M3.27 Working with Costs and Budgets

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M3.27 Working With Costs and Budgets

Explain the Importance of agreeing a budget and operating within it:

A budget plan is the most effective way to keep the business and its finances on track. It gives you the opportunity to review the business’ performance and any factors that are affecting or may affect your business. Also to manage your money more effectively, allocate appropriate resources, monitor performance, meet planned objectives and plan for the future.

To be most effective this has to be an ongoing process as this allows you to act quickly and proactively rather than reacting to problems after the event. It allows you to make continuous improvements based on sound financial information and enables you to make clearer and more focused business decisions. Not operating within the budget could lead to low performance levels, bad decision making and potential financial cash flow problems.

A budget is also the benchmark to measure performance, plan for the future and determines staff levels and progression/expansion of the company.

Describe how you could monitor between actual performance and budget:

Checking actual figures against projected budget plans using budget tools such as MS Excel spreadsheets and checking actual performance against budget plans regularly to identify variances. Keeping these types of records and comparing your budget from the previous year/s you have a base in which you can measure the next years’ performance. Another method could be to compare your figures and projected margins and growth with other similar companies or across different departments within your business.

The key areas to monitor are Sales, costs and working capital. Any trends positive or negative will show up in these figures measured against the budgets and forecasts.

You could then use this information to analyze the reasons for low sales performance such possible flat markets or underperforming products or possible low sales...
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