- The business has been bought out by a new owner who is skeptical about budgets and financial controls. - You and a colleague have been asked to make a presentation to the new owner and board to explain how budgets are useful and how controlling budgets and resources can improve business performance. - The presentation will show how budgets will be used, explain why they are useful, and to what extent controlling budgets and managing resources effectively can help improve business performance.

1. You work for a business in the finance department, where your
activities involve managing budgets. The business has recently
been bought out by a tycoon renowned for his relaxed attitude
towards financial controls. The new owner is cynical about the
use of budgets and is also unsure as to whether a strict
approach is needed in regard to the management of other
resources. You and a colleague in the finance department have
been asked to make a presentation to the new owner and the
board of directors. The presentation will show how budgets will
be used, explain why they are useful and will explain to what
extent controlling budgets and managing other resources
effectively can help improve the performance of the business.
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2.  This type of budget is vital for planning a start up. Before the business starts
trading they are likely to already incur costs such as licensing, this means
that the business needs to already have enough cash available for these
costs. If the business fails to control these costs then it is likely to lead to
failure as a business. This type of budget needs to be in great detail. Some
of these costs may be; building and location costs, equipment and
computers, legal costs, and employee costs.
 This type of budget focuses on the management of current expenses within
a business. There may be provisions for transactions in the future or
additional expenses. This type of budget is used to see how much income is
needed to operate and still be able to pay their expenses. The operating
budget may include the sales and costs of goods.
 This type of budget shows how much the business is expecting to make over
the year. The way it does this is by calculating the payments made. To use
this they take away the costs of expenses. Both the cash income and
expenses are estimated this way. After finding the income and expenses for
the year a business can then use a cash flow budget to estimate what the
cash flow may be for the following year.
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3.  A budget is needed to know where the money you have is going to be spent. It
allows money to be planned for certain expenditures. Budgets can be used to
plan for long term future aspirations such as a new house, retirement or particular
goals. If budgets were not planned then expenses may be more than income and
if there is not an amount left for something such as rent or mortgage repayments
there can be severe consequences.
 There are three main types of budget which are income, expenditure and profit.
These are used for different purposes within businesses.
 Break even is what businesses use to find out what level of sales will be able to
make them break even in terms of profit and loss. To find the point of break even
the fixed costs is divided by the contribution of units. To find the contribution of
units the selling price is taken away from the variable cost of each unit. By
calculating the break-even point businesses will be able to see how much they
actually need to sell to start gaining positive revenue and therefore can set
business objectives to meet this. The business can also find out where they
would actually make a loss. This is called the margin of safety and is calculated
by taking away the break-even point from the actual sales.
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4. The budgets may be used by the people within a business that are
in charge of costs and purchases. This means that people such as
the board of directors have to look at the budgets, finance and
department managers also need to look at budgets to know what
to expect.
The budgets are used to plan for the future in terms of expenditure
and purchases. If budgets were not used then the business may
struggle to know what it is spending and without that they cannot
have predictions for the future.
What these budgets show is the amount of money that a business
can expect to profit over the time of a year and it will include the
costs of everything that has been purchased and the different
incomes received.
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5. A budget is needed to know where the money you have is
going to be spent. It allows money to be planned for certain
expenditures. Budgets can be used to plan for long term future
aspirations such as a new house, retirement or particular
goals. If budgets were not planned then expenses may be
more than income and if there is not an amount left for
something such as rent or mortgage repayments there can be
severe consequences.
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6.  This type of budget is vital for planning a start up. Before the business starts
trading they are likely to already incur costs such as licensing, this means
that the business needs to already have enough cash available for these
costs. If the business fails to control these costs then it is likely to lead to
failure as a business. This type of budget needs to be in great detail. Some
of these costs may be; building and location costs, equipment and
computers, legal costs, and employee costs.
 This type of budget focuses on the management of current expenses within
a business. There may be provisions for transactions in the future or
additional expenses. This type of budget is used to see how much income is
needed to operate and still be able to pay their expenses. The operating
budget may include the sales and costs of goods.
 This type of budget shows how much the business is expecting to make over
the year. The way it does this is by calculating the payments made. To use
this they take away the costs of expenses. Both the cash income and
expenses are estimated this way. After finding the income and expenses for
the year a business can then use a cash flow budget to estimate what the
cash flow may be for the following year.
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7.  Break even is what businesses use to find out what level of
sales will be able to make them break even in terms of profit and
loss. To find the point of break even the fixed costs is divided by
the contribution of units. To find the contribution of units the
selling price is taken away from the variable cost of each unit.
By calculating the break-even point businesses will be able to
see how much they actually need to sell to start gaining positive
revenue and therefore can set business objectives to meet this.
The business can also find out where they would actually make
a loss. This is called the margin of safety and is calculated by
taking away the break-even point from the actual sales.
 The contribution is the profit that is actually made on the
individual products. It is used to find how many products or
services have to be sold to cover the costs and this applies to
both variable and fixed products. The difference between the
variable costs and the sales is the contribution.
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8. Through the use of computers and applications that use spreadsheets
with formulas the data results can be provided very quickly.
Investors can use the information to their advantage and decide if they
should invest into smaller businesses.
This is useful to small businesses because it allows them to determine the
outcome of their sales changing.
This requires a miniscule amount of training and is very easy to apply.
One of the bad things is that the situation can appear to be too simplified
because there may be certain customers that may get cheaper rates
because of their relationship with the business.
The break-even also can go out of date quickly because of the changing
economy and the costs and prices for both the raw materials and the final
product can change at any point and are unpredictable.
The data is only useful for finding out the future costs and sales.
The economy scale is not taken into account where the costs may have
changed when higher quantities of supplies are purchased.
The data is hard to apply when a business is selling a large range of
products that have differing amounts covering the fixed costs.
For the information to be useful there needs to be relevant research into
the market that’s supports it and the predictions about the economy.
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9.  The business has fixed costs of £100,000 and each product
is sold at £100 each. The business has variable costs of
£60. Calculate break even using a formula, table and chart.
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10. Break even point = Fixed costs
Unit contribution
Unit contribution = selling price –
variable cost
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11. Schedule
Units Produced 0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000
Sales Revenue 0 50000 100000 150000 200000 250000 300000 350000 400000 450000 500000
Variable Costs 0 30000 60000 90000 120000 150000 180000 210000 240000 270000 300000
Fixed costs 100000 100000 100000 100000 100000 100000 100000 100000 100000 100000 100000
Total Costs 100000 130000 160000 190000 220000 250000 280000 310000 340000 370000 400000
profit/loss -1E+05 -80000 -60000 -40000 -20000 0 20000 40000 60000 80000 100000
This is the point at which the
business will not make a profit
but will also not make a loss.
This is called the Break Even
point.
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12. 100000
130000
160000
190000
220000
250000
280000
310000
340000
370000
400000
430000
460000
490000
520000
550000
0
100000
200000
300000
400000
500000
600000
700000
800000
0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 5500 6000 6500 7000 7500
Value
Units Produced
Break Even
Sales Revenue
Fixed costs
Total Costs
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13.  In a business you would need to know what you have
available to spend and the costs that you expect to be
paying. If the budget was not controlled and costs exceeded
the budget then there will be a negative balance. This way it
is possible to enter a debt spiral without even realizing it.
Therefore it is important to control budgets to ensure that as
a business not to fail, as a person not to enter debt. This also
applies to the fact that large businesses have the primary
goal of gaining a profit and using a budget will efficiently do
this.
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14. Cost Nov £ Dec £ Jan £
Materials 300 300 200
Petrol 200 200 200
Wages 800 800 800
Advertising 200 200 200
Insurance 300 300 300
Factory Rental 400 400 400
Bank Loan
Repayment
350 350 350
Van Payment 250 250 250
Total 2800 2800 2700
The actual cost for November, December and January are given as follows
-Materials were £200, £300 and £250
-Petrol costs were £100, 150 and £100
-Wages were as expected
-Insurance was more expensive than predicted at £400 per month
-Factory rental was reduced by 50 per cent for January only
-The bank loan repayment was £375 each month
-Van repayment was £230 per month
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15. Cost Nov £ Nov
Actual
Variance Dec £ Dec
Actual
Variance Jan £ Jan
Actual
Variance Total
Materials 300 200 100
FAV
300 300 0
FAV
200 250 50
ADV
50
FAV
Petrol 200 100 100
FAV
200 150 50
FAV
200 100 100
FAV
250
FAV
Wages 800 800 0
FAV
800 800 0
FAV
800 800 0
FAV
0
FAV
Advertising 200 200 0
FAV
200 200 0
FAV
200 200 0
FAV
0
FAV
Insurance 300 400 100
ADV
300 400 100
ADV
300 400 100
ADV
300
ADV
Factory
Rental
400 400 0
FAV
400 400 0
FAV
400 200 200
FAV
200
FAV
Bank Loan
Repayment
350 375 25
ADV
350 375 25
ADV
350 375 25
ADV
75
ADV
Van
Payment
250 230 20
FAV
250 230 20
FAV
250 230 20
FAV
60
FAV
Total 2800 2745 55 2800 2855 55 2700 2555 145 145
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16.  If budgets were not controlled then it is highly likely that a business is
not going to make a profit or at least an efficient profit. They will not
know what they are spending on things such as raw materials; this
means if they pay a certain amount the first time, the second purchase
could be at a much higher rate compared to other suppliers. If a
business was to overspend its budget it will have a negative balance
and therefore will be making a loss and if this continues to build up then
they will either enter a debt spiral or fail as a business.
 A debt spiral is when a deficit continues to worsen. An example of this
is having £100 income and £150 outcome. The first time there will be a
£50 deficit, the second time if they have the same expenses they will
have to pay off the deficit first and they will be left with £50 income and
£150 outcome so they will then have a £100 deficit. This continues to
increase and can be prevented with a good budget.
 Without a budget a business also has the disadvantage of not being
able to predict future income and expenditure, this is because they
would not have noted down their expenditures and incomes. They may
have the total amount of ± profit but this is a far less reliable piece of
data than the total costs of expenditure and income.
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17. Machinery
A business needs to know the amount of
products the machines are able to produce.
The business also needs to know the machines
current capacity.
 The machines may need a spare 20% capacity left over
for any repairs.
 At 100% capacity there is a higher chance of the
machine breaking which would reduce the produce to 0.
 The machines need to be used to their full potential to
make sure that they cover the running costs.
 The costs of the machines will need to be budgeted so
that the business is efficiently making a profit.
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18. Staff
A business needs to know the amount of staff
that are required at any one time.
 The business needs to monitor the amount of wages.
 Dependant on the sales the business needs to reduce
the number of staff.
 The staff need to be working effectively to reach the full
potential for the business.
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19. Plant Machinery and Equipment
A business needs to make sure they have all of
the equipment to maintain machines.
A business needs to use the equipment until it is
no longer of any use to save money
A business needs to keep their equipment
secure.
The staff need to be able to get more equipment
if they need it.
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20. Buildings
The business needs to know how their buildings
are used.
The business needs to make sure that each part
of the buildings are being used enough to profit.
The business needs to see if they can improve
anything that would increase the performance.
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