3.9 Budgets

Budget

Detailed financial plan for the future, usually involving expected costs and revenues

State the stages of preparing a budget

1. Define objectives

2. Identify limiting factors

3. Sales budget agreed

4. Subsidiary budgets agreed (product cost, administration, labour)

5. Budgets coordinated from departments

6. Mater budget concludes budgeted profit & loss & balance sheet

7. Budget presented to directors for approval and adoption

P CAFÉ

• Planning

• Contingency planning → preparing for the unexpected

• Accountability

• Financial control

• Efficiencies

State the differences between profit and loss vs budget

Profit and Loss Account	Budget
Summary of the past	Forecast
Must be published	Doesn’t need to be published

Imposed budgeting

Boss imposes budget targets for activity and costs (top to down)

Negotiated budgeting

Responsibility is shared, good ideas may feed up in the organisation (top and down)

Participative budgeting

Recommended targets for activity and costs, democratic way (down to top)

Incremental budgeting

Uses last year’s budget as a basis for adjustments

Zero budgeting

Setting budgets to zero each year and budget holders have to argue their case to receive any finance

Limitations of budgets

• Lack of flexibility

• Too short term

• Unnecessary spending

Cost centres + examples

Sections of a business that are accountable for the costs generated, e.g:

• Customer Service

• HR

• Marketing

• R & D

Profit Centres + examples

Sections of a business that is held accountable for the amount of profit generated, e.g:

• Each branch of a chain of shops

• Each department of a department store

List the profit centre structure

• Organisation by function (the sectors of a market)

• Organisation by product

• Organisation by geography

MAMA

• Monitoring and control

• Autonomy

• Motivating

• Accountability

Problems with cost/profit centres

• Unhealthy competetion (compartmentalisation)

• Loss of control

• Subjectivity

• Short-termism

Variance

Discrepancy between planned (budgeted) item of revenue and actual amount

Favourable Variance

Profits are higher than expected

Adverse Variance

Profits are lower than expected

No Variance

Profts and budgets are equal