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Setting Budgets

Setting budgets is a very important aspect of financial planning. But you should note that a budget is not a forecast, it is a target!

Income Budgets

(also called REVENUE BUDGETS) These are often a motivating factor for anyone given a particluar income target. If they are reasonable and realistic, income budgets can make employees feel empowered to do their best to ensure they are achieved. (e.g. “you must aim to sell £200 worth of ice cream cones today”). By having a system of delegated budgets, most employees can have some financial responsibility. A manager's performance can be measured by comparing targets with actual results.

Income Budget Breakdown
  • target set for the amount of revenue to be achieved in a set time period
  • can be split by products, services or departments
  • may be translated into individual sales targets for staff
  • informed by market research and sales forecasts
  • informs cash inflows in the cash flow forecast

Expenditure Budgets

(also called COST BUDGETS) This sort of budget sets spending limits for a business, seperate departments or individuals within a business. If every employee or budget holder can ensure that their own spending budget is not exceeded, then the costs of the entire business should not get out of control.

Expenditure Budget Breakdown
  • a limit placed on the amount to be spent in a given period
  • can be split by department, function or product
  • responsibility can be passed to individual managers
  • a seperate expenditure budget may be set for running costs and start up costs
  • informs cash outflows in cash flow forecast
  • allows for monitoring of underspending as well as overspending

Profit Budgets

This type of budget provides clear goals and targets that can motivate people to perform well, but they also allow quick monitoring of performance against actual profits made.

Profit Budget Summary
  • a target set for the surplus between the income and expenditure in a given period of time
  • calculated based on the income and expenditure budget
  • may be set for the entire business or for individual departments, products or branches
  • within a business plan will be used to highlight the potential feasibility of the business

Problems in Setting Budgets

There are a range of problems associated with setting budgets, as there are a number of variables that impact on a business. Some problems include:

  • Managers with delegated authority may try to persuade their bosses to set spending budgets higher than they really need to be.
  • Inaccurate budgets which may have been set by senior managers with no input from 'people on the ground' might be demotivating to staff if they are inappropriate or unattainable.
  • Short term decisions taken in order to stick to budgets (e.g. using cheaper production materials) could damage the business' reputation.
  • Budgets that are too easy to achieve will not provide the motivational incentives that more challenging targets would.
  • Most importantly, the sales revenue budget is subject to so many constraints outside the business, that it is very difficult to plan for.

Finance


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