Budgeting

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    Budgeting

    Quick revise

    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
    • 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 set at zero and budget holders must bid for capital 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

    Sometimes a favourable and adverse variance may take, it is essential to therefore understand the

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