Budgeting

Budgeting

1. Benefits of setting budgets

   • Setting targets to be achieved
   • Coordination
   • Monitoring and controlling
   • Effective allocation of resources
   • Modifying
   • Assessing performance
   • Planning

2. Key features of budgeting

   • Budgets are plans that organisations aim to fulfil.
   • Coordination between departments when establishing budgets is essential.
   • delegated budgets: control over budgets is given to less senior management

3. Budgetary control – variance analysis

   • variance analysis: the process of investigating any differences between budgeted figures and actual figures
     • adverse variance: exists when the difference between the budgeted and actual figures leads to a lower than expected profit
     • favourable variance: exists when the difference between the budgeted and actual figures leads to a higher than expected profit

4. Budgetary control and strategic planning

   • Setting, agreeing and controlling budgets is time-consuming. Budgets can fail to reflect changing circumstances and become inflexible. Budget holders can look upon a budget as a limit up to which they can spend, whether their department needs all of the resources or not.

5. Preparation of budgets

   • Stages in setting budgets
     • Stage 1 The most important organisational objectives for the coming year are established
       • Stage 2 The key or limiting factor that is most likely to influence the growth or success of the organisation must be identified
         • Stage 3 The sales budget is prepared after discussion with sales managers in all branches and divisions of the business.
           • Stage 4 Subsidiary budgets are prepared, which will now be based on the plans contained in the sales budget.
             • Stage 5 These budgets are coordinated to ensure consistency.
               • Stage 6 A master budget is prepared that contains the main details of all other budgets and concludes with a budgeted profit and loss account and balance sheet.
                 • Stage 7 The master budget is then presented to the board of directors for its approval.
   • Setting budget levels
     • incremental budgeting: uses last year’s budget as a basis and an adjustment is made for the coming year
     • zero budgeting: setting budgets to zero each year and budget holders have to argue their case to receive any finance

6. Potential limitations of budgets

   • They lack flexibility.
   • They result in unnecessary spending.
   • Training needs must be met.
   • They are focused on the short term.
   • Revised budgets may need to be set for new projects.
   • Cost and profit centres
     • profit centre: a section of a business to which both costs and revenues can be allocated
     • cost centre: a section of a business, such as a department, to which costs can be allocated or charged