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All departments of a business are given a budget with which they can conduct the various things that they need to do. For the marketing section of the business this can be quite extensive as they have to do with promotion (one of the biggest financial costs) as well as salaries, paying for research etc.

There are several ways in which businesses can set budgets:

Contents 1 Competitor parity 2 Incremental budgeting 3 Task Based Budgeting 4 Zero Based Budgeting 5 Also See 6 Comments

Competitor parity

This is where the budget for different areas of the business is set so that it is approximately the same, or slightly higher than the amount of money that their closest competitor has spent in the same area. The reasoning behind this is that it means the competitor does not have an edge in any sector and it evens the playing field. However, the spending and costing may be different or different businesses and this could be a wasteful method of setting budgets.

Incremental budgeting

This is where the budget is set a percentage higher than the previous year (normally just above the rate of inflation). This means that the business has a little more to spend each year. However, this encourages managers to be wasteful because if they do not spend their entire budget then it will not be increased therefore possibly costing the business.

Task Based Budgeting

This is where money is allocated for certain, broken down, tasks rather than to the division as a whole. Money will be given for a TV campaign. Different money for an advertising campaign. This can be useful in terms of simplicity but it may mean that the business pays more in the long run.

Zero Based Budgeting

This is probably the best way of setting budgets each year although it takes the longest. Every year each department starts with no budget and must apply for the amount that they feel they will require for the entire year, no extra money will be made available. The reason it takes longer is that every pound applied for must be justified to the board of directors, they will not just give out money it must be deemed to be necessary.

Budget allocation depends on a number of things. Firstly, it depends on the financial reserves of a business. A small sole trader business will not have a lot of money to spend on marketing but a big multinational will be able to afford to spend millions. Also, the company needs to look at the return that they are likely to get from the marketing that is taking place. If extra money will bring lots of extra business then maybe going slightly over the expected budget can be justified but if the results are doubtful then maybe the money could be better spent elsewhere.

Also the target market of the product must be considered because if it is aimed at high income earners then more money must be spent ensuring that the marketing is done in a way that entices those types of customers. Also, in allocating the marketing budget to different products in the product portfolio it must be weighted so that stars and problem children get lots of support whereas cash cows can support themselves and dogs are probably no longer needed.

The marketing budget is required for a number of different types of promotions. It can be used for above the line promotion (where promotion is done through the various media). Also there is below the line promotion (leaflets, free samples on high streets, doorstepping potential clients). The budget also needs to be used for salaries of those in the marketing division, for research (primary and secondary) and also it could be used to run competitions that could lead to the sale of more products.

Also See

Read these other AQA A2 Business Studies Unit 4 revision notes:

• Privatisation
• SWOT Analysis of the UK
• Balance Sheets
• Limitations of Accounts
• Profit and Loss Accounts
• Revenue and Capital Expenditure
• Market Analysis and Decision Making
• Marketing Maths
• Marketing Objectives and Decision Making
• Marketing Budgets
• Corporate Planning
• Management of Change
• Invention, Innovation and Design
• Network and Critical Path Analysis
• Business and the Law
• Employee Participation
• Human Resource Management
• Performance Measurement

Comments

These notes are aimed at people studying for AQA A2 Business Studies Unit 4, but will also be suitable for other courses and exam boards.

Originally submitted by eksman on TSR Forums.