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  1. 1. So how was your holiday?
  2. 2. Budgeting Year 11 Business studies
  3. 3. 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.
  4. 4. 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 department sections
  5. 5. What are they for? • To ensure specific departments or individuals spend no more that what the company expects. • 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.
  6. 6. Countries have budgets too
  7. 7. Who is responsible for the UK budget? • 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.
  8. 8. Budgeting • 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 objectives • Figures included are based on research or previous experience
  9. 9. How do organisations set budgets?
  10. 10. How do organisations set budgets? In 4 ways that’s how • • • • Past Other Organisations Objectives Zero based Budgets
  11. 11. Past - (historic) • Past– historic the simplest way to set budgets is by looking at and analysing previous years. • 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 / goods.
  12. 12. Other Organisations • Other organisations – what do competitors spend? If they have increased their spending, maybe it is ok to increase ours.
  13. 13. Setting budgets through objectives • Objectives – What is the business trying to achieve / what are the expected returns / revenues? • The UK right now is trying very hard not to spend any money, so the budget is tight (little to spend)
  14. 14. 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 resources.
  15. 15. So what do we remember about budgets?
  16. 16. 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 term
  17. 17. May be problems agreeing on the targets. Managers may resist attempts to set financial targets (do not want to be measured). 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 Limitations of Budgets The process of setting and agreeing budgets may in itself be very time consuming. Job insecurity if they do not meet Managers may take short targets term decisions to keep within budget rather than the ‘right’ long term decision
  18. 18. Effective budgets must be S.M.A.R.T. • • • • • 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 Christmas
  19. 19. Budgetary control and variance analysis 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 3500 Heating 2500 3500 Rent 6000 5000
  20. 20. Variance Analysis: • 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 performance 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
  21. 21. How do we remember this? •We could write it down!!! •But instead how’s about this
  22. 22. Angry Adverse
  23. 23. Fantastic Favourable
  24. 24. Favourable / Adverse Task 1 Budget Actual Sales (revenue) product x 8000 8900 Sales (revenue) product z 7600 7500 Rent 5000 6000 Electricity 1200 700 Wages 3500 3300 Material costs 2300 1800 Variance Favourable / Adverse
  25. 25. Task 2 Item Forecast (£) Actual (£) Tea / coffee 2,000 2,200 Soft drinks 400 300 Food 4,000 4,500 Total Sales 6,400 7,000 Wages 1,000 1,050 Rent 800 800 Heating 100 110 Advertising 50 50 Cost of food 1,900 2,010 Total costs 3,850 4,020 Sales revenue Costs Profit Variance (£) + or -
  26. 26. Class Task Budget Actual Variance Sales revenue (x) 7250 8000 Sales revenue (y) 2260 2060 Sales revenue (z) 1320 1400 Rent 3100 3200 Electric 760 600 Raw Materials 920 1120 3000 2820 Wages Favourable / Adverse 750 Favourable
  27. 27. So what are the causes of variance 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 / service price
  28. 28. 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