A budget is like a plan that businesses makes. They plan it on their predictions of what they think is going to happen for them in future months / years and is an estimate of expected income and expense for a certain period in time. It gives the business an idea of their financial situation and helps them to track their money.
Tesco use budgets for several reasons, these reasons include:
Tesco will have enough money to buy in enough supplies for their sales because they would've been tracking their money income and outcome.
Suppliers give discounts when a business pay them on time, having a budget will allow Tesco to be able to afford to pay straight away. Paying on time also helps Tesco to avoid paying interest, getting a bad credit rating and possible bankruptcy.
They will be able to save money for the use of retained profit if they have a bad month. They will also be able to save money for contingencies.
They will have enough money to make investments if that is what they need to do.
Budgeting will also help 'Name It Ltd' to expand and develop their business in the future.
Budgeting and the Purpose
A budget is a statement of the financial position that a business hopes to achieve. There are 7 common types of budgets that a business such as Tesco will create.
Sales Budget: The sales budget is an expectation of how much will be sold measured in both units and profit.
Production Budget: It’s basically a financial plan for products that are in the process of being made.
Purchases Budget: Purchases budget is just one facet of a company's overall functional budget strategy
Labour Budget: The Labour budget outlines the labor requirements of the production budget.
Cash Budget: A cash budget is extremely important, especially for small businesses, because it allows a company to determine how much credit it can extend to customers before it begins to have liquidity problems.
Capital Expenditure Budget: A plan for a company's capital expenditures. Capital expenditures are payments made over a period of more than one year.
Master Budget: The master budget is the summary of all budgets to measure profit and loss.
Types of costs
Fixed Costs: Fixed costs are costs that the business has to pay that don't change over a short period of time. As the product sale or service increases the costs stay the same. The same amount is paid regardless of the level of production. Fixed plans can include rent charge, electricity bills, gas bills, advertising costs or insurance prices.
Variable Costs: Variable Costs are costs that they business have to pay but it is possible that they will change as the output increases. Variable costs can include raw materials, delivery costs or packaging costs.
Businesses should aim to break even to ensure they are going to survive in the future. Break-even is where the business doesn't make enough sales to make a profit but they make enough sales to avoid making a loss. The point of break-even is shown on a graph that businesses produce to see how well they are doing financially.
M4: Analyse the reasons why costs needs to be controlled to budget
In the merit part of the assignment, I will talk about why costs need to be controlled to budget and the advantages and disadvantages of controlling costs to budgets. I will also explain what can happen to a business if costs and budgets are unmonitored.
Importance of controlling costs and budgets:
It is very important for an organisation to control its costs to their budget so that it can manage its financial resources properly. The reason organisations need to control their costs properly would be that it would end up saving money on expenses and increase its revenue. This will help the company to increase its revenues and this would also allow the company to invest more money if they need to. For example, the business should control its costs so that it saves money and by having the right amount of stock the business can then have the full benefits of selling those stocks and getting cash which could be used for other areas of the business if they needed to.
It is essential for a business to meet its budgets. Budgets help the business to determine whether they have enough money to raise the business or generate more profit. It is also important for an organisation to control its budget so that it has finances for the period of the budget. The budget will help the business to reach its targets and goals. A positive controlled budget helps businesses to manage their financial resources properly.
It is very important for the business to manage their costs because an uncontrolled budget can decrease the profit. If a business doesn't make enough profit they might end up in a condition where they end up in debt or bankrupt. If a business doesn't control its costs and budget properly then it wouldn't manage to assess and evaluate its finances. Also if a business doesn't manage or control their budget then it would find it difficult to reach its objectives and targets. It also runs the risk of spending more money than it is taking in or, even, not spending enough money to expand the business and compete with their competitors.
Advantages of following budgets:
It can manage its financial resources effectively
It is a way to achieve the goals set for the employees.
It serves as a benchmark for controlling on-going operations.
It helps in developing a team spirit where participation in budgeting is encouraged.