The Purpose of Budgets
|
Introduction
|
It might be fair to say by now that money is fairly important to
a business. We have seen that a lack of liquidity can lead to complete
failure and financial ruin and we have seen a variety of different
sources of finance that a business can consider.
When making financial decisions or requesting financial assistance,
a business will often make a budget.
|
Defined
|
A budget is basically a plan of how much the business will spend
each month and how much it will earn. Yes, it's a little like a
cash flow forecast but not quite the same.
A budget will often break down the revenue and expenditure sections
into many detailed categories. The business will decide how much
money will go to the personnel department in January, how much will
be spent on research and development in June, etc.
You may have heard the word 'budget' in relation to the government.
The government is like a business in that it produces goods and
services. Its annual budget is a plan of how it is going to raise
its money from taxes and how it is going to spend it.
Budgets are forecasts - they attempt to consider what the future might
bring. Managers must think carefully when making budgets or their
predictions will be unrealistic and meaningless.
|
Targets
|
One of the best reasons to have a budget is so that
managers can use it to monitor the business throughout the year. If
you set planned marketing expenses at £200,000 per month, you
might notice the figure going above the planned level if your marketing
department was overspending. This would alert you to a problem which
you might be able to solve.
|
Obtaining Finance
|
It isn't only managers who are interested in plans. When you go
begging to the bank for that vital new loan to help you buy that
new oven you wanted for your restaurant, they will want to see your
plans. This will include a basic budget, a cash flow forecast and
projections for your profit and loss account and balance
sheet.
They're not going to want to lend you money if they think you haven't
planned sensibly - they might not get it back.
Likewise, investors may want to see plans before they put their capital
into the business.
|
Capital and Revenue Expenditure
|
Budgets will detail the expenditure plans of a business and one
of the decisions a manager must make is what proportion of total
expenditure will go to capital expenditure and how much will go
to revenue expenditure.
- Capital expenditure is purchasing machines, equipment
and other fixed assets that may add to the efficiency and productivity
of the business. (Yes, 'capital' has more than one meaning - it
can mean money invested by owners and it can mean machinery -
whoever thought that one up was being really helpful that day)
- Revenue expenditure is money spent on the day-to-day
running of the business. This will include supplies and wages.
|
