Budgets

1
Budgets Business Planning
GCSE Business Studies
tutor2u
Revision Presentations 2004
2
What is a Budget?

• A vital part of the way a business is managed
• An agreed plan for future expenditure and income
  from sales
• Allocates resources for spending and investment
  based on expected business activities in the
  coming year
• Based on objectives of business

3
Using Budgeting to Control a Business

• Budget helps managers to measure whether they are
  achieving what they set out to achieve
• If they are under or over budget they can take
  steps to correct position
• Budget also helps managers allocate resources at
  start of a period, e.g.
• In which areas is business going to invest
• How much will be spent on marketing promotional
  activities this year
• How many employees does the business need what
  will they be paid?
• Provide a way of allocating responsibility among
  employees
• E.g. managers are given their own budgets and are
  responsible for controlling how the budget is
  spent / achieved

4
Main Business Budgets

• Sales budget
• Breakdown of how many products business aims to
  sell how much revenue it will get from those
  sales
• Marketing budget
• Describes how business intends to achieve
  budgeted sales (e.g. how much advertising, sales
  promotion)
• Production budget
• Volume of production (units) and production costs
  to achieve it
• Used to help schedule work, order raw materials
  and manage capacity
• Departmental cost budgets
• Cash flow budget
• Ties all other budgets together
• Helps understand what money is coming in (sales)
  and what money is going out (production and
  departmental)

5
Budgets and Motivation

• Budget - a non-money motivator
• Provides a focus and a sense of achievement when
  it is reached
• Rewards in form of bonuses can be linked to
  achievement of budgets
• Encourages employees to contribute more towards
  overall profitability of business

6
Preparing a Cash Flow Budget

• Opening balance -How much cash business has at
  start of time period
• Cash inflows - How much cash is coming into
  business from product sales, sales of assets,
  loans from bank, grants from government, and
  other sources of finance
• Cash outflows - How much cash is going out of
  business, such as expenses, wages, raw materials,
  buying new machinery, tax payments and dividends
• Closing balance - How much money is left at end
  of month

7
Example of a Cash Flow Budget
8
What is a Business Plan?

• A business plan sets out how a business is going
  to achieve its aims and objectives
• It is extremely useful a new business to use a
  plan because it can be used to show potential
  investors how their money is going to be spent

9
Contents of a Business Plan

• Statement of aims and objectives
• Analysis of the market
• Size, growth and segmentation
• Competitors activities, strengths, weaknesses
• Marketing strategy
• Products
• Pricing strategy
• Promotional mix
• Distribution plan
• Operational strategy
• Production / capacity
• Costs
• Finance
• How the business plan will be financed
• Risks and opportunities and how they are
  reflected (if at all) in the plan

10
Business Plan and Banks

• Before a bank will lend money to a business it
  will want to know if it will get money back
• A business plan serves several purposes in this
  case
• Fleshes out business idea so bank can see whether
  it is likely to work financially
• Shows bank whether future profits will cover
  interest on loan
• Shows bank when it can expect to be repaid
• Shows where information comes from and whether it
  is reliable
• Business plan must be presented in such a way as
  to convince bank that intentions of business are
  serious and achievable

11
Improving Cash Flow

• Agree an overdraft or increase an existing
  overdraft from bank
• Extend length of time taken to pay suppliers
• Reduce price of some products to get quick sales
• Sell to customers for cash rather than offer
  trade credit
• Sell some equipment
• Reduce stock levels
• Buy cheaper raw materials
• Allow debtors discounts for early payment
• Operate tighter customer credit controls
• Use debt factoring