Budgets Teacher’s notes included in the Notes PageFlash activity. These activities are not editable. Icons key: For more detailed instructions, see the

Budgets

Teacher’s notes included in the Notes PageFlash activity. These activities are not editable.

Icons key: For more detailed instructions, see the Getting Started presentation

Budgets

Web addressesExtension activities Sound

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Learning objectives

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What is a budget?

What are the main purposes of a budget?

How do businesses prepare and use budgets?

What are variances, and why are they investigated by businesses?

What are the similarities and differences between budgets and cash flow forecasts?


Budgets

Businesses use financial information taken from throughout the year to work out how much is being spent each week or month.

The actual expenditure is then compared against the amount budgeted for. Any differences from the planned budget are referred to as variances.

A budget is a type of plan for a future period, covering relevant costs and revenues that a business will encounter over the coming financial year. If you’ve budgeted before, you’ll know that planning a budget is relatively straightforward, but keeping to it is the harder part.


Budgeting

The main aim is to make sure that the different sections of the business are working together effectively in achieving the overall goals of the business.

What do you think would happen if budget reports were only given at the end of the year instead of at

the end of each month?

The budgeting process involves managers responsible for the budget (called budget holders) drawing up detailed estimates of costs for each department or cost centre of the business, and turning these into spending limits for the coming months.


The purposes of budgets


Benefits of budgeting


Budgets and cash flow forecasts

A cash flow forecast is a prediction of the future flows of money in and out of the business for a specified period of time.

Can you summarize what a cash flow forecast is?

It shows, month by month, the money that is anticipated to be coming into the business and the money that the business will be paying out.


Budgets and cash flow forecasts


Creating a budget


Why do variances occur?

Internal matters:performance of individuals (ordering)wastage of materialsslow workingequipment faults.

External issues:change in supply and demandshortage of materials and labourchange in economic conditions.

Incorrect budgets:budgets are based on incorrect information.

Variances are differences from the planned budget which occur in the actual expenditure. There are numerous reasons for the occurrence of variances in a budget, which include:


Variance analysis

Variances take the form of either favourable (+) or adverse (-). They are worked out using the following formula:

If the department has spent more than the budgeted amount, it is called an adverse (or negative) variance.If the department has spent less than the budgeted amount, it is called a favourable (or positive) variance.

Variance = budgeted amount - actual amount


Example of variance analysis

Examine and comment on this budget report:


Activity – Hunter’s Gardens

Jeff Hunter runs a garden centre, Hunter’s Gardens. He needs your help to create his budget for the coming month.

Put the following information into the budget on the next slide:

Stock (plants etc): £1,000Staff: £750Utility bills: £80Telephone and Internet: £50Insurance: £28Maintenance: £50Vehicle costs: £75



Budgeted amount

Actual amount Variance

StockStaffUtility billsTelephone and InternetInsuranceMaintenanceVehicle

Total 0 0 0

Can you correctly fill in the budget using the information on slides 13 and 15?



At the end of the month, Jeff discovers the following spending:

Stock: £900Staff: £780Utility bills: £80Telephone and Internet: £65Insurance: £38Maintenance: £37Vehicle costs: £98

Put this information into the budget on the previous slide and work out the variances for each cost.

What are your observations about the variances in the Hunter’s Gardens budget?


Activity – tracking your weekly spending

Remember to write down everything you spend and

earn over the week!

Make a record of your own daily income and expenses for a week.You need to include all relevant income you receive – from parents, working, etc.You also need to include all relevant expenditure you have – entertainment, clothes, shopping, food, transport etc.Use the table on the next slide as a template.

An important first step in preparing a budget is to track your income and expenses.


Activity – tracking your weekly spending

Day Item Income (£) Expense (£) Balance (£)

e.g. parents give money for the week £15.00e.g. bus fare £1.10e.g. lunch £2.00 £11.90

Thursday

Friday

Saturday

Sunday

Weekly spending

Monday

Tuesday

Wednesday


Activity – self budgeting

Now have a go at preparing a budget for yourself…The table on the next slide shows two sections: one for income and one for expenses. Income includes any wages and other sources of money, e.g. from parents. Expenses include food, clothing, entertainment, transportation, savings, and other miscellaneous costs.Can you categorize each source of income and expense that you listed last week? Either copy the table with categories listed, or create a table filled in with your own categories. Then you can estimate projected expenses for the coming month, using your actual expenses you listed over a week as a guide. Over the next month, track the items and see where you come in over or under budget.



Category Budget amount (£) Actual amount (£) Variance (£)

Income

Parents

WorkOther

Income subtotal

Expenses

Food

Transport

Clothing

Shopping

Entertainment

SavingsMisc./other

Expenses subtotal

Total income (income - expenses)

Self budgeting



Is your total variance favourable (+) or adverse (-)?If your spending doesn’t balance with your income, where will you get the extra money from?If you have any money left over, what will you do with it?Are there ways for you to increase your income? If so, how could you use this money to balance your budget?

Now see how well you have done!Look at the variances (differences) for each item:


Question time!

What does a favourable variance tell the manager of that department?

What lessons can be learned from budgeting?

Why would they be unhappy if there was a favourable variance that was large?

1.

2.

3.

4.

How might businesses accommodate an

unavoidable overspend?


Who wants to be an A* student?


Glossary

Documents

Budgets Teacher’s notes included in the Notes PageFlash activity. These activities are not editable. Icons key: For more detailed instructions, see the