G10 the types of Budgets in business.pptx

Types of budgets in business

1. Budgets Purpose of Budgets Types of Budgets Variance Analysis Difficulties of Budgeting.

2. A budget is a financial plan that a business (or department in the business) sets about costs and revenue Reasons for budgeting . 1- Controlling and Monitoring: Budgeting allows management to control the business by setting objectives and targets. Budgeting also helps monitor the activities of a business and how it is successful to achieve the desirable targets.

3. Planning Businesses that use budgets are actively  planning ahead Problems and their solutions may be considered and solved  in advance Coordination & Communication Budgeting requires different parts of a business to operate as part of a  coordinated whole Budgets may be  communicated throughout the organization  to provide a framework for decision-making and communication

4. Motivation & Efficiency Budgets play an important role in  target-setting  and performance management which can be used by managers to measure success The allocation of budgets  spreads decision making  across the organization acting as a  motivator  to the managers who control them

5. Types of Budgets Sales Budget A financial plan that estimates a firm’s total revenue in a specific time period. It Focuses on the number of products sold and the price at which they are sold to predict how the company will perform. Production Cost Budget A firm’s planned production costs for a future period of time. Companies usually set a budget for the number of unites that will be required and produced.

6. Zero Based Budget A system of budgeting where no money is allocated for costs or spending unless they are justified by the fund holder. This is particularly useful where a business needs to control costs closely (e.g. to improve profitability)

7. Variance Analysis A budget variance  is a difference between a figure budgeted and the actual figure achieved by the end of the budgetary period (e.g. twelve months) Variance analysis  seeks to determine the reasons for the differences in the actual figures and budgeted figures A  favourable variance  (F) is where the actual figure achieved is better than the budgeted figure A favourable variance in a revenue or profit budget is where the actual figure is higher than the budgeted figure A favourable variance  in a costs budget is where the actual figure is lower than the budgeted figure An adverse variance (A) is where the actual figure achieved is worse than the budgeted figure An adverse variance in a revenue or profit budget is where the actual figure is lower than the budgeted figure An adverse variance in a costs budget is where the actual figure is higher than the budgeted figure

8. Difficulties of Budgeting

9. The difficulties of budgeting  Data must be  up to date, accurate and free of bias Sources of data must be selected carefully and used with care to ensure the most appropriate assumptions are made Those constructing budgets will require  skills and relevant experience  to do so effectively This may involve training or the recruitment of specialist staff Budgets can encourage managers to focus on the  short-term rather than the long-term success  of the business as budgets are usually set year on year Unrealistic budgets (over or under) can lead to a lack of motivation amongst those tasked to achieve the financial plan   The conflict between budget holders  may arise, reducing the effectiveness of the business as a whole