BUDGETING

Learning Objective

• To be able to describe the purpose of budgeting

http://keepingscore.blogs.time.com/2014/01/17/sochi-expected-to-be-the-most-expensive-olympics-ever/

• Why did it go so over budget?

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Budget

A budget is a plan of money coming in and going out over a period of time. You set a limit.

Budget

Imberhorne School budget

• The school has a budget of about £8 million.
• Approx 83% of this is spent on staffing each year
• Each department has a budget allocated to them each year and this money is spent on books, photocopying, resources etc.

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The purpose of budgeting

• Budgeting helps people (and businesses) to get what they want by planning.

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• It is a process of setting targets for spending and revenue over a future period of time.

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• They are used in many business situations such as:
• Forecasting start up costs
• Introducing a new product or more capital for a business like a factory
• Forecasting sales revenue.

• The main purpose is to ensure that the business is in control of its revenue and expenditure so it makes a profit.

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• Should be set carefully using financial information from the previous year as a guidance.
• Then any future predictions about revenue and costs must be considered, based on market trends.
• Budgets should be realistic, achievable and challenge all staff.

Budgeting and budgetary control

• After setting the budget, there must be a system in place to ensure targets are met. This is budgetary control and can be achieved by:
• Measuring actual performance regularly
• Giving this information to the budget holder, who checks for differences between planned target and actual performance. They can then take action.
• If this works then next month the performance should be better and match the targets set.

Activity

• Discuss what actions a business could take if budgetary control showed that;
• The sales figures were much lower than expected
• Although we bought the same number of units, the cost of purchases every month from our supplier has increased by 20%.
• Due to many products being damaged by employees not being careful, the labour costs i.e. wages have increased by 50% each month so new products can be made.
• The business planned to buy a new van for £10,000 in April, but the old van broke down in February so they bought the new one then. This means the business has no cash to pay the bills in February and March.
• For each of the above situations, what would be the consequences to the firm if they had not used budgetary control and did not know about the problem?

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Risks of not completing a budget or an inaccurate one

• Hard to plan when it needs to bring in more money like an overdraft or loan.
• May be in a position where they cannot pay their bills.
• Inaccurate budgets may be based on wrong data and mistakes like new cola!

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Tasks

• Back to back hand out
• Back page of booklet

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