So how was your holiday?

BudgetingYear 11 Business studies

What is budgeting?

• Budgeting is setting targets to cover all aspects of costs and revenues.

• The process of budgeting often starts with the predicted revenue, previous experience or knowledge.

• There is a cost ceiling set to allow for desired area of profit.

Who are they for?

• Budgets are set for the whole company.

• The company budget is then broken down into departments such as marketing, HRM etc…

• In large organisations budgets will be broken down further into divisions or department sections

What are they for?

• To ensure specific departments or individuals spend no more that what the company expects.

• Enable businesses to measure success. • This should eliminate unexpected

surprises within an organisation.• Managers can receive bonus, or profit

share from operating under budget. • Empower and motivate managers.

Countries have budgets too

Who is responsible for the UK budget?

• One MERIT for his name.• George Osborne.

• One MERIT for his

job title. A clue is he is just

lower down than the prime minister• Chancellor of the Exchequer.

Budgeting

• A budget is a financial based forecast or prediction of the profit a business expects to generate in a given period

• The budget includes targets for revenue and costs based on business objectives

• Figures included are based on research or previous experience

How do organisations set budgets?

How do organisations set budgets?

• Past• Other

Organisations• Objectives• Zero based

Budgets

In 4 ways that’s how

Past - (historic)

• Past– historic the simplest way to set budgets is by looking at and analysing previous years.

• What the business spent and add on a bit to account for inflation (a general rise in the price of goods or services) and also in in the costs of raw Materials / goods.

Other Organisations

• Other organisations – what do competitors spend? If they have increased their spending, maybe it is ok to increase ours.

Setting budgets through objectives

• Objectives – What is the business trying to achieve / what are the expected returns / revenues?

• The UK right now is trying very hard not to spend any money, so the budget is tight (little to spend)

Zero based budgeting

• Zero based budgeting - give everyone a budget of zero and it is then up to each department to explain how much they need and why. Do you like asking for money?

• Zero Budgeting, keeps spending low, as managers have to justify expenses, can be time consuming (time is money), waste of resources.

So what do we

remember about

budgets?

Why set budgets?

• Enables the business to measure success• Can be used to keep control of costs• May motivate staff by providing them with

targets / direction• Enables management to focus on those

areas failing to meet budgets• Enables business to empower departments• Encourages efficiency = lowers costs long

term

Limitations of Budgets

May lack flexibility and not reflect changing conditions.

Managers may take short term decisions to keep within budget rather than the ‘right’ long term decision

May be problems agreeing on the targets.

Budgets may constrain action; managers may not take certain steps because they exceed the budget.

Managers may resist attempts to set financial targets (do not want to be measured).

The process of setting and agreeing budgets may in itself be very time consuming.

Budget may be unrealistic and demotivate staff

Job insecurity if they do not meet targets

Effective budgets must beS.M.A.R.T.

• Specific (inform departments)• Measurable (A means of tracking progress)• Achievable (possible to accomplish) • Realistic (does it fit the business)• Timed – have a set time scale (1 year)

TASK Write a smart objective for yourself. i.e

I (Mr Ahern) want to loose 5kg of weight by Christmas

Budgetary control and variance analysis

Budget Actual Variance

Sales (revenue) 3000 3500

Heating 2500 3500

Rent 6000 5000

The difference between the budgeted figure and the actual figure is called the variance.The reasons for any variances can then be analysed (variance analysis) and appropriate action taken where necessary.

• Is the process of measuring the difference between budgeted (planed) and actual outcomes.

• Wherever actual differs from budgeted performance a variance takes place (A variation).

• Purpose – to detect problems, so action can be taken to improve performance

Negative / Adverse - bad for business

Costs are more than budget Revenues are less than budget

Positive / Favourable - good for business

Costs are less than budget Revenues are more than budget

Variance Analysis:

•We could write it down!!!

•But instead how’s about this

How do we remember this?

Angry

Adverse

Fantastic

Favourable

Favourable / AdverseTask 1

Budget Actual Variance Favourable / Adverse

Sales (revenue) product x

8000 8900

Sales (revenue) product z

7600 7500

Rent 5000 6000

Electricity 1200 700

Wages 3500 3300

Material costs

2300 1800

Item Forecast (£)

Actual (£) Variance (£) + or -

Sales revenue

Tea / coffee 2,000 2,200

Soft drinks 400 300

Food 4,000 4,500

Total Sales 6,400 7,000

Costs

Wages 1,000 1,050

Rent 800 800

Heating 100 110

Advertising 50 50

Cost of food 1,900 2,010

Total costs 3,850 4,020

Profit

Task 2

Class Task

Budget Actual Variance Favourable / Adverse

Sales revenue (x) 7250 8000 750 Favourable

Sales revenue (y) 2260 2060

Sales revenue (z) 1320 1400

Rent 3100 3200

Electric 760 600

Raw Materials 920 1120

Wages 3000 2820

In pairs discuss possible ways in which variation can occur between budget and actual figures

• Change in product / service demand.• Rise in rent.• Change of supplier.• Increase in staff.• Increase / decrease in product /

service price

So what are the causes of variance

Well done for today

• We got through a lot quickly• Please make sure you check the blog

for a homework task that will be placed on there to be handed in Sunday