Cambridge Notes, Past Papers, Revision Questions

5.5 Budgets – Meaning and Purpose

Budgets are like the road maps of a business. They show where the company wants to go, how much it can spend, and how it will keep on track. 📊

1️⃣ Measuring Performance

Think of a budget as a scorecard for a sports team. It sets targets (e.g., sales of £1 million) and then you compare actual results to those targets. The difference tells you if the team (or business) is winning or needs a strategy change. 📈

Set a sales target of £1 million.

Record actual sales of £950 k.

Calculate variance: £950 k – £1 million = -£50 k.

Analyse why the variance occurred (e.g., lower demand, higher costs).

2️⃣ Allocating Resources

Imagine you’re planning a school trip. You have a fixed amount of money and must decide how much to spend on transport, food, and activities. A budget helps decide these allocations so that the trip runs smoothly without overspending. 💰

Determine total available funds.

Prioritise essential categories.

Assign amounts to each category.

Adjust if new information (e.g., cheaper bus service) becomes available.

3️⃣ Controlling and Monitoring

Budgets act like a thermostat for a business. If the actual spend rises above the budget, the thermostat triggers a cooling action (e.g., cut non‑essential costs). 🔥❄️

Control Point	Action
Excessive Marketing Spend	Review campaign ROI and reduce spend.
Low Production Output	Investigate bottlenecks, adjust staffing.

4️⃣ Example: A Small Café Budget

Suppose a café has £5 000 for the month. The budget might look like this: 📋

Expense Category	Planned (£)	Actual (£)	Variance (£)
Rent	1 200	1 200	0
Coffee & Supplies	1 500	1 650	-150
Staff Wages	1 800	1 750	+50
Total	4 500	4 600	-100

📚 Exam Tips

Tip
• Define each purpose clearly: measuring performance, allocating resources, controlling, monitoring. • Use real‑world examples: a school trip, a café, or a sports team. • Show calculations: variance, % difference, or simple algebra like \$Revenue = Price \times Quantity\$. • Remember the “why” behind budgets: they help managers make informed decisions and keep the business on track. • Practice diagramming: a simple flowchart of budget cycle (plan → execute → review).

Tip

• Define each purpose clearly: measuring performance, allocating resources, controlling, monitoring.

• Use real‑world examples: a school trip, a café, or a sports team.

• Show calculations: variance, % difference, or simple algebra like \$Revenue = Price \times Quantity\$.

• Remember the “why” behind budgets: they help managers make informed decisions and keep the business on track.

• Practice diagramming: a simple flowchart of budget cycle (plan → execute → review).