Amelia Gruner-Overgaard Unit 2 P6
Managing Budgets
Budgeting
Budgeting is setting a limit for the estimated amount of money spent on particular areas within a
business. There are many reasons why setting a budget is so important for the financial health of a
business:
To ensure a business doesn't spend money that it doesn’t have, else the business may go into
debt and could come at a cost if they needed to find a financial source to recover from this.
Planning the businesses expenditure to understand where the business can create savings, these
savings can then be used to reinvest in the business further on in the future.
Accurately predict the businesses future income and expenditure as this will help the business
understand the likelihood of trading in the future.
Enables the business to cope with change, for example if the suppliers change they know how
much they can spend on purchasing from a new supplier.
Planning for the future of the business so it doesn’t become insolvent, this could be helped by
increasing the businesses savings in the long run and increasing the businesses profit.
Spreads the risk of loss, as money is moved between different areas within the business and cuts
can be made in some areas if it is appropriate.
Prioritise spending in different areas of the business, allocating the budget appropriately to
those in the business who require it more.
To make sure the business can cover its expenses ie. Staff wages else the employees won't be
content with working for Harvey's Products LTD.
In the case of an emergency the business can financially afford the costs if there is a budget put
in place.
Improving staff motivation and organisation if they know where the money needs to be spent to
improve the business.
If the business does go into debt, they may find it hard to get financial support of a third party.
Setting a budget also provides the business and employees with tangible goals, such that they
are easy to identify when the goals have been met.
There are two different methods of budgeting with in a business, these are allocated budgeting and zero
budgeting. Allocated budgeting is where different departments in the business ask for money based on
an estimated amount of what they think they'll need for the financial year. Zero budgeting is set out at
the start of the financial year and is monitored against the progress of that department.
There are three short term budgets that a business can use during the financial year, all of them are
based on a forecast. Sales (revenue) budget is the planned sales for the short term, expenditure budget
is the planned short term costs and expenses and capital budget is the planned expenditure on fixed
assets for the budget period.
Variance Analysis
1
Managing Budgets
Budgeting
Budgeting is setting a limit for the estimated amount of money spent on particular areas within a
business. There are many reasons why setting a budget is so important for the financial health of a
business:
To ensure a business doesn't spend money that it doesn’t have, else the business may go into
debt and could come at a cost if they needed to find a financial source to recover from this.
Planning the businesses expenditure to understand where the business can create savings, these
savings can then be used to reinvest in the business further on in the future.
Accurately predict the businesses future income and expenditure as this will help the business
understand the likelihood of trading in the future.
Enables the business to cope with change, for example if the suppliers change they know how
much they can spend on purchasing from a new supplier.
Planning for the future of the business so it doesn’t become insolvent, this could be helped by
increasing the businesses savings in the long run and increasing the businesses profit.
Spreads the risk of loss, as money is moved between different areas within the business and cuts
can be made in some areas if it is appropriate.
Prioritise spending in different areas of the business, allocating the budget appropriately to
those in the business who require it more.
To make sure the business can cover its expenses ie. Staff wages else the employees won't be
content with working for Harvey's Products LTD.
In the case of an emergency the business can financially afford the costs if there is a budget put
in place.
Improving staff motivation and organisation if they know where the money needs to be spent to
improve the business.
If the business does go into debt, they may find it hard to get financial support of a third party.
Setting a budget also provides the business and employees with tangible goals, such that they
are easy to identify when the goals have been met.
There are two different methods of budgeting with in a business, these are allocated budgeting and zero
budgeting. Allocated budgeting is where different departments in the business ask for money based on
an estimated amount of what they think they'll need for the financial year. Zero budgeting is set out at
the start of the financial year and is monitored against the progress of that department.
There are three short term budgets that a business can use during the financial year, all of them are
based on a forecast. Sales (revenue) budget is the planned sales for the short term, expenditure budget
is the planned short term costs and expenses and capital budget is the planned expenditure on fixed
assets for the budget period.
Variance Analysis
1
