buss2.1 using budgets finance using budgets budgets this unit follows on from the study of budgets...

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BUSS2.1 Using Budgets Finance Using Budgets Budgets This unit follows on from the study of budgets in Unit 1- Setting Budgets “ Budgets are for cutting, that’s why you set them” Dr Laurence Buckman

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Page 1: BUSS2.1 Using Budgets Finance Using Budgets Budgets This unit follows on from the study of budgets in Unit 1- Setting Budgets “ Budgets are for cutting,

BUSS2.1 Using Budgets

Finance

Using BudgetsBudgets

This unit follows on from the study of budgets in Unit 1- Setting Budgets

“ Budgets are for cutting, that’s why you set them”Dr Laurence Buckman

Page 2: BUSS2.1 Using Budgets Finance Using Budgets Budgets This unit follows on from the study of budgets in Unit 1- Setting Budgets “ Budgets are for cutting,

BUSS2.1 Using Budgets

Using BudgetsIn this topic you will learn about:

The benefits and drawbacks of using budgets

The calculation and interpretation of favourable and adverse variances

Using variance analysis to inform decision making

Page 3: BUSS2.1 Using Budgets Finance Using Budgets Budgets This unit follows on from the study of budgets in Unit 1- Setting Budgets “ Budgets are for cutting,

BUSS2.1 Using Budgets

Income, Expenditure and Profit Budgets Income Budgets

A target set for the amount of revenue (income) to be achieved in a set period of time

Expenditure Budgets A limit set for the amount of money that can

be spent (expenditure) in a set period of time Profit Budgets

A target set for the amount of profit (income in excess of expenditure) to be achieved in a set period of time Revise

budgets from unit 1?

Page 4: BUSS2.1 Using Budgets Finance Using Budgets Budgets This unit follows on from the study of budgets in Unit 1- Setting Budgets “ Budgets are for cutting,

BUSS2.1 Using Budgets

The benefits of using budgets Improves financial control

Reduces overspending Better forecasting ability More efficient allocation of money

Delegates spending power Motivates staff Opportunity cost of manager’s time

Sets targets and goals Improves cash flow forecasting Allows for monitoring of performance

Page 5: BUSS2.1 Using Budgets Finance Using Budgets Budgets This unit follows on from the study of budgets in Unit 1- Setting Budgets “ Budgets are for cutting,

BUSS2.1 Using Budgets

The benefits of using budgets

“We have always found that people are most productive in small teams with tight budgets, time lines and the freedom

to solve their own problems.” John Rollwagen

American Businessman, CEO of Cray Research

You will need access to the internet to watch this video?

Is sticking to a budget and deadline always the right move? Watch this video where the CEO of BA defends the first day of T5

Analyse two reasons why people may be more productive in these circumstances?

Analyse two reasons why people may not be more productive in these circumstances?

On balance which of the arguments do you think is stronger? Justify your answer.

What factors might influence whether people are more or less productive in these circumstances?

Page 6: BUSS2.1 Using Budgets Finance Using Budgets Budgets This unit follows on from the study of budgets in Unit 1- Setting Budgets “ Budgets are for cutting,

BUSS2.1 Using Budgets

The drawbacks of using budgets Potential for conflict

Lack of transparency Short term saving may be detrimental to long

term objectives May be too easy or too hard to achieve

May be restrictive Opportunities may be missed Inappropriate cost cuts

Time consuming to set and monitor“ The budget evolved from a management tool into an obstacle for management.”

Frank C Carlucci, American Secretary of Defence

Page 7: BUSS2.1 Using Budgets Finance Using Budgets Budgets This unit follows on from the study of budgets in Unit 1- Setting Budgets “ Budgets are for cutting,

BUSS2.1 Using Budgets

Variance

The calculation and interpretation of variances An advantage of budgets was that they

allow for monitoring of performance This is achieved by comparing the budget

to the actual Any difference is known as a variance

Profit Budget Profit

Actual

Expenditure Budget£25000

Variance £2000

ExpenditureActual

£27000

Page 8: BUSS2.1 Using Budgets Finance Using Budgets Budgets This unit follows on from the study of budgets in Unit 1- Setting Budgets “ Budgets are for cutting,

BUSS2.1 Using Budgets

The calculation and interpretation of variances Variance is therefore the difference between

the actual income, expenditure or profit and the figure that had been budgeted

Variance Analysis is the process of calculating and interpreting these variances

Budget Actual Variance

Income £60000 £62000 £2000

Expenditure £32000 £32800 £800

Profit £28000 £29200 £1200

Page 9: BUSS2.1 Using Budgets Finance Using Budgets Budgets This unit follows on from the study of budgets in Unit 1- Setting Budgets “ Budgets are for cutting,

BUSS2.1 Using Budgets

Variances can be Adverse or FavourableAdverse An adverse variance is one

that is bad for the business Expenditure higher than

budget Income lower than budget Profit lower than budget

Favourable A favourable variance is one

that is good for the business Expenditure lower than

budget Income higher than budget Profit higher than budget

Budget Actual Variance

Income £60000 £62000 £2000 Favourable

Expenditure £32000 £32800 £800 Adverse

Profit £28000 £29200 £1200 Favourable

Page 10: BUSS2.1 Using Budgets Finance Using Budgets Budgets This unit follows on from the study of budgets in Unit 1- Setting Budgets “ Budgets are for cutting,

BUSS2.1 Using Budgets

Interpreting Variances Once a variance has been identified it is

important to 1) Identify the cause of the variance 2) Consider the effect of the variance 3) If appropriate look for a solution

Use either the internet link or word doc to read about overspending at the BBC

What is the cause, effect and possible solution?

Page 11: BUSS2.1 Using Budgets Finance Using Budgets Budgets This unit follows on from the study of budgets in Unit 1- Setting Budgets “ Budgets are for cutting,

BUSS2.1 Using Budgets

Possible causes of variances Action of competitors

Lower prices Introduce a new

product Close a store

Action of suppliers Change prices Offer a discount

Changes in the economy Change in interest rates Increase to minimum

wage

Internal inefficiency Poor management of a

budget Demotivated sales

team Internal decision

making Change suppliers Special promotions

In each of these cases consider the possible impact on actual expenditure and/or income

and explain whether you think the variance will be adverse or favourable

You need access to the internet to watch this video

What factors prompted NZ Tourism board to increase its budget?

Do you think this was a wise decision?

Page 12: BUSS2.1 Using Budgets Finance Using Budgets Budgets This unit follows on from the study of budgets in Unit 1- Setting Budgets “ Budgets are for cutting,

BUSS2.1 Using Budgets

Using variance analysis to inform decision making Having identified variances managers now

need to decide how to respond Change budgets? Staff training? Reward staff? Change suppliers? Reallocate budgets? New marketing tactics? Review product portfolio?

Can you think of an adverse or favourable variance where each of these might be an appropriate

course of action?

Biz24 offers guidance to small businesses on variance analysis

Page 13: BUSS2.1 Using Budgets Finance Using Budgets Budgets This unit follows on from the study of budgets in Unit 1- Setting Budgets “ Budgets are for cutting,

BUSS2.1 Using Budgets

Activity – Del Rio PizzeriaDel Rio Pizzeria has been trading for 6 months. Toni, the owner, is worried that waste levels in the kitchen are high and customer

numbers low. He decides it is time to sit down and look at the books.

6 Months Budget Actual Variance

Pizza Sales £55000 £48000

Drinks Sales £18000 £20500

Materials £27500 £1500 Favourable

Drinks stock £9000 £10250

Wages £23000 £1000 Adverse

Overheads £40000 £43000

Profit / Loss

• Fill in the gaps • Identify possible causes of the variances• Identify possible solutions• Toni is considering lowering the materials expenditure budget for the next 6 months,

discuss the arguments for and against this course of action