Budgeting is a catalyst for business success. Having a budget allows businesses to grow, enhance their operations, and minimise the effects of any unexpected costs. As a result, businesses can thrive and find new opportunities in their markets and industries.
What is a budget? A budget is a financial plan that gives guidelines for spending and sets financial targets for businesses to achieve. Budgeting identifies current available capital, provides an estimate of expenditure, and anticipates incoming revenue.
To optimise business success, Select Training and Management Consultancy L.L.C. will deliver suggestions for monitoring and controlling a business’ budget.
Monitoring the Budget
After assessing all of the financial details needed to create a business’ budget, it is important to monitor the budget for optimal effectiveness. Giving other individuals responsibility over certain areas of the budget, (by department, business unit, project, etc.), is a great way to make sure that it is closely considered in day-to-day operations. Scheduling regular meetings to discuss budget details will also ensure that the budget is not only being considered, but is being discussed.
To make sure your business’ budget is on track, Select recommends the following:
- Collect figures as they become available.
- Compare actual numbers with budgeted amounts.
- Cite reasons for positive and negative variances.
- Classify reasons as a trend or unique incident.
After using the previous tips to monitor your business’ budget, below are some signs that it is on track:
- Variances are minor.
- The reasons for any variances are already known and predicted.
- The reason for a negative variance is due to a unique incident and not a trend.
Budgetary Control Using Variances
A variance is the difference between actual and planned results. Variances may be favourable or adverse, depending on whether a good or bad thing has happened. The calculation of variances allows managers to better monitor the performance of their business. It allows the variances to be analysed, the reasons to be examined, and the decisions to be made. By using the variances, managers can produce more accurate budgets in the future, which will help with planning and control.
The following list of formulae show how to calculate different variances:
- Material Variances:
Material price variances may occur if a discount is given, a business found a cheaper supplier, or there has been an unexpected rise in prices.
Material price variance = (budgeted price – actual price) x actual usage
Material usage variances may occur because of careless work creating waste, inefficiency, or a machine breakdown.
Material usage variance = (budgeted usage – actual usage) x budgeted price
- Labour Variances:
Wage rate variances can be caused by the activities of trade unions, the supply of labour. and government regulations.
Wage rate variance = (budgeted wage rate – actual wage rate) x actual hours
Labour efficiency variances are affected by the productivity of the workers, training, and the reliability of the machinery used.
Labour efficiency variance = (budgeted hours – actual hours) x budgeted wage
- Sales Margin Variances:
Sales margin price variances may arise due to changes in market conditions or unplanned changes in prices.
Sales margin price variance = (actual price – budgeted price) x actual sales
Sales volume variances can occur for many reasons. Changes in consumer tastes, the action of competitors, and changes in marketing techniques are a few causes.
Sales volume variance = (actual sales – budgeted sales) x budgeted price