given period of time.
What is Expenditure Budget?
A limit placed on the amount to be spent in a given period of time.
What is Profit Budget?
A target set for the surplus between income & expenditure in a given period of time.
What is Cash-flow forecast
This is a form of budget. it is setting targets for the amount of cash flowing in and out of a business at set point in time.
What is What-if analysis?
What-if analysis allows a business to see what the forecast outcome will be in a range of scenarios. This is by changing key variables.
Purpose of a budget?
- Helps with planning and forecasting to inform decision making.
- Provides a quantifiable target, that can be communicated to interested parties, against which actual outcome can be measured.
Give 3 Benefits of budgeting
- Improves financial control
- Reduces overspending
- Better forecasting ability
- More efficient allocation of money
- Delegates spending power
- Motivates staff
- Sets targets and goals
- Improves cash flow forecasting
- Allows for the monitoring of performance using variance analysis.
Give 3 Drawbacks of budgeting
- Potential for conflict
- Lack of transparency
- Short term saving may be detrimental to long term objectives
- May be too easy or too hard to achieve
- May be restrictive
- Opportunities may be missed
- Inappropriate cost cuts
- Time consuming to set and monitor
- Opportunity cost of manager’s time
What is Favourable Variance?
The variance has a positive impact on profit and is therefore seen as good for the business.
What is Adverse Variance?
The variance has a negative impact on profit and is therefore seen as bad for the business.
What is Variance Analysis?
The process of calculating and interpreting any differences between budgeted budgeted figures and actual figures i.e. budgeted figure - actual figure.
