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Budgeting: AS Business Studies

Budgets are financial forecasts that plan costs and incomes. They help businesses control finances and ensure expenditures are managed. Issues can arise from external influences, communication problems, and incorrect allocations. Budgets prioritize activities, provide coordination, and can motivate performance. However, training is needed and they may focus too much on the short term. Variances identify differences between actual and planned figures. Zero budgeting requires areas to bid for funds rather than receiving preset allocations.

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Jozef Chen
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31 views

Budgeting: AS Business Studies

Budgets are financial forecasts that plan costs and incomes. They help businesses control finances and ensure expenditures are managed. Issues can arise from external influences, communication problems, and incorrect allocations. Budgets prioritize activities, provide coordination, and can motivate performance. However, training is needed and they may focus too much on the short term. Variances identify differences between actual and planned figures. Zero budgeting requires areas to bid for funds rather than receiving preset allocations.

Uploaded by

Jozef Chen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Budgeting

AS Business Studies
Content
• What are budgets
• Purposes of budgets
• Problems with budgets
• Advantages and disadvantages
• Calculating variances
• Zero budgeting
What is a Budget
• 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
Purposes of Budgets
• To plan - they help businesses control their
finances as they plan expenditures over a period of
time
• To control - help to ensure that businesses don’t
spend more than they should
Problems of budgeting
• 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 Budgeting
• 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
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
Variance
• If revenues are greater than budgeted – Favourable
variance
• If revenues are less than budgeted – Adverse
variance
• If costs are greater than budgeted – Adverse
variance
• If costs are less than budgeted – Favourable
variance
Variance analysis
• If businesses regularly analyse variances it allows
them to notice if financial plans are inaccurate
• If businesses fail to analyse variances on a regular
basis they will not be aware of their financial
performance compared to what is budgeted
Zero Budgeting
• This is where the budget is stet at zero and budget
holders have to bid for any monies and justify the
reasons why
• These can be good for new businesses / new
ventures
Summary
• Budgets are financial plans showing expected costs and revenues
over a period of time
• Purposes of budgets – they help the business plan and control
finances
• Problems with budgets – external factors, poor communication,
incorrect allocations
• Advantages – allows to prioritise, provides direction, can motivate
• Disadvantages – need to train staff, can be short term not long term
• Calculating variances – look at costs and revenues if they are
adverse (negative) or favourable (positive)
• Zero budgeting – all areas start off with nothing and have to bid for
money

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