Budgets - Autumn 2024 Budget

This is the Autumn 2024 budget spends. Why is it important for the government to set a budget? 2.2A BUDGETING In this topic you will learn about Understand the role of the finance department Explain what is meant by a budget Explain the purpose of budgets Evaluate the us...

This is the Autumn 2024 budget spends. Why is it important for the government to set a budget? 2.2A BUDGETING In this topic you will learn about Understand the role of the finance department Explain what is meant by a budget Explain the purpose of budgets Evaluate the use of budgets to a business and its stakeholders THE FINANCE DEPARTMENT The finance department will be responsible for all aspects of the accounting side of the business from record keeping to producing final accounts This will include: Budgets Cash flow forecasting Credit control Paying suppliers Production and analysis of year end accounts BUDGETS Budgets are forecasts or plans finances of a business These can be for the business as a whole or set for specific functions e.g. a marketing budget Budgets can be: Income Expenditure Profit 5 Activity in pairs Task 1 Make a list of the top 20 items you would need to consider budgeting for when planning a wedding. Task 2 Take the 12 items sheet and allocate a budget to spend on each of the items. NO PHONES! Task 3 The look at the average cost sheet and compare it with your budgeted items. Work out the variance by taking the actual away from the budget. 6 BUDGETS Income budgets a target set for revenue to be achieved in a specific time can be split by products, services or departments may be translated into individual sales targets for staff informed by market research and sales forecasts informs predicted cash inflows in the cash flow forecast BUDGETS Expenditure budgets a limit placed on the amount to be spent in each period of time can be split by department, function or product responsibility can be passed to individual managers a separate expenditure budget may be set for running costs and startup costs informs predicted cash outflows in cash flow forecast allows for monitoring of under spending as well as overspending BUDGETS Profit budgets a target set for the surplus between income and expenditure in a given period of time calculated based upon the income and expenditure budget may be set for the business as a whole or for individual departments, products or branches will be used to inform decision making on products to include in the businesses portfolio as well as where cuts may need to be made THE PROCESS OF SETTING BUDGETS Set clear Carry out Produce a Set objectives market sales income research forecast budget Set Set Set Review divisional profit expenditure against targets budget budget objective SAMPLE BUDGET Jan Feb Mar Income 5000 6000 6000 Budget Expenditure 2500 3500 3500 Budget Profit 1500 2500 2500 Budgets PROBLEMS IN SETTING BUDGETS Dependent upon predictions and forecasts Costs are subject to change Actions of competitors are unknown Managers may lack experience May be subject to bias Take time and effort which itself has an associated opportunity cost 13 BENEFITS AND DRAWBACKS OF SETTING BUDGETS Benefits of setting budgets Drawbacks of setting budgets 1. Provides a quantifiable target against which actual 1. Potential for conflict outcomes can be measured e.g. Lack of transparency Are sales targets being achieved? Short term saving may be detrimental to long term Are managers keeping expenditure under control? objectives Is the businesses operating efficiently to achieve May be too easy or too hard to achieve profit targets? 2. May be restrictive 2. Informs decision making e.g. Opportunities may be missed What are this year’s priorities? Inappropriate cost cuts Where were budgets met or missed in previous 3. Time consuming to set and monitor years? Where can cuts be made or extra funds channelled? 3. Motivates budget holders due to increased responsibility BUDGETS Budgets can affect a range of stakeholders: Managers will be set budgets to achieve or work within Other functional areas will be constrained by budgets e.g. a marketing budget Suppliers may be faced with fierce negotiations as the business tries to keep to budgets Customers may see businesses raise or lower prices in an attempt to meet income budgets Employees may see cuts in hours or staffing levels in order for the business to meet expenditure budgets