Budgeting

What is a budget?

A detailed financial plan that outlines expected income and expenditure for a future period.

Why do businesses use budgets?

To provide direction, help with planning, and measure performance.

What are the key purposes of budgets?

Planning, Allocating resources, Setting targets, Coordinating departments, Monitoring and controlling, Modifying decisions, Assessing performance.

How is a budget different from a forecast?

Budget = A plan for the future. Forecast = A prediction of the future based on conditions.

What are the key features of budgeting?

Not a forecast, applies to any measurable operation, requires coordination between departments, involves employees responsible for targets, delegated budgets improve motivation.

What is delegated budgeting?

Giving junior managers authority over setting and managing budgets to improve motivation.

What are the key steps in preparing a budget?

Set objectives & strategies, Identify the key limiting factor, Prepare the sales budget, Prepare subsidiary budgets, Coordinate all budgets, Create a master budget, Present to the board.

How does incremental budgeting work?

It uses last year’s budget as a base and adjusts it for inflation or other factors.

What are the benefits of incremental budgeting?

Simple & quick, Easy to implement, Stable & consistent planning.

What are the disadvantages of incremental budgeting?

Does not challenge inefficiencies, Can lead to unnecessary spending, Ignores changes in business conditions.

How does zero-based budgeting work?

Budgets start at zero each year, and managers must justify every expense.

What are the benefits of zero-based budgeting?

Encourages efficiency, Prevents unnecessary spending, Ensures resources are allocated properly.

What are the drawbacks of zero-based budgeting?

Time-consuming, Requires detailed justification, Can demotivate employees.

How does flexible budgeting work?

Adjusts budgets based on actual sales or production levels.

What are the benefits of flexible budgeting?

Adapts to business performance, Allows better variance analysis, More realistic financial planning.

What are the drawbacks of flexible budgeting?

Requires constant monitoring, Complex to manage, Can cause uncertainty in financial planning.

What is variance analysis?

The process of comparing budgeted figures with actual results to measure performance.

Why is variance analysis important?

Identifies budget deviations, Helps improve future budgets, Assists decision-making.

What is a favorable variance?

Budgeted cost > Actual cost, Budgeted revenue < Actual revenue.

What is an adverse variance?

Budgeted cost < Actual cost, Budgeted revenue > Actual revenue.

What are the main limitations of budgeting?

Lack of flexibility, Short-term focus, Encourages unnecessary spending, Time-consuming for new projects, May require additional training.

What are the pros and cons of budgeting?

Pros: Helps assess performance, provides direction, and supports financial planning. Cons: Time-consuming, inflexible, and may not reflect rapid changes.