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 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
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
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?
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
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?
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
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
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
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
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?
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?
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
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