The two main costs that need to be managed are fixed costs and variable costs. Fixed costs are costs that do not charge, regardless of the number of goods that are sold or services that are offered. These include rent, insurance and salaries, these costs have to be paid. Variable costs are costs that change according to output. These are directly linked to how many products are made. Budgeting is difficult as it seeks to give a guide to how much businesses think it will spend. Businesses can use zero budgeting or allocated budgeting. Zero includes no budget but approval from managers, whereas allocated divides money into departments and people working in these areas. There must always be some kind of control over costs as the business has to be coordinated to ensure they can try to always make profit. If costs were not controlled expenditures may be consistently made and certain parts of the business may be at a disadvantage which will not help the business to move forward as a whole.
Break even is the point at which businesses have used calculations that they have made out of fixed costs, variable costs and sales to work out the point at which their costs equal their sales. It shows how many products they need to produce and sell, or services they need to offer, to get to the point where they are neither making a profit or a loss. Calculating break-even allows a business to work out how many products they need to sell before they can actually start to make a profit, this is essential as for the business to be successful there needs to be profit made and preferably enough of a profit to invest money back into the business to improve it further. Break-even can provides quick results. It allows businesses to forecast what might happen to their business if sales go down or costs go up which will help owners in advance to prepare and keep their businesses up and running. Once a business has worked out a break-even point, it knows the levels which it must reach or keep to in order to become profitable which is the aim of many businesses unless they are non-for-profit.
Budgeting is when money is allocated for a budget and divided according to how many departments and people are working there. The budget is usually set at the start of a financial year and the business must ensure each month that the predictions are being stuck to. if sales are higher than budgeted, this is likely to be positive for the business, but if costs are higher this could lead to lower profits or problems paying business expenses.
Variance analysis is the outcome of measuring the difference between what is budgeted and the actual costs or sales revenue that has been received. If the result is better than the company expected, an example being, the sales revenues are higher or costs are lower, this variance is known as favorable. If sales are lower and costs are higher this is known as adverse. Monitoring variances is very important as if the business notices adverse early they can make changes to make sure they get back on track and prevent the business from losing more profit.
Bidding for resources and reserves occur when businesses realize that they do not have enough money available in their budgets to expand or buy new equipment, for example. They bid for additional funding through capital grant or ask others to invest. This type of budget funding is particularly important for public sector businesses as they are often funded on a short term basis. Controlling funding that business can get from elsewhere is key as the business may not be able to be successful on its own. Some owners choose to increase future resources by investment, shares are an example or how private and public limited companies may choose to do this. Smaller businesses may not have shares to offer and so may go to banks or try to get a grant. Reserves are key to balance as this will decrease the chance that your budgeting is ruined by problems that may occur within the business each year.