Budgeting

A budget is a targeted amount of cost or revenue that the company will hope to achieve which can also be split up into certain departments of a company. A budget is drawn up by looking at past and present figures and then trying to predict future needs. Zero budgeting is a type of budgeting which starts afresh each year and does not just modify past figures.

A budget has many purposes:

• Helps planning for the business.
• Makes it easier to monitor the businesses progress.
• Helps communication within the business.
• Helps to motivate staff.
• Helps establish the businesses priorities.

Problems with budgets:

• May not allow for change and therefore be inaccurate.
• No control over external factors.
• May lead to demotivation of staff.

Budgets can be compared with actual outcomes to find the variance. A variance is known as adverse if the company is disadvantaged due to the variance. A variance is known as favourable if the company benefits due to the variance.