Budgeting

Question 1

Define budget

Answer 1

DEFINITION
A budget is a plan of future business activities expressed in monetary terms.

Question 2

Advantages of budget

Answer 2

ADVANTAGES OF BUDGETS
Budgets provide business owners and managers with a plan of future operations,
A budget helps to co-ordinate business activities. All departments must work together to implement
the budget.
A budgeted income statement can show whether an intended activity is likely to be profitable or not.
Budgets improve control over business operations as predicted results can be compared to actual
results. Any large differences can be investigated and action can be taken to improve the
performance of the business or to improve the accuracy of the figures used in the cash budget.

Question 3

Master Budget

Answer 3

Operating Budgets:
Operating budgets could include a: sales budget, cost of sales budget, production budget, purchases and
inventory budget, marketing budget, advertising budget, sales staff budget, general and administrative
costs budget, budgeted income statement.
Finance Budgets
Finance budgets include: cash budget, capital expenditure budget and a budgeted balance sheet.

Question 4

Cash budget

Answer 4

Cash Budget:
The cash budget forecasts cash inflows and cash outflows for a specific period. Cash budget is used to
effectively manage cash in the bank. Excess cash in the bank could be invested in assets which provide a
higher return. Insufficient cash can cause liquidity problems and impact on the business’s ability to meet its
short term commitments

Question 5

Capital Expenditure budget

Answer 5

Capital Expenditure Budget:
The capital expenditure budget predicts expenditure on major non-current assets and how expenditure on
non-current assets is to be financed. i.e. willit be financed by equity, borrowed funds, lease,

Question 6

PURPOSE OF BUDGETS AND PERFORMANCE REPORTS

Answer 6

For Planning purposes
◦ A budget provides management with a written plan of future activities for a given period

For Co-ordinating purposes
• The budgeting process requires all departments of a business to co-ordinate their activities to achieve
the goals of the business

Question 7

Performance report

Answer 7

PERFORMANCE REPORTS:
A performance report is used to compare budgeted and actual results and to identify the reasons for
any differences between the two sets of figures
At the end of the budget period the planned results for each budget should be compared with the
actual results. The reasons for any large differences between expected and actual results should be
identified.