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Budgets

Higher/Int 2

Business Management

2009-2010

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What is a Budget?

A Budget is a statement of future expectations.

Budgets are usually financial in nature although they can be expressed in other units e.g. labour hours.

A Cash Budget is a very common type of budget and can be used as an example of how budgets work.

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Don’t Get Confused!

A Cash Budget is produced for internal use within an organisation. It is a forecast of future events.

A Cash Flow Statement is produced for external use based on past events.

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Why Budget?

The main uses of budgets are:– Monitoring and Control - setting the budget then

making comparisons with actual performance.– Gain Information - lets managers see how well

the business is performing.– Set Targets - giving managers and employees

limits to reach.– Delegate Authority - the use of budgets allows

managers to give responsibility to employees.

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Cash Budgets

The information contained in a Cash

Budget represents estimated figures

of the cash position of an

organisation at a particular point in

time.

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Uses of Cash Budgets

Monitoring the cash position of a particular department.

As a decision-making tool to assess the validity of a particular project or scenario.

As part of a submission to a lender to secure finance.

Using a spreadsheet, changes can be made to the budget and the effects of these changes will automatically be updated in the rest of the budget.

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Management Benefits

The main benefits to management of using cash budgets are:– Planning– Organisation– Command– Co-ordinate– Control– Delegation– Motivation

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Benefit - Planning

Management can look ahead to set aims and strategies.

This allows problem-solving to be planned rather than having to react to situations as they happen.

As an example, plan for when an additional loan or overdraft is required.

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Benefit - Organisation

Budgets allow management to ensure that the right resources are in the right place at the right time.

Management must ensure that it can afford the resources that they require and are able to take advantage of any discounts available from suppliers.

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Benefit - Command

When management are able to make informed decisions, enabling them to instruct their subordinates.

Each departmental manager must also know the department’s limits for requesting additional finance.

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Benefit - Co-ordinate

Management can give instructions to those in charge of departmental budgets and keep a clear overview of the business as a whole.

Making sure that everyone is working towards the same goals.

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Benefit - Control

Evaluation of budgets, comparing the results with what was planned.

Using Cash Budgets as a measure of performance gives management a tool that records quantifiable data in order to compare different department or branch performances.

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Benefit - Delegation

Management should make

subordinates responsible for a

suitable range of tasks and give them

the authority to carry them out.

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Benefit - Motivation

Management have a responsibility to motivate their staff.

This can be done by setting realistic targets in the budgets and introducing concepts such as teamwork, empowerment, and incentives for meeting targets or operating within the budget.