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Budgeting
and planning
a trip to Barbados
Budgeting in business, like personal budgeting, involves making plans to achieve objectives - something
that you want. It involves planning and control.
Ella, who has won 150,000 on the Lottery, is planning the holiday of a lifetime for her partner and herself
in the Carribean island of Barbados.
First of all Ella must look at her income how much money has she got and what can she afford to spend
on the holiday? She reckons she can afford about 5,000 for a fortnight for two people. This is her income
budget. As in business, if she wanted to spend more than she had available, she could always
finance the holiday by means of a loan.
Then Ella must look at her expenditure. She writes down headings and costs such
as flights, hotel, entertainment money, visits, and emergencies. She adds
them up and find that they come to about 4,000. This is her expenses
budget.
When she is on holiday she must monitor her spending and make
sure she is not running out of money. This is the control process of
budgeting.
The diagram below shows how the income and costs budgets work
together and link into the cash budget. The cash budget estimates
the money flowing in and out of the bank account each month.
income costs
sales budget production budget
What can we sell How much will it cost
and what income will us to produce our
we get? products?
departmental
budgets
How much will it cost
us to run these
departments or areas
of the business?
marketing
finance
human resources
administration
cash budget
What money will be
paid in and out of
the bank account?
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GCSE Applied Business
cash budget
The cash budget, also known as the cash flow forecast links all the
other budgets together. It estimates the amounts of money received
into the bank account and paid out of the bank account each month.
A typical cash budget shows sales revenue, start-up costs and
running costs.
The bottom line' of each monthly column shows the forecast bank
balance at the end of that month.
Study the format shown below. The calculations contained in it will
be explained in detail in the next chapter.
2 Now write down the names of the main budgets businesses have to draw up.
3 Will a car manufacturer have the same range of budgets as a holiday company? Explain why
budgets can vary from business to business.
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budgeting and planning
1 setting the 2 3
monitoring take action
budget Compare the budget If there is a
Estimate the figures with the difference, action
income and costs actual figures may be needed
is action needed?
A minus sign for the Sales variance means that Sales are below
target the Sales Force will need consulting and sales will have to
improve. If there is a plus sign for a Costs variance (eg Production)
it means that costs are over target and will have tobe cut.
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GCSE Applied Business
SALES BUDGET
January February March April May June Total
Clothing Sales 120,000 140,000 150,000 150,000 170,000 190,000 920,000
PRODUCTION BUDGET
January February March April May June Total
Clothing Costs 60,000 70,000 75,000 75,000 85,000 95,000 460,000
You have been told by the Finance Manager that the actual results for June were:
Sales 175,000
Production 110,000
He points out that the actual and variance columns in the Budget Report are incomplete . . .
BUDGET REPORT
Month June Date 7 July
1 What are the missing figures? Remember to include a + or sign in front of the variance.
2 What does the Sales variance mean for the business? Is it a good or bad result?
3 What does the Production variance mean for the business? Is it good or bad? Think about this
carefully, remembering that Sales is an income but Production is a cost.
4 If you were part of the Management Team of Peakwear, what suggestions might you make about
improving the performance shown in the Budget Report for June?
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budgeting and planning
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