Edexcel Business A Level Revision

Whilst budgets are widely used to in business, you should appreciate that they have some important limitations. In particular: Budgets are only as good as the data being used to create them . Inaccurate or unreasonable assumptions can quickly make a budget unrealistic Budgets can lead to inflexibility in decision-making Budgets need to be changed as circumstances change , for example sales figures can be affected by many variables in demand such as changes in tastes, the actions of a competitor and so on. Budgeting is a time consuming process – in large businesses, whole departments are sometimes dedicated to budget setting and control. This has an associated OPPORTUNITY COST Budgets can result in short term decisions to keep within the budget rather than the right long term decision which exceeds the budget Managers can become too preoccupied with setting and reviewing budgets and forgetting to focus on the real issues of winning customers Costs covere...

Zero based budgeting - means no budget is set and no money is allocated to cover costs. Managers must be prepared to bid for and justify spending on their departments. This forces them to examine all their costs. Advantages of Zero based budgets Disadvantages of Zero based budgeting Resources should be allocated more efficiently Can be more expensive Easier to adapt as circumstances change Can be more time consuming Gives more flexibility in response to changes in the market or economy Forceful managers may be more successful in attracting funds than others who may have more worthwhile projects Forces managers to think and plan more carefully Because of the expense, some businesses use zero-based budgeting every few years, or use a mixture of zero and historical e.g. departments receive a base budget and have to negotiate the rest.