Budgets
An agreed plan establishing the expected revenue and expenditure of an organisation.
Types of Budget
Income Budget
Shows the planned inflows to the organisation over a period of time.
Expenditure Budget
Shows the planned outflow of the organisation over a period of time.
Profit Budget
Shows the planned profit of an organisation over a period of time.
Good Budgeting
Variance Analysis
Actual figures are compared to those that are budgeted for
We have two types of variance:
Adverse Variance
When a business has done WORST than expected meaning...
When a business has done BETTER than expected meaning...
BENEFITS
DRAWBACKS
An agreed plan establishing the expected revenue and expenditure of an organisation.
Types of Budget
Income Budget
Shows the planned inflows to the organisation over a period of time.
Expenditure Budget
Shows the planned outflow of the organisation over a period of time.
Profit Budget
Shows the planned profit of an organisation over a period of time.
Good Budgeting
- Consistent with aims of the organisation
- Based on the opinions of as many people as possible
- challenging but realistic aims/targets
Variance Analysis
Actual figures are compared to those that are budgeted for
We have two types of variance:
- Adverse
- Favourable
Adverse Variance
When a business has done WORST than expected meaning...
- Actual costs was HIGHER than budgeted for
- Actual revenue was LOWER than budgeted for
When a business has done BETTER than expected meaning...
- Actual costs was LOWER than budgeted for
- Actual revenue was HIGHER than budget for
BENEFITS
- To establish priorities. Indicating the level of importance attached to a particular policy or division.
- To provide direction and coordination. Ensuring that spending is geared towards firm's aim.
- To assign responsibility. Identifying the person who is directly responsible for any success or failure.
- To motivate staff. Greater responsibility and recognition - meet targets.
- To improve efficiency. Investigating reasons for failure.
- To encourage forward planning. Studying possible outcomes
DRAWBACKS
- Incorrect allocations. Budget may be too generous - may encourage inefficiency. A insufficient budget will demotivate staff and hinder progress through lack of money.
- External factors. Changes outside the budget holders' control may affect their ability to stick to the plan.
- Poor communication. Budgets must be agreed between people who understand the area in question and also other factors that might influence budgets.