Setting Budgets
A budget is an estimate of costs, revenues and resources over a specified period, reflecting a reading of future financial conditions and goals.
Budgets are statements setting out the planned performance of a business typically in a table made up of numbers. Usually these plans deal with money units but they can also consist of other measurable units e.g. units of output. Creating a budget enables an organisation to plan ahead and then have the ability to check on its performance against budgeted figures.
Advantages of budgeting
1. It gives managers greater control. They can make decisions based on variance analysis.
2. It enables forward planning and the setting of targets to work towards. These targets can be set for the various components (e.g. departments) of an organisation.
3. It provides a means of measuring performance - i.e. the budgeted figure is the desired performance. A favourable variance shows that we are exceeding performance targets. An adverse variance shows poor performance.
4. A budget sets motivating targets for everyone to work towards achieving.
Budgets don't have to be set in tablets of stone. Some budgets can be 'flexed' i.e. allowed to be flexible to take account of changing circumstances. A flexible budget is therefore a plan that can be revised in the course of time.
Disadvantages of budgeting
1. Budgets are only as good as the data being used to create them. Inaccurate or unreasonable assumptions can quickly make a budget unrealistic.
2. Budgets can lead to inflexibility in decision-making.
3. Budgets need to be changed as circumstances change.
4. Budgeting is a time consuming process – in large businesses, whole departments are sometimes dedicated to budget setting and control.
5. Budgets can result in short term decisions to keep within the budget rather than the right long term decision which exceeds the budget.
6. Managers can become too preoccupied with setting and reviewing budgets and forgetting to focus on the real issues of winning customers.
Budgets are statements setting out the planned performance of a business typically in a table made up of numbers. Usually these plans deal with money units but they can also consist of other measurable units e.g. units of output. Creating a budget enables an organisation to plan ahead and then have the ability to check on its performance against budgeted figures.
Advantages of budgeting
1. It gives managers greater control. They can make decisions based on variance analysis.
2. It enables forward planning and the setting of targets to work towards. These targets can be set for the various components (e.g. departments) of an organisation.
3. It provides a means of measuring performance - i.e. the budgeted figure is the desired performance. A favourable variance shows that we are exceeding performance targets. An adverse variance shows poor performance.
4. A budget sets motivating targets for everyone to work towards achieving.
Budgets don't have to be set in tablets of stone. Some budgets can be 'flexed' i.e. allowed to be flexible to take account of changing circumstances. A flexible budget is therefore a plan that can be revised in the course of time.
Disadvantages of budgeting
1. Budgets are only as good as the data being used to create them. Inaccurate or unreasonable assumptions can quickly make a budget unrealistic.
2. Budgets can lead to inflexibility in decision-making.
3. Budgets need to be changed as circumstances change.
4. Budgeting is a time consuming process – in large businesses, whole departments are sometimes dedicated to budget setting and control.
5. Budgets can result in short term decisions to keep within the budget rather than the right long term decision which exceeds the budget.
6. Managers can become too preoccupied with setting and reviewing budgets and forgetting to focus on the real issues of winning customers.