31

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.

a point to think about . . .

Businesses, like holidays, never go exactly to plan. The
important factor is to keep an eye on what is happening
and take action when things turn out differently.

what is a business budget?

As a business plans ahead it will set targets for income and costs
normally over the period of a year:
a sales budget will estimate the number of products a business
plans to sell and the amount of sales revenue it will receive
a production budget will estimate the number of products a
business will make or provide and the cost of producing those
items
departmental budgets will estimate the running costs of
different areas of the business
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 budgeting and planning

Set out below is an example of a sales revenue budget of a business

with three departments. Six months figures are shown. Budgets can
also (and often do) show the figures for the whole year.

sales revenue budget (extract)

January February March April May June Total

Department A 1,000 1,000 1,000 1,000 1,000 1,000 6,000
Department B 1,500 1,500 1,500 1,500 1,500 1,500 9,000
Department C 2,500 2,500 2,500 2,500 2,500 2,500 15,000
Total Sales 5,000 5,000 5,000 5,000 5,000 5,000 30,000

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.

CASH BUDGET Jan Feb Mar etc

000 000 000 000
Receipts
Sales revenue 150 150 161 170
Other receipts (loans, capital from owner) 70 80 75 80
Total receipts for month (A) 220 230 236 250
Payments
Purchases of raw materials or stock 160 165 170 170
Running costs 50 50 50 60
Start-up costs 50
Total payments for month (B) 210 265 220 230
Opening bank balance at beginning of month 10 20 (15) 1
add total receipts (A) 220 230 236 250
minus total payments (B) 210 265 220 230
Bank balance (overdraft) at end of month 20 (15) 1 21

Activity 31.1 personal and business budgets

1 You are planning a trip out somewhere with friends, for example to the cinema or to a club.
Write down under the heading cost budget estimates of all the the costs of the trip, for example
any new clothes, transport there, entrance tickets, drink, food, shared taxi home.
Then write down under the heading income budget how you are going to finance the trip in
other words where the money is coming from.
This is your personal budget.

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

monitoring the budgets

Setting a budget in the first place is only half the story. It certainly
helps with planning personal activities and business activities. But
what if circumstances change? What if something goes wrong?
It is essential that budgets are monitored in other words the figures
that have been projected have to be checked against what actually
happens. This is known as monitoring.
There are three main stages in budgeting:

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

monitoring business budgets

When businesses monitor their budgets the process is more formal
and carried out in a budget report.
In the example below the three columns with figures represent (from
the left) the budgeted figures, the actual figures and the variance.
The variance is the the actual figure minus the budgeted figure.

SALES BUDGET REPORT

Month October Date 7 November

budget actual variance

Product A 60,000 55,000 5,000
Product B 75,000 65,000 10,000
Product C 80,000 85,000 + 5,000
Total 215,000 205,000 10,000

the estimated sales figures the difference between the and

the actual sales figures
actual and budgeted figures

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

Activity 31.2 understanding business budgets

You are on a work experience placement in the Finance Department of Peakwear, a mail order
company that sells its own brand of outdoor clothing, largely through catalogues and its website.
You have been shown some budgets for the first six months of the year . . .

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

budget actual variance

Sales 190,000
Production 95,000

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

Nutshell summary Key terms

Personal budgeting and business budgeting have many Budgeting

features in common. A plan which sets targets for
income and costs, normally
Budgeting involves making plans for income and costs
over the period of a year.
to achieve certain targets.
A business budget normally covers a period of a year Sales budget
and estimates figures on a monthly basis. An estimate of the sales
revenue a business will
The main income budget is the Sales Budget which
receive.
estimates the number of products a business will
produce and the amount of sales revenue which will be Production budget
received. A product can include a service provided or An estimate of the cost of
an item sold by a shop. producing a product by a
The costs of a business are covered by the Production business.
Budget (which estimates the cost of the product) and
Departmental Budgets which cover areas including: Departmental budget
- marketing An estimate of the cost of
running a business
- finance
department or area of activity.
- human resources
- administration Cash budget
An estimate of the amount of
The Cash Budget also known as the cash flow
money paid in and out of the
forecast estimates the money received and paid out
business bank account month-
of the bank account of the business each month.It links
by-month. Also known as a
all the other budgets together because all the income
cash flow forecast.
and costs from the other budgets will pass through the
bank account
Monitoring
The cash budget is the main feature of the next chapter. Checking the figures of the
budgets against the actual
Monitoring is an important part of budgeting. This
figures as they become
involves comparing the budgeted figures with the actual
available and taking any action
figures, month-by-month on a form known as a Budget
which becomes necessary.
Report.
The budgeted figure is deducted from the actual figure Budget report
each month to show what the difference is. This A form which compares
difference is known as the variance. budgeted and actual figures.

The business may need to investigate and take action if Variance

the difference (variance) is a cause of worry. The difference between
For example, a rise in costs or a fall in sales would need budgeted and actual figures.
looking into. The business might then need to cut costs
and to increase the sales effort.

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