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 Don’t ask me, I have no idea!
 Put simply, a budget is a tool that is used to plan for expected
revenue and expenditure. A budget is set within a given time
 There are various types of budgets…
 The Chief Financial Officer is usually in charge of the budget for
a business.
 The purpose of a budget is to assist with:
 Planning
 Coordination
 Control
 Motivation
TASK: Read pgs 379-380 of
your text. Use the
information to create a mind
map detailing the purpose of a
 When planning a budget, a business should consider:
 Available finance : how much money is actually there to
Historical data: how much money did the business
spend the year before?
Organizational objectives: what does the business plan
to achieve?
Benchmarking: what are the business’ competitors
Negotiations: what does the rest of the team think is
 Ummmm, when you figure this one out, let Ms Elicia
 Budgeting has limitations:
 Changes will occur that a business can’t plan for
 Budget holders often overestimate their budgets…the bigger
the budget, the easier it is to meet targets
Leftover funds often can’t be carried to the following financial
year…instead, they are taken off next year’s budget. Eek!
Budgets are often set by people who aren’t directly involved in
day to day running
Poor budgeting can lead to ‘cutting corners’
Budgeting is time consuming
A heavy focus on budgets can lead to neglect in other areas
Budgeting may create competition between colleagues
 Complete Question 3.4.1 (a, b)
on pg 379 of your text.
 Complete Question 3.4.2 (a, b)
on pg 381 of your text.
 Complete Question 3.4.3(a, b)
on pg 382 of your text.
Question 3.4.1 – Michael Cahill
a. Income = $150 * 10 = $1,500
Outgoings = $110 * 10 = $1,100
Net income = $400
Based on the projections, Michael will be short of $100 from being able to pay for his overseas
b. Budgeting as a forward-looking plan might be able to help Michael because it allows him to
assess whether he is achieving his objectives (i.e. a planned holiday in Prague). He can then
take appropriate action in order to resolve any expected financial problems before they arise.
Examples of such corrective measures include:
Reducing his outgoings – especially those that are non-essential or ‘flexible’
Raising income – perhaps by working overtime at weekends or evenings if possible
Question 3.4.2 – Tsingtao Brewery Company
a. Budgeting is the cyclical (or on-going) process of planning, setting, controlling,
monitoring and reviewing the financial plan of expected revenue and expenditure
for an organization (or a department within an organization), for a given period of
time. Being China's largest brewery, Tsingtao will need effective budgetary control
in order to run its global operations efficiently. Budgeting as a management tool is
important to a firm such as Tsingtao for several reasons, which include:
b. Budgeting can be used to motivate Tsingtao managers and other budget holders, to
encourage responsibility and accountability and to aid financial control.
It helps to control business costs in order to prevent liquidity problems.
It has a central role in business strategic planning, e.g. setting aside a budget to
sponsor major sporting events such as the Beijing Olympic Games.
Budgeting requires Tsingtao managers to plan for the future as it tries to enhance its
corporate brand awareness.
Question 3.4.3 – Ryanair
a. Market size can also be measured by:
Size of each airline company’s fleet (number of aircraft owned)
Sales revenue of the airline as a proportion of the total sales within the airline industry
Relative profit figures of each airline company
b. Limitations of using budgeting at Ryanair include:
Unforeseen changes in the external business environment can cause large variances in budgets,
e.g. the financial tsunami of 2008 causing major repercussions for the airline industry or
fluctuating exchange rates affecting the final price paid for the Boeing (American) aircraft.