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Business AS CIE

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  1. enterprise as
    6 主题
  2. business-structure as
    6 主题
  3. size-of-business as
    3 主题
  4. business-objectives as
    3 主题
  5. stakeholders-in-a-business as
    2 主题
  6. human-resource-management as
    8 主题
  7. motivation as
    4 主题
  8. management as
    2 主题
  9. the-nature-of-marketing as
    7 主题
  10. market-research as
    3 主题
  11. the-marketing-mix as
    6 主题
  12. the-nature-of-operations as
    3 主题
  13. inventory-management as
    2 主题
  14. capacity-utilisation-and-outsourcing as
    1 主题
  15. business-finance as
    2 主题
  16. sources-of-finance as
    3 主题
  17. forecasting-and-managing-cash-flows as
    1 主题
  18. costs as
    4 主题
  19. budgets as
    1 主题
  1. Business AS CIE
  2. budgets as
  3. budgets using-budgets-effectively
课 19, 主题 1
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budgets using-budgets-effectively

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Exam code:9609

An introduction to budgets

  • A budget is a financial plan that a business (or department in the business) sets regarding costs and revenue

    • The budget is usually closely aligned with the business objectives

Diagram showing "Budgets and business performance" in the centre, connected to four ovals: measuring overall, functional performance, and comparing performance across functions and over time.
Budgets can be used to compare overall business performance and compare functional performance over time

Measuring performance with budgets

Measuring overall business performance

  • Budgets allow managers to assess how well the whole business is performing

    • Compare actual income and expenses with budgeted figures to identify profit levels, cost control, or overspending

    • Helps judge if the business is meeting its financial goals, such as revenue targets or profit margins

    • Variances help explain good or poor performance

Measuring functional performance

  • Each function, e.g. marketing, operations, HR, usually has its own budget

    • Comparing actual department spending and results with the budget shows how well each area is performing

    • Helps hold managers accountable for cost control and meeting targets

    • Encourages efficient use of resources within each function

Comparing performance over time

  • Budgets help track performance year-on-year or month-on-month

  • Businesses can spot trends, such as rising costs or improving efficiency

  • Helps with long-term planning and forecasting

Comparing performance across functions

  • Budgets help compare different departments at the same time, even if their roles are different

  • This supports fair decision-making on things like bonuses, promotions or extra funding

Types of budgets

1. Incremental budgets

  • An incremental budget is based on last year’s figures, with small adjustments made to reflect expected changes

    • Changes could include inflation, wage rises or modest increases in sales and costs

Evaluating the use of incremental budgets

Advantages

Disadvantages

  • Quick and easy to prepare

    • Last year’s figures with small adjustments are used, saving time and effort

  • Carry forward inefficiencies

    • Past mistakes or unnecessary spending can be repeated.

  • Stable and predictable

    • They are suitable for well-established businesses with consistent operations and costs

  • Discourage innovation

    • Departments may stick to old habits rather than improving or reviewing spending

2. Flexible budgets

  • A flexible budget is adjusted depending on the level of output or sales

    • Instead of using one fixed figure, it shows what income and expenses should look like at different levels of activity

Evaluating the use of flexible budgets

Advantages

Disadvantages

  • Adapt to changes in activity

    • Budgets can be adjusted based on actual output or sales, giving a more accurate picture of performance

  • More complex to prepare

    • They require detailed data and strong forecasting, which can take time and skill

  • Better control and planning

    • Managers can compare actual performance to the correct budget level, helping to identify efficiency or overspending

  • It is not suitable for all businesses

    • It may not be needed in small firms with steady, predictable activity levels

3. Zero budgeting

  • Zero budgeting is when every department or manager must justify all spending

    • Rather than using the previous year’s budget as a starting point, each cost must be reviewed and approved individually

Evaluating the use of zero budgeting

Advantages

Disadvantages

  • Encourages cost control

    • Every cost must be justified, which helps reduce waste and unnecessary spending

  • Time-consuming

  • Each department must explain all costs from scratch, making it a slow process

  • Promotes careful planning

    • It forces managers to think critically about what they actually need and prioritise spending.

  • May demotivate staff

    • Constant questioning of expenses can feel discouraging or lead to underfunding important areas

The use of budgets

  • Budgets can play an important role in the day-to-day management of a business

  • They help with planning, decision-making, control, and monitoring of non-financial performance

Ways budgets are used

Allocating resources

  • Budgets help businesses decide where money and resources should be focused

  • Each department receives funding based on its needs and priorities, ensuring efficient use

Control within a business

  • Budgets set clear financial limits to help prevent overspending

  • Managers are accountable for staying within their budget, which improves discipline and control

Monitoring non-financial performance

  • Budgets can track spending on non-financial goals like customer service, training, or sustainability

  • This ensures resources support wider business objectives

Variances

  • Once budgets have been set, managers carry out variance analysis to compare actual performance to the targets set in the budget

    • A budget variance is a difference between the figure budgeted and the actual figure achieved by the end of the budgetary period

  • Variance analysis seeks to determine the reasons for the differences between the actual figures and the budgeted figures

Types of variance

Favourable (F)

Adverse (A)

  • This is where the actual figure achieved is better than the budgeted figure

    • A favourable variance in a costs budget is where the actual figure is lower than the budgeted figure

    • A favourable variance in a revenue or profit budget is where the actual figure is higher than the budgeted figure

  • This is where the actual figure achieved is worse than the budgeted figure

    • An adverse variance in a costs budget is where the actual figure is higher than the budgeted figure

    • An adverse variance in a revenue or profit budget is where the actual figure is lower than the budgeted figure

Calculating and interpreting variances

  • A budget variance is calculated by subtracting the budgeted figure from the actual figure

space Revenue space variance space equals space Actual space revenue space minus space Budgeted space revenue

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