Budgets 2.2.4

Budgets - are forecasts or plans for the future finances of a business. It sets out targets to be met, the costs of achieving them and how that spending might be financed.

Income budget - A target set for the amount of revenue to be achieved in a set period of time.

Expenditure budget -  A limit placed on the amount to be spent in a given period of time

Profit budget -  A target set for the surplus between income and expenditure in a given period of time

Budgets can be:

1. Income
2. Expenditure
3. Profit (Income - Expenditure)

The purpose of setting budgets...

1. Provides a quantifiable target, that can be communicated to interested parties, against which actual outcomes can be measured. For example, are sales targets being achieved? Are managers keeping expenditure under control? Is the business operating efficiently to achieve profit targets? 
2. Helps with planning and forecasting to inform decision making. For example, what are this years' priorities? Where were budgets met or missed in previous years? Where can cuts be made or extra funds channeled?
3. Motivates budget holders due to increased responsibility. For example, motivational theorists such as Maslow would put it down to esteem being increased, or Herzberg believing that greater responsibility means job empowerment. 

 INCOME BUDGET 

• Can be split by products, services or departments (department stores may break down income budget to different sections)
• May be translated into individual sales targets for staff (this can be motivating)
• Informed by market research and sales forecasts which the budgets are based on
• Informs predicted cash inflows in the cash flow forecasts 

EXPENDITURE BUDGET 

• Can be split by department, function or product
• Responsibility can be passed to individual managers
• A separate expenditure budget may be set out for running costs and start up costs
• Informs predicted cash outflows in cash flow forecasts
• Allows for monitoring of under spending as well as overspending   

PROFIT BUDGETS  

• Calculated based upon the income and expenditure budgets
• May be set for the business as a whole or for individual departments, products or branches
• Will be used to inform decisions making on products to include in the business portfolio as well as where cuts may need to be made. 

 

Advantages of budgets	Disadvantages of budgets
Help to control income and expenditure	Can cause resentment and/or rivalry as departments compete for funding
Provide clear targets for managers	If a budget is too inflexible the business might miss opportunities when markets change
Authority is delegated to managers which can be motivating in itself	Restrictive budgets may stifle creative managers and be de-motivating
Help to focus on costs	Setting budgets can be time consuming and expensive
Force managers to constantly monitor their budget and highlight waste inefficiency	If the actual results are very different, then the value of the budget is diminished
Help to coordinate departments and managing the business in general
Help to reveal areas where corrective action is necessary