13128567
Description
Mind Map by Keana Campbell, updated more than 1 year ago
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Created by Keana Campbell
about 6 years ago
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Budgets and
Variance
- Reasons for
Budgeting
- Measuring the money entering and
leaving the business in all areas,
using the information to indicate the
level of efficiency and effectiveness
of the business's activity.
- Giving information on the
productivity levels of staff and
providing one possible means of
appraising and rewarding
workers.
- Providing information for current and
prospective shareholders and
investors.
- Ensuring that the
cashflow is
adequate to meet
the day-to-day
needs of the
business.
- Providing managers with the
information they need to manage their
departments and monitor their
performance.
- Giving the whole business a
strategic perspective and target
what focuses on where it is now
and where it would like to be after
a specific period of time.
- Providing the basis of
control and meeting
objectives.
- Measuring the money entering and
leaving the business in all areas,
using the information to indicate the
level of efficiency and effectiveness
of the business's activity.
- Decision Making
and Strategic
Planning
- Cashflow
information can be
useful in all the
following budgeting
situations:
- Improving Liquidity: cashflow can be improved
by delaying payments to suppliers and
demanding payments from customers. This
option is often unavailable to new businesses
because of their weak bargaining position with
with larger and more established firms.
- Dealing with Lenders: The
preparation of a cashflow
chart will highlights the need
for borrowing, and ensures
the business takes action
before the event rather than
when forced to react to
unforeseen circumstances.
- Making Changes: Sometimes cashflow
forecast may highlight a need for change. For
example, a theme park may decide that it's
not worth opening at certain times because
the revenue generated in insufficient - the
business needs to take account of the costs
and benefits of its actions.
- Budgeting in Other Areas: Budgeting
ensures that spending is controlled
and to provide forecasts of likely
costs and returns.
- Budgeting by department makes it possible to split the
business into smaller units and pass responsibility to
departmental heads. Delegation of responsibility is useful as
individual managers are likely to have better immediate
knowledge of their department and are able to ensure budgets
are realistic and achievable. Responsibility to budgeting can
also be a motivator, showing that senior management trust the
judgement of their more junior managers.
- Can be used to judge the performance of a
particular department, its employees and its
managers. However, such figures don't take into
account reasons why the department may have
failed to meet the budget. Therefore, in such
situations using common sense is needed.
- Budgeting by department makes it possible to split the
business into smaller units and pass responsibility to
departmental heads. Delegation of responsibility is useful as
individual managers are likely to have better immediate
knowledge of their department and are able to ensure budgets
are realistic and achievable. Responsibility to budgeting can
also be a motivator, showing that senior management trust the
judgement of their more junior managers.
- Improving Liquidity: cashflow can be improved
by delaying payments to suppliers and
demanding payments from customers. This
option is often unavailable to new businesses
because of their weak bargaining position with
with larger and more established firms.
- Need for liquidity: From a
cashflow forecast a business
firstly needs to assess what
demand for cash is likely to
be at any time, to allow the
business to meet the
demands for payment.
- Zero Budgeting: Involves setting all budgets at
zero, requiring managers to justify any
requirement funds. This prevents a situation
where the same money is given each year
without any consideration of actual need.
- May be used in a business where it has a number of
potential developments planned but is only prepared
to proceed with those that are cost-justified (it would
be wrong to budget for all alternatives due to the
amount of management time that would be taken in
preparing the budgets.
- Main problem is the amount of time it takes for
budget holders and financial co-ordinator to manage
the system. The need to review items of expenditures
and decide whether to pass them will be ongoing and
may become tiresome for the person responsible. It
may also mean that the business has a ST perspective
of the situation.
- May be used in a business where it has a number of
potential developments planned but is only prepared
to proceed with those that are cost-justified (it would
be wrong to budget for all alternatives due to the
amount of management time that would be taken in
preparing the budgets.
- Flexible Budgets: Allows a
business to make allowances for
changes in the level of sales
volume so that adverse variances
are avoided.
- Variance Analysis: This is the amount by
which the actual financial results for an
item differ from the amount in the budget.
- Variance can be adverse or favourable: For revenue, if actual
sales exceed the budgeted figures the variance will be
favourable, whereas for costs if actual costs exceed the
budgeted figure the variance will be negative. A positive
variance improves profit and a negative variance reduces
actual profit.
- Variance can be adverse or favourable: For revenue, if actual
sales exceed the budgeted figures the variance will be
favourable, whereas for costs if actual costs exceed the
budgeted figure the variance will be negative. A positive
variance improves profit and a negative variance reduces
actual profit.
- Cashflow
information can be
useful in all the
following budgeting
situations:
- Three Main Types
of Budgets
- Revenue Budget - expected revenues
or sales and is broken down into more
detail (products, locations etc).
- Cost (or expenditure) budget
- expected costs based on
sales budget; overheads and
other fixed costs.
- Profit Budget - based on the
combined sales and costs
budgets, of great interest to
stakeholders and may form
basis for performance
bonuses.
- Revenue Budget - expected revenues
or sales and is broken down into more
detail (products, locations etc).
- Key sources of
Information for
Budgets
- Financial performance in
previous years - particularly
for established businesses
where lots of relevant data is
likely to be available.
- Market research -
trends in market size,
growth, segmentation,
product lifestyles;
competitor activity and
customer feedback.
- Difficulties
in Budgeting
Accurately
- Sales Forecasting
- Harder when market
experiences rapidly change
(e.g. new technology).
- Startup firms find it
hard to estimate likely
sales and revenues.
- Competitor actions
difficult to predict.
- Harder when market
experiences rapidly change
(e.g. new technology).
- Costs
- Always likely to be
unexpected costs.
- Will vary depending on
the sales budget.
- Changes in external
environment will
impact costs (e.g. taxes,
exchange rates).
- Always likely to be
unexpected costs.
- Sales Forecasting
- Problems and
Limitations of
Budgets
- Are only as good as
the data being used.
- Can lead to
inflexibility in
decision-making.
- Need to be changed as
circumstances and change.
- Are only as good as
the data being used.
- Financial performance in
previous years - particularly
for established businesses
where lots of relevant data is
likely to be available.
- Variance Analysis -
Calculating and investigating
the differences between the
actual results and the budget.
- A variance arises when there
is a difference between
actual and budget figures.
- Variances can be:
positive/favourable
(better than expected) and
adverse/unfavourable
(worse than expected).
- Variances can be:
positive/favourable
(better than expected) and
adverse/unfavourable
(worse than expected).
- Possible Causes of
Favourable Variances
- Stronger market
demand than expected
= higher actual revenue.
- Selling prices
increased higher
than budget.
- Cautious sales and
cost assumptions (e.g.
cost contingencies).
- Competitor
weakness leading
to higher sales.
- Better than expected
productivity or efficiency.
- Stronger market
demand than expected
= higher actual revenue.
- Possible Causes
of Adverse
- Unexpected events lead
to unbudgeted costs.
- Over-spends by
budget holders.
- Sales forecasts prove
over-optimistic.
- Market conditions (e.g.
competitor actions)
means selling prices are
lower than budget.
- Unexpected events lead
to unbudgeted costs.
- A variance arises when there
is a difference between
actual and budget figures.
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