Planning a Budget
Davis Service Group is a large public limited company employing around 17,000 people. Its shares are quoted on the London Stock Exchange.The business is based on service contracts to source, clean and maintain industrial textiles, such as protective clothing and linens. This is across four key sectors: workwear, healthcare, hotels and restaurants, and general facilities, such as washroom linen
Budgets are forward financial plans. They show financial targets over a given period of time for income, expenditure and cash flows within a business. Davis uses budgets to plan the future use of its resources, either in the short or long term. For example, operational areas need to assess the costs of the people needed to meet production targets or the marketing team must determine costs of promoting services to increase sales. Budgets are also communication tools which allow employees to understand where the business is heading.
Section 2 -
Advantages and disadvantages -
There are many advantages to using budgets. They: provide a method of allocating and using resources within the organisation help to monitor and control operations promote forward thinking show employees an overall picture of the direction of the organisation which can motivate staff help to co-ordinate different departments and align them towards shared objectives provide a framework for delegation.
Sensitivity Analysis –
Managers use sensitivity analysis to review different scenarios. They ask questions and consider the impacts of various alternatives (the “what-ifs”). For example:
The economic outlook - What is the overall economic trend for the UK and Europe? For example, increased redundancies during a recession would mean less demand for workwear. A sharp rise in the value of the euro against the British pound would make earnings from Davis” European business more valuable to the company.

Customers - How are customer needs likely to change? For example, some larger clients have been moving from simply buying a textile service to wanting a complete solution to cleanliness and safety needs. Will demand from the hospital sector grow more than that from hotels and restaurants?
Staff - Is the company recruiting sufficient staff? Are salaries high enough to keep vital knowledge and experience within the Group or does Davis need to recruit additional expertise?
Different types of variances –

Variances may be favourable (better than expected) or adverse (worse than expected). Small variances are inevitable and usually not significant. A key task of managers is to watch for variances that are unexpected, either in their size or timing, and take action accordingly.

Adverse variances prompt investigation into what has gone wrong. They may suggest: unrealistic budgeting; budget data may need to be revised or flexed a failure with part of the process a change in the external environment
Assumptions -
A budget needs to make assumptions about how internal and external business conditions will develop and change. Once the effects of these assumptions have been evaluated, managers can set forecasts for sales turnover and costs to meet profit targets. Detailed planning can then follow to estimate the plant capacity, staffing, materials and marketing needed.They ask questions and consider the impacts of various alternatives. For example –

The economic outlook
Competition
Customer needs
Suppliers activity

Variables -

A company's objectives budget is the overall financial plan showing expenditure of the available funds. It is driven by the aims and objectives of the organisation as well as what the organisation can actually accomplish.
Many variables in a business can be budgeted. These include: sales output costs operating and fixed profits cash flow capital investment.
Operating and zero budget –
The budget will be based on key assumptions about likely business conditions for the year ahead. These inform the detailed operating budgets