Budgets

• Budgeting is the process of estimating financial data over a period of time
• Budgeting helps businesses control and monitor expenditure
• Budgeting is a motivational tool for setting targets
• Budgeting provides a measure of performance for managers
• Historical budgets are based on previous years’ budgets
• Zero budgeting requires justification for every expenditure
• Variance analysis compares budgeted figures with actual figures
• Favourable or adverse variances depend on income/profit or expenditure

Budgeting is an important process for businesses as it helps control and monitor expenditure, set targets, and motivate employees. There are different methods of setting budgets, such as historical budgets based on previous years’ data or zero-based budgets where each expenditure must be justified. After the budget period, variance analysis is conducted by comparing actual figures to budgeted figures. Variances can be favorable or adverse, depending on whether they are related to income/profit or expenditure. However, budgets can be affected by external factors beyond a business’s control, so flexibility is necessary. Despite limitations, budgeting is a valuable tool for businesses to assess performance and achieve their financial goals.