Analyse the reasons why costs need to be controlled to a budget
?M4-Analyse the reasons why costs need to be controlled to a budget. Give at least 4 examples of the negative effects of exceeding financial budgets and how it affects the business. Example of costs Variances and whether they are adverse (A) or favourable(F) over the three months (Nov, Dec, Jan) Identify the possible reasons for these variances Materials On budget Petrol 20 Adverse Petrol prices went up. Wages On budget Advertising 150 Adverse
The person in control of advertising didn’t budget effectively and anticipated the prices wrong or they took out a marketing campaign that was substantially higher than they expected. Insurance 300 Adverse They could’ve renewed their insurance but if this is the case then they should’ve known how much the insurance was going to cost. Alternatively they could’ve had a claim within the 3 months. Factory rental 20 Adverse The landlord the company are renting their land from may have put up his rental prices or perhaps they slightly expanded their factory within the 3 months.
Bank loan payment 75 Adverse The interest rate may have increased and they weren’t aware of this. Equally in previous months they could have paid less to the bank and therefore had to catch up during these 3 months and paid more. Van Payment 60 Favourable An adverse variance in petrol would arise the problem of trying to limit the amount you transport. They can do this by comparing the petrol prices of local petrol stations and then using the cheapest proven one.
An adverse in advertising would cause a problem as the company may need to decrease how much they advertise, which could cause the business to become less known or they could limit their advertising to only market their product at prime times. In order to do this they could predominantly advertise their product before Christmas or if their product is predominantly seasonal then advertise it during peak times e. g. in summer or winter. A 300 adverse variance for insurance as this means they have less money to spend on liabilities and will need to ensure they aren’t going to make any claims as this will increase the insurance further.
In order to do this they will need to improve their health and safety around their offices and stores and also the regularly check the maintenance of any vehicles they own. If the landlord has decided to increase the factories rent then there is nothing the company can predominantly do help this, whereas if the business has expanded the factory then this shouldn’t become problematic for the company as they should be producing more and therefore increasing sales to bring in more revenue for their expenses.
The problem the business has with an adverse on bank loans is that the interest can go up and will not decrease just because they are unable to pay the substantial amount one month the payments should be paid consistently and at the same price every month as they are a debt that should be cleared as soon as possible. D3- As a result of these adverse variances I am writing a report about the problems caused when you don’t check your costs and budgets and when you are spending more than you have.
If a business is unable to manage their costs and budgets they then become incapable of paying their expenses, for example electricity, gas and other bills. Alternatively spending money the business hasn’t got results in the business owing debts. If you don’t manage your finances you can have outstanding debts, from external sources like banks. When a business takes out a loan from the bank they agree in a contract to the terms and conditions the bank set.
These standards are expected to be met even if you find your company struggling to keep up with payments. The business will also be expected to pay interest on the loan, small businesses will pay a different amount of interest on the loan than bigger businesses and these interest rates will be determined by the circumstances of the business. A bank could impose a legal binding covenant before a loan is issued. If this condition is breached, the bank can order the business to repay the loan immediately.
The staff can also be affected by the lack of control on a company’s finances. This can cause the staff members to feel unappreciated and can result in them becoming demotivated and not producing a high standard of work, in severe circumstances the staff can strike. Moreover the suppliers won’t continue to supply the goods required to operate and without the goods the customers won’t be able to buy the products, from the company, this could lead to the customers starting to go to competitors as they will have to look elsewhere.
In addition to this the shareholders won’t get the right amount of money required from the profits, resulting in disputes and legal cases within the business. Other shareholders will then not want to continue investing in the business and give the business a bad reputation. Overall when a business does not manage their costs to a budget they damage their business, mostly the three main elements; staff, suppliers and customers which is the most important parts of criteria when successfully running a business.