1. BUDGETING AS BUSINESS UNIT 1

2. BUDGETING A BUDGET IS A FINANCIAL PLAN FOR THE FUTURE.
SET USUALLY OVER A 12 MONTH PERIOD.
3 TYPES:
INCOME BUDGETS - Forecast the amount of money that will come into the business as revenue.
EXPENDITURE BUDGETS - Predicts what the total costs will be for the year for the business.
PROFIT BUDGETS - This uses the totals from the income and expenditure budgets to calculate what the expected profit/loss will be.

3. BUDGETING Income budgets
A target set for the amount of revenue to be achieved in a set time period
Can be split by products, services or departments
May be translated into individual sales targets for staff
Informed by market research and sales forecasts

4. BUDGETING Expenditure budgets
A limit placed on the amount to be spent in a given period of time
Can be split by department, function or product
Responsibility can be passed to individual managers
Allows for monitoring of under spending as well as overspending

5. BUDGETING Profit budgets
A target set for the surplus between income and expenditure in a given period of time
Calculated based upon the income and expenditure budget
Within a business plan will be used to highlight the potential and feasibility of the business

6. The process of setting budgets
Set clear
objectives
Carry out
market
research
Produce a
sales
forecast
Set
income
budget
Review
against
objective
Set
profit
budget
Set
expenditure
budget
Set
divisional
targets

7. Problems in setting budgets
Dependent upon predictions and forecasts
Costs are subject to change
Actions of competitors unknown
New entrepreneurs may lack experience
Can be restrictive
Take time and effort which itself has an associated opportunity cost

8. Advantages of setting budgets
Help control income and expenditure.
Spending can be co-ordinated and prioritised
They provide a target to hit and this can be motivating for both employees and managers.
Budgeting lets businesses and departments review their activities.

9. Sample budget Jan Feb Mar Income Budget 5000 6000 Expenditure Budget
2500
3500
Profit Budgets

10. Nihal is setting up a Sri Lankan cook in sauce business offering specialist sauces to deli’s and small food outlets across the north east of England. After careful research he has estimated his income to be £100,000 and has read that on average promotional budgets tend to be between 1 and 5% of income. He is however keen to keep his expenditure budget to a minimum and has therefore decided his promotional budget should be just 2.5%.
Use the information sheet to make a recommendation for how Nihal should use his promotional budget – remember you should not overspend but may decide to under spend.
BUSS1.14 Setting Budgets

11. Different budget types
FIXED BUDGETS – Budget holders MUST stick to their budget plans.
ZERO BUDGETING – Means starting with £0 each year and justifying everything they need getting approval for money.
FLEXIBLE BUDGETING – Budgets can be altered to meet changing market conditions/needs of the business.
HISTORICAL BUDGETING – Looks at what the business spent the previous year to obtain its allowance for the forthcoming year.

12. Variances
Variance is the difference between the actual budget and the budgeted spend.
A variance means the business is performing better or worse than expected.
A FAVOURABLE variance leads to increased profit e.g. Costs are lower than expected or revenue is higher than expected.

13. Variances
An ADVERSE variance is a difference that can reduce profits. It may mean selling fewer items than expected or spending more on different aspects of the business than planned e.g. Raw materials.
Example a business plans to spend £5,000 on an advertising campaign but actually spends £8,000 then £5,000 - £8,000 = £3,000 adverse variance.

14. Consider the following budgets for three months’ trading in computer games.
Now assume that the following were the actual outcomes. Calculate the variances for each month and then calculate the total (cumulative) variance for each budget.
Budget Forecasts
November
December
January
TOTALS
Sales
20,000
45,000
15,000
80,000
Expenditure
5,000
3,000
23,000
Profit
30,000
12,000
57,000
Actual outcomes
November
December
January
TOTALS
Sales
15,000
55,000
9,000
79,000
Expenditure
6,000
2,000
23,000
Profit
40,000
7,000
56,000

15. The resulting variances would be as follows:
November
December
January
TOTALS
Sales
(5,000)
adverse
10,000
favourable
(6,000)
(1,000)
Expenditure
nil
1,000
Profit