2.2.4 Budgets and variances

What is budget?

A finacncial plan for the future concerning the revenues and costs of a business

What are the uses of budgets?

- Provide direction, allocating resources and monitoring performances

What are the two main approaches to budgeting?

-historical budgeting

-zero-based budgeting

Describe historical Budgeting

- Uses last years figures as the basis for the budget

- Realistic, because it's based on actual results

- However, circumstances may change and they don't encourage efficiency

Describe zero-based budgeting

- Budgeted costs and revenues are set to zero

- budget is based on new proposals for sales and costs

- Makes budgeting more complicated and time consuiming, but potentially more realistic

How is a budget constructed?

1. Analyse the market: market size and growth. Market share

2. Draw up a sales budget: Sales forecast, new products

3. Draw up a cost budget: Based on sales budget, allow for known changes in supplier price. Include contingencies

What are the difficulties in budgeting accurately?

Sales forecasting:

- Harder when market is experiences rapid changes

-Startup firms have a hard time estimating sales and revenues

- Competitors actions may be difficult to predict.

Costs:

- Always likely to be unexpected costs

- Will vary depending on the sales budget

- Changes in external environment will impact costs

What is a variance?

When there is a difference between actual and budget figures.

Variance = actual - budgeted

If a cost is positive the th variance is adverse

What is variance analysis?

Calculating and investigating the differences between actual results and the budget