What is a budget?
A budget is a financial plan for the future period in quantitative terms.
What are purposes of budgets?
Planning (forecasting income,costs and resources
Control (comparing actual results to budget)
Coordination ( aligning departments )
Motivation (setting performance targets)
Communication (sharing objectives)
Decision making ( supporting management decisions
What does budgetary control mean?
Comparing actual vs budget
Calculations variances
Taking corrective action
What does a budget holder do?
Budget holders are responsible for achieving departmental targets. They prepare and manage departments budgets and explain variances.
What does senior management do?
Approves budgets and sets objectives and monitors overall performance.
What does a finance department do?
They prepare budgets and monitor performance, consolidates budgets and reports variances.
What are some types of budgets?
Sales budget (expected sales)
Production budget ( units to be produced )
Cash budget ( cash inflows and outflows)
Flexible budget (adjusts for activity levels)
What is top down budgeting?
Budgets set by senior management
These are quick but can be demotivating
What is bottom up budgeting?
These are prepared by budget holders
They are more accurate but time consuming
What are common uncertainties in budgeting?
Sales demand change
Cost fluctuations
Economic conditions
Inflation
Government legislation
How can you manage uncertainty ?
Using flexible budgets
Regular budget reviews
Using rolling budgets
Including contingency allowances
What are the positives about budgeting?
Motivation
Accountability
Improve performance
What are the negatives of budgeting?
Budgetary slack
Demotivating if targets are unrealistic
Short term focus
What is budgetary slack?
Over or underestimating the budget to make targets easier to reach for benefits like bonuses or seem more efficient
What are some ethical issues with budgeting?
Manipulating budgets
Deliberately underestimating income
Overstating costs
Why might sales demand be uncertain?
Customer demand may increase decrease
Customer preferences can change
Completion may intensify
Why might cost be uncertain?
Raw material prices might fluctuate
Labour costs may rise (.e.g minimum wage)
Energy and transport costs may change
Why might the economic & market conditions?
Inflation
Interest rate changes
Recession or growth
What are some external uncertainties?
Government legislation
Tax changes
Environmental regulations
What are some internal operational uncertainties?
Machine breakdowns
Staff a sense or turnover
Supplier delays
Why is uncertainties a problem?
It can cause
Adverse variances
Poor performance evaluation
Incorrect decision making
Loss of control
What is a flexible budgets?
A flexible budget adjust costs to actual activity levels
Separate planning errors from performance issues
What are rolling budgets?
They are budgets that update regularly such as monthly or quarterly, but always look 12 months ahead
What are contingency allowances?
This is an extra margin that can be built into budgets to help absorb unexpected costs
