Unit - Finance - Budgeting Flashcards
(19 cards)
What is a budget?
A budget forecasts future earnings and future spending
What are 3 types of budgets?
-income budgets
-expenditure budgets
-the profit budget
What is income budgets?
Forecasts the amount of money that will come into the company as revenue
What are expenditure budgets?
They predict what business’ total costs will be for the year, taking fixed and variable costs in account
What is the profit budget?
This uses income budget minus the expenditure budget to calculate what the expect profit or loss will be for that year
What are budget holders?
People responsible for spending or generating the money for each budget
What are advantages of budgeting?
-help to achieve targets
-helps to control income + expenditure
-helps to persuade invest that the business will be successful
What are some drawbacks of budgeting?
-can cause resentment + rivalry if departments have to compete for money
-budgets can be restrictive
-time comsuming
What is zero based budgeting?
When start up businesses have to develop their budgets from scratch
What is historical budgeting?
After the first year, a business can use data from the previous year which is historical budgeting
What is fixed budgeting?
This means budget holders have to stick to their budget plans throughout the year - even if market conditions change
What is flexible budgeting?
This allows budgets to be altered in response to significant changes in the market or economy
What does variance mean?
Means the business is performing either worse or better than expected
What is a favourable variance?
Where actual income is more then budget, or actual expenditure is less than budget
What is an adverse variance?
Where actual income is less than budget, or actual expenditure is more than budget
Why do businesses have to investigate favourable variances?
Favourable variances may mean that the budget targets were not stretching enough, so businesses needs to set more difficult targets. Also if a business can identify why performance is better they can spread this throughout the organisation
What are some external factors that cause variances?
Competitor behaviour and changing fashions may increase or reduce demand for products, the cost of raw materials and changes in economy
What are some internal factors that cause variances?
Improving efficiency causes favourable variances, changing the selling price changes sales revenue
What does variance analysis mean?
This means spotting variances and figuring out why they have happened, so that action can be taken to fix them
