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BTEC Business - Unit 2 - Business Resources - P6 - Illustrate the use of budgets as a means of exercising financial control of a selected company$3.91
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P6 Report
Subject: Illustrate the use of budgets as a means of exercising financial control of a
selected company.
In this report, I will be illustrating the use of budgets as a means of exercising
financial control of a selected company
Importance of budgets
Budgets set out the planned performance of a business and is usually in a table
made up of numbers. These plans deal with money units but they can also consist of
other measurable units such as units of output. Creating a budget allows an
organisation to plan ahead and then to check on its performance against budgeted
figures. It is important because it is a way of ensuring a business will have enough
funds for the things that they need as well as any other expenses that will contribute
to the running of the business. In addition, creating a budget and sticking to it can
keep a business out of unnecessary debt as well as working your way out of one.
Types of budgets
Master budgets – This is a comprehensive projection of how the owners expects to
manage all aspects of business over the budget period, usually a fiscal year. This
type of budget summarises projected activity by way of a cash budget, budgeted
balance sheet and budgeted income statement. Master budgets are generally used
in larger businesses because it can keep managers on the same page.
Operational budgets – This budget covers revenues and expenses surrounding the
day-to-day business of a company. This is budgeted annually, but it is also broken
down into smaller reporting periods, such as weekly or monthly. Management would
compare on going results to budget throughout the year, planning and adjusting for
variations in revenue.
Cash flow budget – This budget examines the cash inflows and outflows in a
business on a day-to-day basis. It can predict a company’s ability to take in more
money than it pays out. Management would monitor cash flow budgets so that they
can identify shortfalls between expenses and sales and times when financing may
be needed to cover overheads.
Financial budget – This budget illustrated how a business receives and spends
money or a big scale including revenues from core business plus income and costs
from capital expenditures. Managers use financial budgets to leverage financing and
value the company when it comes to mergers and public offerings of stock.
Static budget – This contains elements where expenses remain unchanged with
variations to sales levels. Overheads costs in an example of one type of static
budget, but these budgets are not confined to traditional overhead expenses. Some
departments within the company may have a fixed amount of money to spend in
budget, and it is up to the managers to make sure that these amounts are spent
without going over-budget. This condition occurs often in public and non-profit
sectors.
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