ZIMSEC O Level Business Studies Notes: Business Finance and Accounting: Ratio Analysis:Budgets an introduction

  • As pointed out in another topic one of the principal functions of management is planning
  • It involves creating predetermined courses of action (i.e. plans)
  • A budget is a plan of action for achieving quantified objectives
  • Budgets are plans of action expressed in quantitative(measurable) terms
  • They are prepared and agreed in advance
  • They cover a specific time period e.g. the next coming 4, 12 or 24 months
  • They are expressed in either financial terms or in real terms for example a profit of $10 000 or 25 000 units
  • They cover the entire business or only sub-units or departments
  • There various types of budgets but each functional unit of the organisation can have a budget made for it
  • Thus there are production budgets, sales budgets, human resources budgets etc
  • Budgets can also be made that cover the acquisition, use and disposal of strategic resources for example cash budgets
  • Master budget- refers to the budget version of the final accounts/financial statements
  • Usually the master budget is prepared by combining all the other various budgets
  • It comprises of the financial statements but in this instance they are prepared for future periods instead of from a historical perspective
  • Fixed budget-is a budget based on a single level of activity or other adjustable variables
  • This is less useful than a flexible budget given the fact that it is impossible to foresee the future
  • Flexible budget- is a budget that is adjusted to show financial performance or business events at various levels of activity
  • A flexible budget can be adjusted to suit various levels of activity or changes in circumstance in accordance to the needs and requirements of the affected department of the entire business
  • Zero based budgeting-is an approach to budgeting in which activities are analysed as if they were being started for the first time
  • Each year and each time the budgets are prepared the balances from the previous year are excluded from the process
  • For example when making a cash flow statement/cash budget we start with a cash balance of zero
  • The opposite of this is called incremental budgeting
  • Incremental budgeting- a budgeting method in which the data for the previous year is used as a starting point
  • Budgetary control-a comparison of actual performance with the budget so that if necessary, corrective action can be taken
  • First standards for everything are established and used to predict future performance and create budgets
  • Then variance analysis is carried out to compare actual performance to these standards
  • Any variances are analysed and corrective action is taken and the process is repeated
  • Management by exception- is an administrative style whereby supervisors focus their attention on circumstances and outcomes that differ from considerably what was expected and planned for
  • with this style business managers have more time to devote to strategic planning and staff development

To read about the Uses, Advantages and Disadvantages of budges click here

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