Budgeting

Budgeting

 Is a plan that sets targets for costs and revenue that have to be met over a certain period of time.
 A budget can be set for a company as a whole and a budget can be set for individual departments
within the company.
 There are two types of budgets:
1. Predicted budget: The figures you predict/hope to get.
2. Actual Budget: What actually happens throughout the year. A factual record of what
occurred during the year.
 If the two are different there is a variance. The business can try to find out why these variances
occur.
Advantages Disadvantages
To control spending -> the money a firm has a resource thus the Budgets are predictions based on research which isn't always good
business wants to use it efficiently. By asking managers to set a quality and therefore budgets aren't set accurately/will be wrong.
budget they are more likely to be responsible and improve
efficiency.
It gives managers responsibility and this may improve Budgets can be inflexible -> which means they can't be changed after
motivation/morale -> have a budget to be in control of. Also they are set + if market conditions change the business cant react and
departmental managers should know better in terms of what is change + a competitive advantage may be lost.
required and budgets should be used effectively. If it is too low/unrealistic managers are under pressure-> cost cutting
measures may be taken which reduces quality and the decisions aren’t
in the best interest of the business.
If it’s too high ->not as efficient as they should be.
Control -> By setting budgets you are asking managers to control Some managers (powerful managers) are good at arguing their case
what goes on in their departments as they attempt to control and can get more than they actually deserve. If they manage it well +
their/meet their budgets. Provides an elements of control -> they look like they are better managers even though they have too
know what the budget is being spent in the best interest of the much money in the first place. This can lead to intra-departmental
business. conflicts as other departments get more money.
You can measure the actual performance of the business in At the end of the year managers may just spend money so their
comparison to the predicted budget which will help carry out budget is spent + the manager does this to get the same budget next
variance analysis. Which is why did the differences occur. year and if they are seen to have a reserve at the end of the year, the
business may not give them the same budget next year so therefore
managers spend money which may not be in the best interest of the
company.
If managers aren't involved in setting the budget -> de-motivate.
Managers may not have the skills to set the budget/control it.

There are a number of types of budgets:

1. Fixed Budgets.
2. Zero-based budgets.
3. Incremental.

Fixed Budget:

 This is when you set a budget which is fixed and doesn’t vary year from year.
 It is quick and easy to set.
 Does not take into account market conditions.


Zero-based Budgeting:

 When you start at 0 and managers have to justify the money they have asked for.
 Most efficient way to spend the money -> managers has to justify. Those departments in greatest
needs should get more.
 Longer way to set a budget as it all has to be justified.
 Some managers are good at getting what they need.