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
Expenditure
Budgets
Fixed sum of money to be spent by a department over time.
• 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.
Income Budgets
Sales revenue target for a whole business or department.
• 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.
Profit Budgets
Target profit for the business over a period of time.
• 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
• Set clear objectives for the firm for the year.
Stage 2
• Gather information such as market research
and historic budgets to base figures on.
Stage 3
• Construct sales budget showing targets for
each product/region/department.
Stage 4
• Based on sales budget, set budget for major
cost areas such as labour, materials etc.
Stage 5
• Set profit target based on the sales and cost
budgets already made.
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.