Accounting and finance

Budgets and budgeting

Accounting and finance

Budgets and budgeting

Budgets

• a budget is a plan of action expressed in quantitative terms

• in effect, it is a forward financial plan showing forecast sales and forecast costs

• budgeting is the process by which budgets are drawn up

Classification of budgets

• budgets normally apply to functional areas within a business (e.g. production department, purchasing department)

a revenue centre is responsiblefor generating budgeted income

(e.g. sales department)

a cost centre must ensure that thecosts of an activity remain within

a budget (e.g. purchasing department)

a profit centre is required both to generate income and to control costs

(e.g. a branch of a supermarket)

Aims of setting a budget

• to establish priorities• to provide direction and co-ordination• to assign responsibility• to motivate staff• to improve efficiency• to assess forecasting ability

budgets provide a means of measurement

Example of a budget

• a simple sales budget:

Feb (units) Mar (units) Apr (units)

Product 1 100 100 100

Product 2 50 80 80

these are the sales targets in terms of numbers of units to be sold

targets can also be set in terms of £’s revenue or

£’s costs

Problems with budgeting

• if the budgeting process is poor or if incorrect allocations are made, then the importance of budgets will be lost

• if budgets are seen to be “imposed” then this may lead to resentment and de-motivation

• if budgets are too inflexible then the business may suffer

• external factors may affect performance

Zero based budgeting

• most budgets are based on historic figures which are used as the starting point to predict next years figures

• zero based budgets set all the coming years budgets at zero and managers have to bid for funding each time they want to spend some moneya justification for spending on each

individual project must therefore be given