Budgeting in Business

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is a budget, and what information does it typically include?

A budget is a financial plan for a future period, and it typically includes information about revenue and expenditure.

What are the different types of budgets, and what do they include?

The types of budgets are Revenue or Earnings budget, Expenditure budget, and Profit budget. Revenue budget includes expected levels of sales, likely selling price, and forecast based on past performance. Expenditure budget includes planning expenditure on labour, raw materials, and essentials for production.

What is the importance of researching before constructing budgets?

Research is important to predict sales trends and prices, analyze market trends, and consider government estimates for wages and inflation.

What are the sources of information for constructing budgets?

The sources of information are Previous trading records, Results of market research, and Government agencies. Signup and view all the answers

What are some difficulties in constructing budgets?

Difficulties include estimating sales revenue, dependence on market research, changes in tastes and fashion, and unforeseen changes in costs. Signup and view all the answers

What is the purpose of analyzing budgets?

The purpose is to compare budget to actual figures, identify problems, and aim to reduce them for future. Signup and view all the answers

What are the steps to analyze a budget?

The steps are to compare budget to actual figures, identify problems, and aim to reduce them for future. Signup and view all the answers

Why are budgets important for managers and stakeholders?

Budgets are important for managers and stakeholders as they provide information on how to improve financial performance and make informed decisions. Signup and view all the answers

What is the purpose of analysing budgeted and actual expenditure in a business?

To judge the ability of different parts of the business to manage expenditure and identify areas for improvement. Signup and view all the answers

What might be the reasons for not meeting revenue budget according to the text?

Prices too high compared to competitors, not advertising efficiently, not targeting correctly, and quality or design issues. Signup and view all the answers

What are the two categories of variance in budgeting?

Favourable variances (higher profits than budget) and Adverse variances (lower profits than planned). Signup and view all the answers

What is the value of budgeting in a business?

Control finances effectively, make good decisions, avoid overspending, and motivate staff. Signup and view all the answers

What are some disadvantages of budgeting?

Cost of training, need for skilled managers, and only considering the current financial year. Signup and view all the answers

What is the purpose of cash flow forecasts?

To support loan applications, avoid cash flow crises, and inform when short of cash. Signup and view all the answers

What are the two main components of a cash flow forecast?

Cash in (inflows) and cash out (expenditure). Signup and view all the answers

What is effective budgeting, according to the text?

Setting demanding objectives, reviewing budgets frequently, and using them to motivate staff. Signup and view all the answers

Study Notes

Budgets

A financial plan for a future period that includes information about revenue and expenditure.
Typically prepared on a monthly basis.

Types of Budgets

Revenue or Earnings Budget: sets out a business's expected revenue, including expected levels of sales and likely selling price.
Expenditure Budget: also known as cost or production budgets, plans expenditure on labour, raw materials, and essentials for production.
Profit Budget: combines sales revenue and expenditure budgets.

Construction of Budgets

Research is necessary before constructing budgets, including:
- Market research to predict sales trends and prices.
- Researching costs, such as labour, fuel, and raw materials.
- Considering government estimates for wages and inflation.
Sources of information for budgets include:
- Previous trading records.
- Results of market research.
- Government agencies.

Difficulties in Constructing Budgets

Estimating sales can be difficult, especially for start-up businesses.
Changes in tastes and fashion can affect sales forecasts.
Unforeseen rises in costs, such as increases in raw material prices, can impact budgets.
Decisions by governments, such as increases in interest rates, can also affect budgets.

Analyzing Budgets

Compare budget to actual figures to identify problems and areas for improvement.
Steps to analyze budgets include:
- Analyzing budgeted and actual expenditure.
- Analyzing revenue data.
- Analyzing profits budgets.

Variance Analysis

Occurs when actual sales/expenditure figure differs from budgeted figure.
Two categories of variance:
- Favourable variances: difference between actual and budgeted results in higher profits.
- Adverse variances: difference between actual and budgeted results in lower profits.

Value of Budgeting

Advantages of budgeting:
- Control finances effectively.
- Help managers make good decisions.
- Allow managers to avoid overspending.
- Motivate staff.
Disadvantages of budgeting:
- Cost of training.
- Need for skilled managers.
- Only considers current financial year.

Cash Flow Forecasts

Used to support applications for loans and to help avoid unexpected cash flow crises.
Constructing cash flow forecasts includes:
- Cash inflows: cash and credit sales.
- Cash out (expenditure): expected expenditure on goods and services.
- Net monthly cash flow = Total Inflow – Total Outflow.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

Learn about the importance of budgeting in business, including types of budgets, revenue, and expenditure planning. Understand how to create a budget on a monthly basis and the differences between established and start-up businesses.