AS Business Studies Unit 1 Budgeting AS Business Studies Unit 1

Aims and Objectives Aim: Understand budgeting Objectives: Define budgeting Discuss the budget setting process. Analyse method of new businesses setting budgets. Evaluate the problems of budgeting.

Starter Define a budget Definition: Financial target for a given period of time. NOT A FORECAST OR PREDICTION

Fixed sum of money to be spent by a department over time. Expenditure Budgets If every budget holder (person accountable for budget) was able to make sure their budget was not exceeded, costs should not get out of control. Sales revenue target for a whole business or department. Income Budgets Can be motivating if used as targets If budgets are reasonable and realistic employees will do their best to achieve them. By delegating budgets employees can feel some financial responsibility. Target profit for the business over a period of time. Profit Budgets Provide clear goals and targets which are motivating Allow quick monitoring of performance against actual profits made.

Process of Setting Budgets In your groups decide on a process of how a business sets it’s budgets. Eg. Stage 1: Stage 2:

Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Set clear objectives for the firm for the year. Stage 1 Gather information such as market research and historic budgets to base figures on. Stage 2 Construct sales budget showing targets for each product/region/department. Stage 3 Based on sales budget, set budget for major cost areas such as labour, materials etc. Stage 4 Set profit target based on the sales and cost budgets already made. Stage 5

Setting Budgets for New Businesses If a business does not have historical data to base budgets on, it can be harder to set realistic targets. They must follow the following rules.

Blindfolded Pictionary

Tip 1 Use spread sheet software and keep updating regularly. http://www.classtools.net/education-games-php/timer

Tip 2 Set budgets for at least 12 months as most new businesses will be expected to make a loss in the first few months.

Tip 3 Give great importance to monthly sales forecasts.

Tip 4 Make sure all of the costs of operation involved in producing and delivering product to customers are included in budget.

Tip 5 Keep a running month by month total of profit and losses to be able to spot trends.

Tip 6 Monitor each major budget monthly and take corrective action accordingly.

Monitoring Budgets Monitoring budgets is vital to make sure: Money is being spent on the correct items and not misallocated. All costs are accounted for. Major costs ‘excesses’ are reported to managers before expenditure agreed Revenue and profits are meeting target levels. If not managers informed.

Problems of Budgeting In groups brainstorm the problems of budgeting.

Problems of Budgeting Future is never certain, budgets can turn out very differently. Changes to external environment. Managers with authority may try and persuade their bosses to set spending budgets higher than they need to be. Inaccurate budgets made with no input from workers, may be demotivating

Problems of Budgeting Short term decision to cut budgets, by using cheaper materials might damage the businesses’ longer term reputation. Budgets that are too easy to achieve will not be motivational. The key sales budget is subject to so many constraints outside of the firm’s direct control that planning is difficult.