Effective Budget Allocation and Forecasting.pptx

Advanced Level: chapter 32
Developed by Nosheen Abbasi

1. Budget Set for each section of the business Target for financial performance Essentially a plan not a forecast Income Expenditure Uses past data Set objectives for the future Cost, Sales and Revenue

2. Importance of Financial Plans Business without direction or purpose Ineffective allocation of scarce resources Demotivated employees with no plans to work towards Lacking progress measurement…plans against actual performance If not made then:

3. Benefits Planning Allocating Resources Setting Targets Realistic targets e.g. Sales Budget: How much to produce? How much to spend on sales promotion? Who gets what? Doesn’t spend more resources than it has access to. e.g. avoiding downsizing in CS department Increases motivation especially when budget holder is delegated with accountability for setting and reaching budget levels Coordination Monitoring and Controlling a Business Measuring and Assessing Performance Work together effectively to discuss if the targets are achieved Change of factors since budget was set. Checks should be made carefully Variance Analyses: Calculations of difference between actual and budgeted figures and analysis of reasons

4. Potential Drawbacks Lack of Flexibility Focus on Short Term Unnecessary Spending Sudden change in external environment…will demotivate budget holder and employees Set for within 12 months e.g cutting size to be within labour budget…though may be needed later Underspent budget may lead to unnecessary spending. Budget Surplus Difficult to justify next period Training on Budget Budgets for Big New Projects Managers need extensive training for the role Often difficult or inaccurate, especially if undertaken for the first time

5. Key Features of Effective Budgetting Delegated Budgets: Giving authority to junior managers for setting and achieving budgets Gives a sense of ownership: Leads to establishment of more realistic targets

6. Setting and Using Budgeting Incremental / Revised Budgeting: Using last year’s budget as basis, and an adjustment for coming year…less time consuming Raised or Lower e.g. Cost Budgets Depends upon market conditions Adjusted for forecasted inflation and expected changes in output Doesn’t allow for unforeseen events No fundamental appraisals for each department for targets and need for resources

7. Setting and Using Budgeting Zero Budgeting Setting zero budget each year and argue the case for set targets to receive finance…more time consuming Clearly reflects external environment e.g. less cost of employees; salaries due to advent of technology Added incentive for manager To defend the work of his / her own section Fundamental review of work and importance Of each budget holding section

8. Setting and Using Budgeting Favorable Variance: A change from the budget that lead to higher than planned profit Adverse Variance: A change from the budget that lead to lower than planned profit

9. Setting and Using Budgeting Flexible Budgeting Cost budgets for each expense are allowed to vary if sales or output vary from budgeted level

10. Thank You