Finance and Budgets Flashcards

Flashcards on Budgets and Financial Analysis in Business Management

Cost Centre

Departments of a business that incur costs but are not involved in generating any profit.

Profit Centre

Departments of a business that incur both costs and revenues.

Advantages of Cost and Profit Centres

Increased accountability of managers, identification of areas of weakness, promotion of team spirit, elimination of cost classifications, allowing for benefits from benchmarking, and improvement of motivation.

Disadvantages of Cost and Profit Centres

Subjective allocation of indirect costs, misleading departmental profits, time-consuming data collection, added pressure on staff, ignoring social and ethical responsibilities, and tension from internal competition.

Budget

A financial plan of expected revenue and expenditure for an organization, or a department within an organization, for a given time period.

Variance Analysis

Looking at the difference between the budgeted figure and the actual expenditure figure.

Favourable Variance

A difference that is of benefit to the business.

Adverse Variance

A difference that is harmful to the business.

Components of Effective Budgeting

Planning, setting, controlling, monitoring.

Reasons for Setting Budgets

Planning and guidance, coordination, motivation, and control.

Planning and Guidance (in budgeting)

Helps to plan for the future, anticipate financial problems, and prepare to overcome them.

Coordination (in budgeting)

Helps different departments to coordinate objectives and expenditures with each other.

Control (in budgeting)

Offers financial control to prevent overspending.

Motivation (in budgeting)

Delegated to budget holders, which can be very motivating due to recognition, responsibility, and the chance for employee motivation.

Considerations when Setting Budgets

The available finance, historical data, organizational objectives, benchmarking, and negotiations.

Limitations of Budgeting

Unrealistic/unachievable budgets, wasteful use of resources, less useful for businesses with fluctuating sales, potential harm to quality, time-consuming preparation, internal competition, ignoring qualitative factors, inflexibility in a rapidly changing context.

SMART Budgeting

Specific, Measurable, Agreed, Realistic, Time constrained.