Budgets

Question 1

What is a budget?

Answer 1

A coward financial plan concerning the revenues and costs of a business

Question 2

What does a budget do?

Answer 2

Provides a target for costs or revenue that a firm or department must aim to reach over a given amount of time

E.g cash flow forecasts (cash budgets)

Question 3

Types of budget

Answer 3

• Sales revenge or earnings budgets
• Expenditure budgets
• Profit budgets

Question 4

Sales revenue or earnings budgets

Answer 4

• Sets our expected sales revenue from selling its products
• Includes level of sales and likely selling price
• Start up business - low revenue budgets during first few months of trading but increase as business becomes more popular

Question 5

Expenditure budgets

Answer 5

• Also called cost or production budgets
• Plan the expenditure on labour, materials, fuel etc
• Set out expected expenditure on monthly basis

Question 6

Profit budgets

Answer 6

• By combining revenue and expenditure budgets possible to calculate profit/ loss
• New business- profit not likely to be made in first few months /years

Question 7

Purpose of budgeting

Answer 7

• Helps achieve objectives
  E.g if objective is to increase sales, budgets will reflect this with the revenue budget showing higher revenues but also higher costs in the expenditure budget

Question 8

Process of creating budgets

Answer 8

• Analyse the market to predict likely sales and prices to plan revenue budget
• Research costs for labour, fuel, raw materials by contacting suppliers
• Consider government estimates for inflation, interest, wage rises incorporating into revenue and expenditure budgets
• No previous information to base data on

Question 9

Historical budgets

Answer 9

• Use last years figures as the basis for the budget
• Realistic in that it is based on actual results
• However, circumstances may have changed (e.g new products, lost customers)
• Does not encourage efficiency

Question 10

Zero based budgets

Answer 10

• Budgeted costs and revenues are set to zero
• Budget is based on new proposals for sales and costs I.e built from the bottom-up
• Makes budgeting more complicated and time- consuming but potentially more realistic

Question 11

Why set up budgets?

Answer 11

• Helps a business control its finances by planning expenditure over a future period (usually a year)
• Targets for entrepreneurs- sales budget can encourage/ motivate employees to increase sales
• Helps co ordinate the decisions within the business

Question 12

Why set up budgets? Continue

Answer 12

• Delegated budgets- asa business grows it becomes different for one person to manage the budget- budget then gets delegated to other employees- empowers employees and motivates them
• Allows entrepreneurs to think about the future of the business. Focuses on costs and how to reduce them to become more competitive

Question 13

What is variance analysis?

Answer 13

Calculating and investigating the differences between actual results and the budget

Question 14

Why is variance analysis needed?

Answer 14

A variance arises when there is a difference between actual and budget figures

Question 15

Variances can be:

Answer 15

• Positive/ favourable (better than expected)

- Adverse/ unfavourable (worse than expected)

Question 16

Favourable variances

Answer 16

• Actual figures are better than budgeted figure
  E.g costs lower than expected
  E.g revenue/ profits higher than expected

Question 17

Adverse variances

Answer 17

• Actual figure worse than budget figure
  E.g costs higher than expected
  E.g revenue/ profits lower than expected

Question 18

Problems with budgeting

Answer 18

• Difficult to forecast sales accurately
  No history to base data on
  Market research needs to be accurate
  Change in tastes and advances in technology
• Unexpected changes
  Unforeseen costs, e.g fuel costs

Question 19

Problems with budgeting continue

Answer 19

• Decisions by government and other public bodies
  Bank of England raising interest rates
  Inflation (price increases)

-Using entrepreneurs time effectively
Setting budgets is time- consuming
Too long setting budgets
Lack of experience

Question 20

Sources of information to help set budgets

Answer 20

• Competition
• Professional organisations
• Bank and government organisations