Analyse the reasons why costs need to be controlled to budget
A budget is an estimation of the revenue and expenses the business are expected to reach over a specific period of time. There are many reasons why costs need to be controlled to budget; if they are not it can lead to many problems.
If costs are not controlled or monitored to budget it can lead to many problems. The first problem that they could have is they won’t be able to achieve their goals and objectives. This is because a budget sets objectives and targets in which the business expect to reach. For instance, they may budget a certain amount of money on costs. If they overspend of costs it means they haven’t reached their goal and would mean the business wouldn’t be able to move forward.
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Furthermore, if they do not control their budget it will also lead to an adverse variance and a decrease in profits. This is because, when businesses overspend than they budgeted for, their costs will go up and the profit will fall; they may even make losses. This means they wouldn’t be able to pay their monthly bills or declare dividends to their shareholders.
Additionally, not keeping to the budget will affect other departments in the business. This is because if they overspend in one department they will need extra funds and this money may come from other departments. This means that other areas won’t be getting as much money which could impact the businesses performance.
Moreover, not monitoring the budget would mean that they won’t have money for other expenses. This is because they will need extra cash to pay for the overspending meaning they won’t have the money to pay for monthly bills. For instance, they won’t be able to pay for their staffs salaries and wages or pay their suppliers to gain raw materials. This means that the businesses efficiency will fall.
Also, not keeping to budgets means that the business could take the money to pay for the over expense out of the reserve funds. This means if the business is ever in an emergency and need to use money to resolve the issue, they won’t be able to due to already spending it. For example, if their machinery breaks down and they need to replace it, they won’t have money to do so which means they wouldn’t be able to produce products.
In addition, if costs are not controlled it would affect the long term expansion of the business. This is because the business would need to use their extra funds to fund the extra costs. Therefore they will not have any money to expand the business and won’t be able to increase the profits they make with the expansion.
It will also make you less competitive in the market. This is because the business won’t have the money to expand or have promotions to compete with similar businesses. They also won’t have the money to introduce new products which could attract more customers. Furthermore, they won’t be reaching their objectives and goals so they wouldn’t be able to move forward as a business and be more successful than their competitors.
Costs need to be controlled because if they are not they won’t be able to take advantage of discounts to buy raw materials in bulk. This is because they will be using extra funds to fund the overspending therefore they won’t be able to buy large sums of raw materials. The supplier may have discounts for buying in bulk and therefore won’t be able to take advantage of these deals and will be missing out.
The next reason why costs need to be controlled to budget is they won’t be able to produce as many products. If the businesses costs increase it will mean they will have to pay more money for less supplies. Therefore they won’t be making as many products meaning they won’t be making as much money. This will affect their profit levels greatly.
Furthermore, they may be forced to increase the selling price of their products. This is because the business need to make more money and this is a way to do so. However this could affect their sales as customers may not want to buy from them and may go elsewhere.
Lastly, they will need to control costs to prevent debt and bankruptcy. This is because the business may use up all their money on funding the overspending and it may lead them little money to provide a service. Therefore the business may end up having no money and may go bankrupt. Or they could be in debt from getting loans.
Overall, it’s important to control costs to budgets as if the business don’t, it can lead to many consequences.