What is budgeting?
• Budgeting is setting targets to cover all
aspects of costs and revenues.
• The process of budgeting often starts
with the predicted revenue, previous
experience or knowledge.
• There is a cost ceiling set to allow for
desired area of profit.
Who are they for?
• Budgets are set for the whole company.
• The company budget is then broken
down into departments such as
marketing, HRM etc…
• In large organisations budgets will be
broken down further into divisions or
What are they for?
• To ensure specific departments or individuals
spend no more that what the company
• Enable businesses to measure success.
• This should eliminate unexpected surprises
within an organisation.
• Managers can receive bonus, or profit share
from operating under budget.
• Empower and motivate managers.
Who is responsible for the UK
• One MERIT for his name.
• George Osborne.
• One MERIT for his
job title. A clue is he is just
lower down than the prime minister
• Chancellor of the Exchequer.
• A budget is a financial based forecast
or prediction of the profit a business
expects to generate in a given period
• The budget includes targets for
revenue and costs based on business
• Figures included are based on research
or previous experience
How do organisations set
In 4 ways that’s how
Zero based Budgets
Past - (historic)
• Past– historic the simplest way to set
budgets is by looking at and analysing
• What the business spent and add on a
bit to account for inflation (a general rise
in the price of goods or services) and
also in in the costs of raw Materials /
• Other organisations – what do
competitors spend? If they have
increased their spending, maybe it is ok
to increase ours.
Setting budgets through
• Objectives – What is the business trying to
achieve / what are the expected returns /
• The UK right now is trying very hard not to
spend any money, so the budget is tight (little
Zero based budgeting
• Zero based budgeting - give everyone a
budget of zero and it is then up to each
department to explain how much they need
and why. Do you like asking for money?
• Zero Budgeting, keeps spending low, as
managers have to justify expenses, can be
time consuming (time is money), waste of
Why set budgets?
• Enables the business to measure success
• Can be used to keep control of costs
• May motivate staff by providing them with
targets / direction
• Enables management to focus on those areas
failing to meet budgets
• Enables business to empower departments
• Encourages efficiency = lowers costs long
May be problems agreeing
on the targets.
resist attempts to
set financial targets
(do not want to be
Budgets may constrain
action; managers may not
take certain steps because
they exceed the budget.
May lack flexibility and not
reflect changing conditions.
Budget may be unrealistic
and demotivate staff
The process of
may in itself be
Job insecurity if
they do not meet
Managers may take short
term decisions to keep within
budget rather than the ‘right’
long term decision
Effective budgets must be
Specific (inform departments)
Measurable (A means of tracking progress)
Achievable (possible to accomplish)
Realistic (does it fit the business)
Timed – have a set time scale (1 year)
TASK Write a smart objective for yourself. i.e
I (Mr Ahern) want to loose 5kg of weight by
Budgetary control and variance
The difference between the budgeted figure and
the actual figure is called the variance.
The reasons for any variances can then be
analysed (variance analysis) and appropriate action
taken where necessary.
Budget Actual Variance
Sales (revenue) 3000
• Is the process of measuring the difference between budgeted
(planed) and actual outcomes.
• Wherever actual differs from budgeted performance a variance
takes place (A variation).
• Purpose – to detect problems, so action can be taken to improve
Negative / Adverse
- bad for business
Costs are more than budget
Revenues are less than budget
Positive / Favourable - good for business
Costs are less than budget
Revenues are more than budget
How do we remember this?
•We could write it down!!!
•But instead how’s about this
Sales revenue (x)
Sales revenue (y)
Sales revenue (z)
So what are the causes of
In pairs discuss possible ways in which variation can
occur between budget and actual figures
Change in product / service demand.
Rise in rent.
Change of supplier.
Increase in staff.
Increase / decrease in product /
Well done for today
• We got through a lot quickly
• Please make sure you check the blog for
a homework task that will be placed on
there to be handed in Sunday
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