1. Budgeting
AS Business Studies

2. Content What are budgets Purposes of budgets Problems with budgets
Advantages and disadvantages
Calculating variances
Zero budgeting

3. What is a Budget A Budget is a forecast of costs and / or incomes
Costs and Incomes must relate to a particular purpose
Individual budgets must be based on a variety of different elements
Individual budgets are brought together into a master budget which is for the organization as a whole

4. Purposes of Budgets
To plan - they help businesses control their finances as they plan expenditures over a period of time
To control - help to ensure that businesses don’t spend more than they should

5. Problems of budgeting Incorrect allocations External factors
Poor communication
These problems can be overcome by flexible budgeting
Some firms adopt zero budgeting to ensure allocations are not excessive

6. Advantages of Budgeting
It indicates priorities
It provides direction and co-ordination
It assigns responsibility
It can act as a motivator
It should improve efficiency

7. Disadvantages of Budgets
Training requirements – staff need to be trained to set budgets and manage them
Allocation of funds – managers may find it hard to allocate funds fairly and in the businesses best interests
Short term vs. Long term planning – budgets usually only look at an annual plan therefore may fail to take a longer term view

8. Variance Analysis
Adverse (or unfavourable) variances – when actual performance is poorer than budgeted performance
Favourable variances – where variance represents a better performance than planned
Identification of the cause of a variance can allow a company to:
Identify the responsibility
Take appropriate action

9. Variance If revenues are greater than budgeted – Favourable variance
If revenues are less than budgeted – Adverse variance
If costs are greater than budgeted – Adverse variance
If costs are less than budgeted – Favourable variance

10. Variance analysis
If businesses regularly analyse variances it allows them to notice if financial plans are inaccurate
If businesses fail to analyse variances on a regular basis they will not be aware of their financial performance compared to what is budgeted

11. Zero Budgeting
This is where the budget is stet at zero and budget holders have to bid for any monies and justify the reasons why
These can be good for new businesses / new ventures

12. Summary
Budgets are financial plans showing expected costs and revenues over a period of time
Purposes of budgets – they help the business plan and control finances
Problems with budgets – external factors, poor communication, incorrect allocations
Advantages – allows to prioritise, provides direction, can motivate
Disadvantages – need to train staff, can be short term not long term
Calculating variances – look at costs and revenues if they are adverse (negative) or favourable (positive)
Zero budgeting – all areas start off with nothing and have to bid for money