Home Economics Business Studies Search the Guru Links Message Boards Contacts



A budget is a target for cost, revenues and/or profits that a firm or department must aim to reach over a period of time.  There are a number of different types of budgeting.


Objective Budgets

These are based on finding the best way of achieving a particular objective.  They will contain information on how to achieve the objective, e.g., a sales budget might show how to meet a sales target.


Flexible Budgets

These are designed to change as a business change.  Changes in business conditions may result in very different outcomes than those budgeted for, e.g., the sales budget may be altered if there is a sudden increase in demand.


Zero Budgeting

This approach sets each department’s budget at zero and asks that each budget holder justify every pound that is asked for.  This helps to prevent the common phenomenon of budgets creeping up each year, thus reducing the overall costs.  It does have the problem of wasting a large amount of managerial time and failing to prevent managers trying to obtain larger budgets than necessary.



A variance is the difference between the actual and budgeted figure.  They can be favourable or adverse.  Favourable variances occur when the actual figures are “better” than the budgeted ones:

  • If sales revenue for a month was budgeted at £10,000, but it turned out to be £13,000, there would be a favourable variance of £3,000.
  • If costs were planned to £7,000, but the actual costs were £5,000, then there is a favourable variance of £2,000.


Adverse variances occur when the actual figures are worse than the budgeted ones.


Variances can provide a warning of slipping revenues or rising costs.  This should then allow management to implement a new strategy to offset the variance.



The way that budgets are used can tell you a lot about the firm’s culture.  Firms with a strict autocratic culture will tend to use a tightly controlled budgetary system.  Organisations with a more open culture will use budgeting as an aid to discussion and empowerment.  Whatever the culture, the manager has the responsibility to meet the budgetary requirements. 


There are a number of advantages of budgeting:

  • Help to control income and expenditure, helping to draw attention to waste, losses and inefficiency.
  • They can emphasise and clarify responsibilities.
  • Enable delegation though the organisational structure, as subordinates have clear budget targets.



However there are some disadvantages:

  • If the budget is too rigid then the business may suffer as it won’t be able to react to internal and external changes.
  • If the actual business results are very different to the budgeted ones then the budget can lose its importance.



E-mail Steve Margetts