A-Level AQA Business Revison Unit 1(Part 15) : Budgets

Budget - Financial targets for the future, covering revenue and expenditure over a certain period of time

Business use budgets to:

- Measure whether key objectives and targets are being achieved

- Control expenditure - by allocating who can spend what

- Provide a sense of direction

- Monitor actual results against budgets and make changes if needed

The process of setting budgets is:

1. Objectives

~ What is the business aiming for?

2. Market research

~ Will people by the product?

3. Sales budget

~ How many sales are expected?

4. Other budgets

~ Labour costs, promotion, materials

5. Profit budget

~ How much profit will be made?

It is difficult for owners to completely monitor the budgets, as a result they will take specific steps to ensure that targets are being met.

Budget holder - A person who is accountable for seeing that a budget is kept to

Owners will also get some input from certain departments as to what the budgets will be

Delegated budgets - Giving some control in the setting and spending of budgets to departments or individuals

The benefits of budgets are:

- Allows managers to plan for the future - less uncertainty

- Control: senior managers focus attention on those departments that have gone over-budget rather than the whole business' spending

- Motivation: can empower middle managers as they have greater responsibility and feel valued

Limitations are:

- External influences can make some budgets meaningless

- Opportunity cost of setting budgets up

- If workers are not involved in setting budgets, it can be demotivating

- Budgets can prevent spending that might benefit the whole business because it may mean one budget is too small for a department

- Budgets can be manipulated by managers

Income budget - The sales revenue target

Expenditure budget - Fixed sum of money to be spen in a time period