Budgeting THE TIMES 100

What is a budget? A budget is a forward financial plan. Budgets can be drawn up for: Income Expenditure Profit Cash flow Output

THE TIMES 100 An expenditure budget £ thousandJanuaryFebruaryMarch Salaries Utilities Rent 180 Administration Depreciation Total expenditure

THE TIMES 100 Benefits of budgeting The use of budgets can: Provide a framework for allocating and utilising resources Aid control and monitoring Encourage managers to plan ahead Provide targets which can be motivating Improve efficiency Allow better co-ordination of different departments in an organisation

THE TIMES 100 Problems with budgeting Predicting the future is not easy because of external factors A lack of historical data makes budget setting for new businesses difficult Budgets may be de-motivating if: ◦workers have no input in budget setting ◦they are too difficult to achieve Managers may make decisions based on the achievement of short term budgets rather than the long term benefits to stakeholders Budgets may cause conflict between managers

THE TIMES 100 The process of setting budgets Draw up sales budgets taking into account the firm’s objectives and any market research carried out Create expenditure budgets based on the costs necessary to create the budgeted sales Use the sales and expenditure budgets to set profit targets

THE TIMES 100 Variance analysis Variance analysis compares actual performance of an organisation with its budgeted performance. Variances can be: Favourable (sales or profit are greater than expected or costs are lower) Adverse (sales or profit are lower than expected or costs are higher)

THE TIMES 100 An example of variance analysis £ thousandBudgetActualVariance A/F Salaries A Utilities A Rent F Administration A Depreciation F Total expenditure F

THE TIMES 100 Budgeting in context

THE TIMES 100 Setting budgets at Davis When setting budgets, Davis managers have to consider different scenarios that could face the organisation over the coming financial year. Give examples of the questions they are likely to ask. Use the Davis case study to help you

THE TIMES 100 Variances £mJanuaryFebruary BudgetActualVariance A/F BudgetActualVariance A/F Sales ?7.26.9? Costs ?4.24.4? Profit ?????? Calculate the missing figures below

THE TIMES 100 Adverse variances Investigations into adverse variances should be carried out. Use the case study to identify what might cause adverse variances.

THE TIMES 100 Drawbacks of budgeting The Davis case study states ‘staff time devoted to budgets carries a real opportunity cost’ Using an example from the case study, explain what opportunity cost means.

THE TIMES 100 Useful resources Budgeting lesson suggestions and activities (The Times 100) Davis Service Group case study (The Times 100) Davis Service Group website