It is crucial for a business to control its budget. 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 effectively.
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 effectively.
Advantages and disadvantages:
Following are the advantages of good monitored your budget:
- It can manage its financial resources effectively.
- It is a way to achieve the goals set for the units.
- It serves as a benchmark for controlling on-going operations.
- It helps in developing a team spirit where participation in budgeting is encouraged.
- It serves as a basis for evaluating the performance of managers.
The problems which can arise if the costs are left unmonitored are that the amount spend on expenses will be too much and this will decrease the profit which the business makes. The business also wouldn’t be able to achieve their targets so it could be difficult to identify what was the cause.
If businesses doesn’t control their budget then serious mistakes can occur for example, a business might have bought too much stock and this means that the stock would be left in the stock room, it may go out of fashion, then the business will have to put reduced offers on the stock, so therefore the business will loose money because they selling the products below cost.
Over-expenditure:
Over-expenditure is where businesses spend more than they estimated at the start of the year. For example if business planned to spend £5000 on expenditure but they actually spent £6000. The reasons for business having resulting in over-expenditure are incorrect data and inexperienced employees.
The incorrect data will cause over-expenditure to occur as the business will think they have more money to spend than they actually have.
The Over-expenditure can also be a result of inexperienced employees creating the wrong budget for business as they do not have the required skills to successfully draw up the business’s budget with the correct figures being used.
Table below shows how business can under spend and over spend the budget it is provide able:
The reason for Gardiner Stores plc having an actual loss of £79.000 in the month of April is due to the business opening a new supermarket in Oxfordshire so start-up costs are to be expected. Business was budgeting too much for their sales revenue. This could have been achieved if they had spent more money on advertisements. This then would increase the other costs by a small amount but in return the actual sales revenue would have been expected to increase to cover the high costs that the business did not budget for. The sales revenue figures were higher than budgeted in both April and May, this shows that they have purchased more stock than they expected to by £24.000 in April and £4.000 in May. Also their wages and salaries for staff were higher than budgeted. They wanted to spend £241.000 in April £245.000 in May but their actual cost is £250.000 in April and £249.000 in May which means they spend too much money on their staff. So, they don’t have to hire more staff.
Also other costs figures were higher than budget in April, this shows that they spend extra money in their other costs that they expected to by £2.000. The budget for Gardiner Stores plc can be brought back into line so long as the budget creators have accurate data at their disposal and the business acts from their last budget accordingly. This is done by attempting to reduce the businesses costs and increase sales revenue levels, as this will show that the business is intending to make profits.
Conclusion
In this task, I have mentioned why costs and budgets need to be controlled and the importance of controlling the budget and costs in the business. I have also mentioned the advantages and disadvantages of producing a good controlled and monitored budget and what can happen to a business if costs and budgets are not monitored. I have also mentioned the over expenditure that why business have to pay more then their estimates. At the end I have also talk about how to monitor budget.
