Budgets

Question 1

What is a budget, and what should it do?

Answer 1

A financial plan for the future that should influence the decisions made by the business.

Question 2

How does a budget help businesses?

Answer 2

• It provides motivation for employees when used with target setting.
• Helps them to achieve their financial objectives.

Question 3

Give at least two examples of the potential problems with budgets.

Answer 3

At least three from:

• A budget is only as accurate as the data on which it is based.
• Past trends can be a poor indicator of what is likely to happen in the future. Therefore, it can difficult to forecast sales.
• An unrealistic budget looses its value as a motivational tool as workers loose motivation for unachievable budgets.

Question 4

What are the three different types of budget?

Answer 4

• sales revenue budget
• expenditure budget
• profit budget

Question 5

What does it mean when a business has a favourable figure in relation to sales revenue?

Answer 5

• The business has made more money that the budget predicted.

Question 6

What does it mean when a business has an adverse figure in relation to sales revenue?

Answer 6

• The business has made less money than the budget predicted.

Question 7

What does it mean when a business has a favourable figure of expenditure?

Answer 7

• The business has spent less money than was budgeted.

Question 8

What does it mean when a business has an adverse figure of expenditure?

Answer 8

• The business has spent more money than was budgeted.

Question 9

What does it mean when a business has a favourable figure of profit?

Answer 9

• The business has made more profit than was expected.

Question 10

What does it mean when a business has an adverse figure of profit?

Answer 10

• The business has made less profit than was expected.

Question 11

What is a budget?

Answer 11

• An estimate of a businesses income and expenditure over a given period of time.

Question 12

Why do businesses need to use budgets?

Answer 12

• In order to help them plan for the events of the business and control the finance of the business.

Question 13

What are the benefits of budgets for businesses?

Give at least two examples.

Answer 13

At least two examples from:

• Estimates revenue, plans expenditure and restricts any spending that is not part of the plan.
• Ensures that money is allocated to those things that support the strategic objectives of the business.
• A well communicated budget helps everyone understand the priorities of the business.
• Reviewing and comparing the budget with actuals can provide information that highlights the strengths and weaknesses of the business.