BUSINESS STUDIES

Alexey Grabarnik

Topics• Starting a business• Financial planning• Finance• People in business• Marketing and competitive environment

Budgets

Businesses make financial plans: how much they’re going to spend and earn. Afterwards, they check to see how they’ve done.

Budget forecasts future earnings and future spending• Income budgets – forecasts the amount of money that will

come into the company, as revenue.• Expenditure budgets – predict the total costs (both fixed

and variable)• Profit budget – totals from the income and expenditure

budgets to calculate what the expected profit (or loss) will be.

Using budgets• Variance is the difference between actual figures and

budget figures (those we have planned)• A favorable variance leads to profit increasing• An adverse variance is a difference that reduces profits• For example,

Budget Actual Variance

Revenue $100K $90K $10K (A)

Wages $40K $30K

Example

Budget Actual Variance

Revenue $140K $135K

Rent $20K $23K

Other costs $80K $60K

Wages $40K $35K

Total costs $140K $118K

Profit $0K $17K

Variances are caused by external/internal factors

External:

• Competitive behavior• Change in the economy• Cost of raw materials may vary

Internal:

• Improving efficiency• Changing the price• Overestimation/Underestimation of any costs/revenues

Variance analysis• Variance analysis means spotting variances and figuring

out why they’ve happened.• Then it is crucial that an action is taken to fix them

• Small variances are not big problems. For example, small favorable variances can motivate employees to keep on working

• But large variances demotivate: large favorable variance – no need to work, large adverse variance – the task is impossible

H/W• Define a variance, explain what favorable and adverse

variances mean, and give two examples (6 marks)• If a business sets an expenditure budget of $15 000 for

marketing, and the actual expenditure for marketing is $20 000, how much is the variance and what type of variance is it? (4 marks)

• Describe two external and two internal factors that cause variances, and describe to what extent the variances can be threat for businesses? (6 + 16 = 24 marks)

Total: 34 marks