Budgeting

Budgeting

1. A budget is a target for cost or revenue that a firm or department must aim to reach over a given period.

2. The aim of a budget is to control expenditure and to challenge departments to increase revenue and profits

3. Budgeting is the process of setting targets, covering all aspects of costs and revenue

4. Budgets tell individual managers how much they can spend to achieve their objectives

5. EXAMPLES

   • A restaurant manager may be given a budget for refurbishing a restaurant.
   • A marketing department may be given a budget for buying new cars

6. A budgeting system shows how much can be spent and gives managers a way to check whether they are on track

7. Budgeting process

   • Make a judgement of the likey sales revenue for the coming year
     • Set a cost ceiling that allows for an acceptable level of profit
       • This company's budget costs is then broken down by division department or by cost centre
         • A budget may then be broken down further so that each manager has a budget and therefore some spending power

8. What is Budgeting for?

   • Control - limits expenditure. It ensures that no department or individual spends more than the company expects them to. Avoids unpleasant surprises.
   • Delegation - can spread out responsibility for profits and income. Spreading the work load. Can ensure closer monitoring and control.
   • Yardstick - helps measure performance and monitor progress. It is a benchmark against which a company can monitor current sales and spending. Gives you a chance to make changes to get back on target.
   • Motivation - Giving people budgets can make people work harder. Giving people the opportunity to make decisions could empower them. Prepares staff to take on responsibility.

9. TYPES OF BUDGET

   • Profit Budget - The profit budget is a target which firms aim to achieve or exceed. Profit budget is a consequence of the other two budgets
   • Expenditure Budget - The expenditure budget is a control limit which puts a cap on how much a business or department can spend. Managers who over spend will have a stern talking to
   • Income budgets - a minimum target for desired revenue levels. Managers will be encouraged to exceed it is is important that these targets are realistic.

10. Benefits/Drawbacks

    • Benefits : Controlling finances. Improving Staff performance
    • Drawbacks: Conflicts can arise. Motivating impact of budget can fail to be acheived.

11. Variance : The difference between budgeted figure and actual figure.