Key Business Skill: Finance – Budgeting
The most effective way to plan and control costs is by setting a budget. A budget is a quantitative expression of a plan for a defined period of time, usually a year. It usually includes target sales volumes and revenues, resources required, costs and expenses, assets, liabilities and cash flows.
Budget setting facilitates everyone in a business to plan activities to the budget and so helps co-ordinate the activities of the business
Budgets are usually set for a year and advance, and are usually set in outline by the Board, who decide on targets for growth, which will in turn lead to targets for extra raw materials, staff etc.
Each department can then take their budget, and work out the detail as it affects them.
Quick Facts: Finance – Budgeting
The advantages of budgeting are that;-
- Management are forced to put plans in place and plan in detail
- It allows the accounts department to control planned spending. They can clearly see if unbudgeted activity is taking place, or budgets are not being met.
- Finance can be put in place for planned activity
- Agreement in outline is reached on expenditure, negating the need for constant consultation and permission for expenditure.
- The budget holder can plan ahead, knowing that expenditure has been agreed in advance
- Use of Resources is planned, monitored and controlled
- Plans are communicated to managers.
- Managers are encouraged to achieve budget goals.
- Performance of managers against targets can be evaluated
- Visibility of the company’s performance is enabled
The disadvantages of budgeting are that;-
- Unforeseen opportunities may be missed if budget cannot be made available.It is a good idea to put contingencies in place to overcome this problem.
- If the budget is poorly planned, and adhered to very closely, then it may adversely affect performance
Types of budgets
Sales budget is an estimate of future sales. Can be expressed in units and/or cash, may be by category or product, or a total company figure. It is used to create company sales goals.
Production budget is an estimate of the number of units that will be manufactured to meet the sales goals. The production budget will estimates the different costs involved with manufacturing those units, such as labour and material. This type of budget is mostly used by manufacturers.
Capital budget is used to identify long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects.
Cash flow/cash budget is a prediction of cash receipts and expenditure for a particular time period. It usually covers a period in the short term future, such as the following month or quarter. The cash flow budget allows management to ensure income will be sufficient to cover expenses, and to seek outside financing if necessary.
Marketing budget is an estimate and allocation of funds for promotion, advertising, and public relations in order to market the products or services.
Project budget is a prediction of the costs associated with a particular project. These usually include cost of labour, materials, and other related expenses.