What is a budget?
An agreed plan establishing, in numerical or financial terms, the policy to be pursued and the anticipated outcomes of that policy.
Advantages and Disadvantages of using a Budget
Features of Good Budgeting
- Be consistent with the aims of the business - meaning managers cannot fund projects that will boost their own careers or interests, rather than meet the needs of the company.
- Be based on the opinions of as many people as possible - Different people can provide different ideas and expertise. Helps budget holder come up with a realistic set of targets.
- Set challenging but realistic targets - SMART (Specific, measurable, agreed/achievable, realistic, timed)
- Be monitored at regular intervals, allowing for changes in the business and its environment - Remedial action can be taken or reasons for beating a target can be looked at.
- Be flexible - Allows for changing circumstances. Adjusting a inadequate budget (due to unforeseen circumstances) to a more realistic level.
Budgetary Control
Budgetary control is the establishment of the budget and the continuous comparison of actual and budgeted results in order to ascertain variances from the plan and to provide a basis for revision of the objective or strategy.
Variance Analysis
Variance analysis is the process by which the outcomes of budgets are examined and then compared with the budgeted figures. The reasons for an differences (variances) are then found.
- Favourable Variance: When costs are lower than expected or revenue is higher than expected. More profit than expected. Shown by 'F'.
- Adverse (Unfavourable) Variance: When costs are higher then expected or revenue is lower than expected. Less profit than expected. Shown by 'A'.
Variance is calculated by this formula:
Variance = Budget figure - Actual figure
Important Points to remember:
- A negative variance for an expenditure budget is an adverse variance (as you have spend more than you budgeted), while a negative variance for a revenue budget is favourable (as you have gained more income than you expected)
- Similarly, a positive variance for an expenditure budget is a favourable variance, while a positive variance for a revenue budget is an adverse variance.
- Other names for income budgets: Revenue budget and sales budget
- Other names for the expenditure budget is a cost budget.
For an adverse variance, providing the factor that caused it is under the firm's control, alternative methods can be investigated.
Favourable variances can be used to identify efficient methods that can be adopted more widely in the company.
Causes of variances in costs
Practice questions on this chapter here - it is a fun multiple choice quiz:
http://www.tutor2u.net/business/quiz/usingbudgets/quiz.html
Market
Definition: A place where buyers and sellers come together to exchange goods and services for money.
Geographical Classification
Based on the area targeted by a firm
Local Markets
Close to where the CONSUMER LIVES
e.g. A plumber, car boot sales, fruit stalls
National Markets
Selling goods across the COUNTRY
e.g. Nationwide Building Society, Thompson Holidays, Lloyds TSB - all sell across the country
International Markets
Trading in MORE than ONE COUNTRY
Not likely to be targeted by a business start-up (but there is now the danger of e-commerce)
e.g. McDonalds, Starbucks, KFC
Physical/Non-physical Markets
Physical Markets:
- "Traditional"
- A tangible place where buyers and sellers meet (e.g. A shop)
- Products can be seen and felt before purchase
Non-physical Markets:
- "Electronic"
- Uses modern Technology
- E.g. selling via the telephone or internet
- Allows a business start-up to compete on a national Scale.
Other Classifications of Markets
1. Market Segmentation
- According to the TYPE of customer
2. Competition in the Market
-HOW MUCH competition there is in the market
3. Nature of the Market
- The TYPE of MARKET the firm is in
- e.g. entertainment, fashion, gaming
Demand
Demand is: The amount of product or service that consumers are willing and able to buy at any given price over a period of time.
Factors Influencing Demand
1. Income and Wealth
- The ability of a consumer to purchase a product.
- Higher income -> Demand for products increase
- Pattern of demand changes -> Higher disposable income -> Consumers more likely to spend money on luxury goods.
2. Price
- If price rises, Demand generally falls
-Alternatives available
- Not so many 'impulse buys' - a higher price makes you think about it!
- Price elastic
e.g Chocolate bars, Luxuries
Model Answer
Explain one factor that affects the demand of a Santa Hat (4)
One factor is the price. As the price of the Santa hat rises, the demand for it will usually fall. There are no specific brands of Santa hats, therefore sales are very dependant on price. The consumers would think more carefully about whether the product is required as it is not a necessity item. As it is not a necessity item it would have many close substitutes, therefore an increase in price will lead to quite a dramatic fall in the quantity demanded. This is the price elasticity of demand being demonstrated. Reversely, if the price was to fall, the demand would increase as people would buy your Santa hat rather than other ones as it is cheaper and so is seen as better value for money.
- Price may rise and demand is hardly affected
-Not so many alternatives are available
- Little difference to sales figures
- Price Inelastic
e.g. Petrol, Necessities
- Similar result for a fall in price - demand will generally increase
e.g. Easter Eggs
3. Marketing and Advertising
- Successful marketing and promotion can have a major impact upon the demand for a product/service.
- Public Relations (PR)
- Branding- Higher prices for 'better' brands = Added Value
4. Competitors Actions
- Price Changes
- If competitors prices drop, demand will decrease as consumer buys from competitors who are cheaper. And Vice Versa.
- Their Marketing strategies
e.g Marlboro's cigarettes Vs Benson and Hedges Gold Cigarettes
5. Tastes and Fashion
- Fashions and tastes change
- Clothing - A key market example
- Changes in taste on tangible items as well as intangible e.g. Coffee Shop experience
- Good market research needed to predict market trends and keeping track of changes.
- Fall in demand if there is a change in taste or fashion
6. Government Action
Governments can influence the demand for a product by:
- subsidising for it
- taxing it
e.g Marlboro Cigarettes are heavily taxed which therefore leads to a higher selling price.
- introducing legislation (e.g. seatbelts)
- using its own advertising campaigns to either encourage or discourage the purchase of a product.
- Bans - e.g. Banning advertising of cigarettes
7. Demographic Factors
- Factors related to the population
- UK population has grown --> increasing demand
- Changes in geographical spread of the population (e.g ethnic balance, size of households, age distribution of population) ---> This change has meant change in the types of product demanded.
e.g. Immigration has meant that Muslims may want Halal food or cultural food.
8. Price of other goods
- Close alternatives
- Lower priced substitutes will generally lead to a fall in demand of the original
e.g Coca Cola and Pepsi
- Good to use along side the original
- Affects each other - if the demand for one increases, it is likely to increase the other
e.g Price of DS console decreases, demand for DS games increase
9. Seasonal Factors
- e.g. Ice cream, pumpkins, Christmas stuff...
- Demand high in one season and that item is not wanted in another season.
Market Segmentation
Definition: The classification of CUSTOMERS or potential customers into groups or subgroups (market segments), each of which responds differently to different products or marketing approaches.
Types of Market Segmentation:
1. Demographic
- Age
- Gender
- Social Class
- Income
- House you live in - Residential
2. Geographic
- According to country or area of that country of current/potential consumers.
- e.g Theatre tickets in London, Walking boots in Scotland, Fake Spray tan in Essex.
3. Lifestyle
- Leisure Activities
- Car owner
- Children
- Eating Habits
4. Frequency of Purchase
- Are consumers a 'tryer' or a 'follower'?
- e.g Iphone 5
Market Mapping
Benefits are Market Mapping:
- Helps firms identify their closest rivals, so they can plan suitable competitive strategies.
- Helps to identify gaps or niches in the market, place for intro of a new product
- If carried out with market research, can discover public's view of its business/brand and competitors
- Help a firm reposition itself in a market
Market size, growth and share
Market Size
The VOLUME of sales of a product (e.g the number of TVs sold)
or
The VALUE of sales of a product (e.g The total revenue from TV sales)
Market Growth
Definition: The percentage change in sales (volume or value) over a period of time.
Percentage change= Difference X 100
Original
Factors influencing Market Growth:
- Economic Growth - If a country's wealth increases per annum, sales are likely to rise in any given market.
- The nature of the product- Markets dealing with luxury goods (e.g. jewellery) tends to grow more rapidly when growth is high. But can suffer severe cutbacks when people are worried about their living standards.
- Changes in taste and fashion- As lifestyles change, new products become more popular while others decline (e.g. Coke and Bottled Water or trend of home cooking)
- Social Changes- The way in which people live may influence product sales. e.g. ready meals for people working longer hours.
Market Share
The percentage of the total sales of a product or service held by one firm or brand.
Formula:
Market share is a good way to measure a company's success as it compares the firm's sales with its competitors.
A company's market share can only increase if the company performs better than its rivals.
