Illustrate the Use of Budgets as a Means of Excercising

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Illustrate the use of budgets as a means of exercising financial control of a selected company
In this task I will be explaining what a budget is, why it used by companies and I will have to show how it helps a company in controlling its finance.
A budget is a plan which predicts how much a company makes in revenues and how much it is going to pay in expenses and so predicts a profit or loss. A budget is can be prepared whenever a company wants two and for however long a period of time it wants to prepare it for. Companies and people would budget in order to avoid overspending and even if this does happen as it will predict how much money will be needed then the person/ business can arrange for it by getting an overdraft facility or loan. There are two types of costs, the first is fixed costs which stay the same and the other is variable costs which are always changing. Shareholders and banks may want to see budgets as the shareholders may want to know how well the company is predicted to do and banks may want to see it in order to get a clue on whether the business/ person will be able to pay back the money borrowed. Income| £| Variable/ Fixed|

Salary after tax and insurance| 1 500| Fixed|
Expenses| | |
Rent| 250| Fixed|
Gas and council tax| 200| Variable/ Fixed|
Car insurance| 140| Fixed|
Tax on car| 20| Fixed|
Entertainment per month| 100| Variable|
Petrol per month| 150| Variable|
Food per month| 70| Variable|
Season ticket for theatre per annum| 420| Variable|
Credit card repayments monthly| 150| Variable|
Interest on credit card monthly| 50| Variable (interest rates could rise/ fall)| Clothes per annum| 1,000| Variable|
If buying a house| | |
Potential mortgage per month| 450| |
Mortgage deposit| 5000| |
Lawyers’ fees| 1 500| |

| Year 1| Year 2| Year 3| Total|
Income| £| £| £| £|
Salary after tax and insurance| 18,000| 18,000| 18,000| 54,000| | | | | |
Expenses| | | | |
Rent| 3,000| 3,000| 3,000| 9,000|
Gas and council tax| 2,400| 2,400| 2,400| 7,200|
Car insurance| 1,680| 1,680| 1,680| 5,040|
Tax on car| 240| 240| 240| 720|
Entertainment per month| 1,200| 1,200| 1,200| 3,600|
Petrol per month| 1,800| 1,800| 1,800| 5,400|
Food per month| 840| 840| 840| 2,520|
Season ticket for theatre per annum| 420| 420| 420| 1,260| Credit card repayments monthly| 1,800| 1,800| 1,800| 5,400| Interest on credit card monthly| 600| 600| 600| 1,800| Clothing per annum| 1,000| 1,000| 1,000| 3,000|

Unplanned Costs| 2,000| 500| 500| 3,000|
Total Expenses| (16,980)| (15,480)| (15,480)| (47,940)| Net Income (Total Income – Expenses)| 1,020| 2,520| 2,520| 6,060| Opening Balance| 0| 1,020| 3,540|
Closing Balance| 1,020| 3,540| 6,060|

From the table, it is seen that money coming in annually after income tax and national insurance is £18,000; I found this by multiplying her monthly wages by 12. I have also found that my sister had expenses of £16,980 in year 1 and believe she will have total expenses off £15,480 in years 2 and 3. This means that she will be saving £1,020 in year 1 and £2,520 in years 2 and 3 giving her total savings of £6,060 at the end of year 3. However will not be enough as she needs to have £6,500 in order to pay a deposit on the house and lawyers’ fees and so she needs £440 more. However if over years 2 and 3, she experiences favourable variances then this amount could fall and whatever’s left could be paid for by arranging an overdraft facility.

In order to check her progress my sister could create monthly budgets in order to see how she is doing in terms of variances as this could give her a better view of how she can save money or spend less in order to stop adverse variances and keep on getting favourable ones as this can help get favourable variances when it comes to checking what...
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