Budgeting in Organizations: Process, Purpose, and Types

This report contains an introduction to budgeting in organizations, the process of budgeting as well as the purpose of the process to a firm, country and an institution. Further the report outlines the traditional budgetary process and its application to the current world. The report further defines three different kinds of budgets which are, zero-based, activity based and the rolling budget. Finally this report concludes with recommends the best budget which the Snappy Drinks could have used.

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Running head: BUSINESS FINANCE
Business Finance
Student’s Name
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Date

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BUSINESS FINANCE
Executive summary
This report contains an introduction to budgeting in organizations, the process of budgeting as
well as the purpose of the process to a firm, country and an institution. Further the report outlines
the traditional budgetary process and its application to the current world. The report further
defines three different kinds of budgets which are, zero-based, activity based and the rolling
budget. Finally this report concludes with recommends the best budget which the Snappy Drinks
could have used.
{1}
The budgeting process
Budgeting refers to the process of designing, implementation and operation an
organization operation in a single budget. Budgeting g can also be said to be the planning
process, preparation, the control procedure and any other activity or procedure involved in this
whole process of preparing a budget (Clark, 2011 pp 576-593). This process represents the
highest accounting level which is used for future reference as it does not only contain reporting
information but also a particular cause of action is provided. Budgeting is part of the
management policies, long-range financial planning, capital expenditure, project management,
and cash flow. A budget is an economic and operating plan spelling out the management target
which they aim at attaining on a forecast basis. A budget is a specific target that Snappy Drinks
is supposed to puts forward and works to achieve it through all available means.
Objectives and the purpose of preparing a budget

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The primary and overall goal of a budget is to help an organization nation or even an
institution to plan the different operational phases in a business, a government or an institution,
coordination of various activities in the available departments of the firm, nation or of the
institution to ensure that adequate control is achieved. For the above purpose to be accomplished
a budget has to aim at attaining several objectives as follows;
 Acceleration of departments or divisions efficiency and the firms, nation or institutions
cost centers.
 Deciding in the capitalization composition to ensure that funds are available at a
reasonable cost.
 Coordination of departmental efforts in the organization towards achieving a common
objective.
 The anticipation of the future financial conditions of a firm as well as the needs for
money to be used in the business to keep it in a solvent form.
 Prognosticate the future sales of a firm, costs of production and other firm expenses;
this is for the firm to earn income amount and minimization of the business losses as
desired.
 Fixing responsibility to departmental heads.
 Ensuring productive firms cash and inventory control.
Budget preparation process in Snappy Drinks is supposed to kicks off after managers
have received marketing objectives and forecasts from the top management for the coming year
which is accompanied with a calendar of events stating hen the budget should be complete.
Marketing objectives from senior management and financial forecasts provide a guideline for
departmental budgeting preparation. The initial stage of budget preparation is sales estimate

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preparation (Abalos, Smith, Grant, Drury, MacKell & Wagner-Riddle, 2016 p76). This estimate
requires intensive market research and the current situation of the market. After the research
individual projection of what the market would be for the period of operation of the prepared
budget is recorded. This process takes several factors into consideration including both the
external and internal. The sale department is the one responsible for the preparation and
recommending the sale budget. The sale budget goes hand in hand with another budget which
includes all the expenses for sailing and distributing. The two combined budgets for Snappy
Drinks will provide the net revenue on sales which are forecasted for the coming year.
After the sales budget is prepared for Snappy Drinks, the firm’s production budget will
also be developed. This budget relies on the sales budget to consider the amount of the expected
goods; minimum and maximum stock the firm is expected to hold in raw material form and
finished products. Furthermore, this budget will rely on the capacity of the Snappy Drinks
equipment and machines as well s other production factors in the industry (Fauré and Rouleau,
2011 pp167-182). After the preparation of this budget, it can now be converted to a production
cost budget. This budget comprises of material cost, labor cost, and overhead budgets. After this
capital budget is prepared this outlines the estimate of payment to be received on capital account
in comparison to revenue account. After capital account budget a cash budget is prepared which
shows the amount and individually received on revenue account. Once all the budgets are ready,
the master budget is then made. And this is achieved by combining all the other prepared
budgets.
Budgeting is one of the most critical tools in operations of Snappy Drinks. This process is
associated with several advantages to the firm as follows; it helps an organization to remain
focused; it forms the basis of motivation to employees as they work towards sustaining the set

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budget. On the other hand, budgeting simplifies managers’ work while helping them to offer
services more effectively and efficiently. Through budgeting, Snappy Drinks will be able to
achieve their long and short term set goals more perfectly (Fauré and Rouleau, 2011 pp167-182).
{2}
Traditional budgeting refers to a method of preparing a budget whereby the ended year
budget is taken into consideration and acts as the base. The upcoming year budget is prepared
through the introduction of several changes in the lasts year’s budget. This is done through
adjusting several changes such as expenses after considering the inflation rate of the market, the
users demand in the market, the situation of the market currently and many other considerations
such an s government policies. Revenues and costs of previous years form a very crucial part of
the current year’s budget drafting (Mao and Humphrey, 2013 pp67-78). This budgetary process
will have several advantages to Snappy Drinks which includes; it is not complicated to
implement, it provides stability factor in the firm as few things only change, this budgetary
process promotes decentralization where every branch is independent like in the case of most
banks. Furthermore, this method of budgeting provides an opportunity for s firm to consolidate
several projects of the firm to a significant major project. Finally, traditional budgeting is easy to
prepare, and it requires less time to get it done; hence it is not complicated.
Snappy Drinks Plc incidental budget would have appeared as;

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Description:
Incidental budgeting
2018 2019
EUR Expenses Estimated expense
diff
Ratio 1%
-4%
Total Snappy Drinks Plc
revenues
550 600 587
13
Wages
Goods and services
Capital expenditure
Own revenue
Total revenue
Total expenses
2340
2400
1600
550
1
3940
2590 1780
810
2300 2200
100
1750 1600
150
502 603
(-101)
1 1
4340 4400
(-60)
{3}
Traditional budget takes into consideration the past trends of other budgets, and hence it
is a crucial part in the preparation of several budgets of a firm as follows; traditional budgetary
process can be used to prepare a sales budget, this can be achieved through looking at the past
several years trend on the sales the company made and through that a forecast can be quickly
arrived at. This is referred to as the most appropriate way to prepare a sale budget s history gives
a precise figure of what it is expected in the coming years (Hope and Fraser, 2010 p30). If the
trend has been a decrease in the sale, the firm will be able to plan for that and vice versa. In the
case of Snappy Drinks, the firm will be able to provide a precise forecast of the future expected
sales volume s for the past fifteen years they have gained more knowledge of the market and

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referring to the trend of the past fifteen years the company will be able to draft a better sales
budget.
Moreover, traditional budgeting is also crucial in the preparation of the production
budget; this is a similar case to the sale budget as the production budget heavily depends on the
sale budget. Through the use of past data on the production volumes and inventory holding
capacity of the firm a clear and appropriate production budget will be quickly arrived at. The
future forecast mostly depends on history and other factors to help in forecasting (Atrill,
McLaney and McLaney, 2015 p89). Referring to the past several year's of operation of Snappy
Drinks, traditional budgets will help a firm in the realization of the correct target or objective to
set. Trough referring to the preceding year’s budget the firm can be able to make decisions on
whether to employ more workers or retrench (Ibrahim and Proctor, 2012). For the case of
Snappy Drinks, more workers need to be added the company has planned to add on to its
production budget. This is as a result of the increase in market sale both domestically and
internationally.
{4}
A rolling budget refers to a revised financial plan sets for the future accounting period.
This method is used to replace the previous year in a continuous budgeting system. This is a new
and updated budget that replaces one another after the period of service expires. Rolling budget
tries to simplify the incremental budget through setting budgets on a quarterly or monthly basis
every year (Zeller and Metzger, 2013 pp299-310). After every quarter a budgeting process is
undertaken. It presents budgeting as a continuous process. This kind of budgeting is mostly used

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by service companies who develop more than three budgets in a whole year. This budget will
help Snappy Drinks in reducing any long term risk that a firm can face by making a complex
yearly budget which will be hard to subject to changes.
Zero-based budgeting is a budgeting process which starts at zero every time a new budget
is being drafted each budget for every department is expected to be justifiable in zero-based
budgeting. Zero-based budgets require in-depth research and look on every transaction as well as
departmental needs (Weetman, P. 2010 pp76-80). This budgetary process will help Snappy
Drinks in tracking every purchase and preventing wasteful spending. This has brought several
reforms to incremental budgeting, as through additional budgeting employees’ takes advantage
and makes unnecessary and wasteful spending leading to losses (Hansen, 2011 pp289-319). Most
of the businesses today are encouraging the application of this budgetary process as it presents
itself to be more accurate as well as cost-saving budget to a company in making future forecasts.
The fiscal process improves the incremental budget through the introduction of zero starts and
hence every department has to track and justify all the listed needs in the budget and their
recommendation on it is required centrally to the incremental budget.
Activity-based budgeting is a process of budgeting which researches, records and makes
the analysis of the activities that leads to business expenses. This process is considered more than
just minor adjustment of the previously available budgets as in the case of incremental
budgeting. In Activity-based budgeting, research is conducted to look for business operation
efficiencies, and a budget is developed from the evidence gathered of similar activities (Pyhrr,
2012 pp677-696). Contrary to incremental budgeting activity-based budget advocates for
intensive market research on all the activities which brings forth cost to a firm and considers
them. Progressive budget, on the other hand, advocates for adjusting of cost values of the past

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events recorded on the previous budget in consideration ton inflation and other issues in the
market.
Recommendations
{5}
The budgeting process has five main elements which all are and can potentially be
applied to Snappy Drinks to improve the business model and also the market performance both
the domestically and internationally. The first element of budgeting is; be comprehensive. This
means that the individuals who are responsible for planning and coming up with the budget
should be prepared to spend a lot of time to research and come out with a satisfying budget. For a
successful budget to be produced comprehensiveness plays a significant role in categorising
expenses and incomes and including every aspect in the list (Schick, 2010 pp1-15). The Finance
Director, Hayley, and Donna and other individuals in the company should be prepared to spend a
lot of time to come out with the best budget which will support all the set expansion mission and
objective of the company.
The second element of budgeting is the capability to be able to understand one's capacity.
Having survived for more than fifteen years, the company should at now be able to classify her
need and priorities and hence to list off non-necessities in the budget (Schick, 2010 pp1-15). As
the company has already done, it has clearly defined her goals on adding other products in her
production proceed. In budgeting, a firm is first required to list down all the set goals and then
start planning on how the budgeting process will help in attaining the goals. Snappy Drinks has
already succeeded in this stage, and hence more strategies need to be looked at and to identify
how the budget to be released will enable the company to achieve her set goals.

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{6}
Having been in operation for more than fifteen years, Snappy Drinks can be able to use
the activity-based budgeting in drafting the next operational year’s budget and notices a big
difference. Through the application of this budget process, the company will not only update the
past years budget but also the company will be able to eliminate wasteful spending by her
departments and also track all the transactions of an activity involved in the budget to make
better forecasts in the future (Clark, 2011 pp576-593). Moreover, the company can also use a
rolling budget. Through this, the company will have evaded from budget risks that may be
associated with the yearly budget. More so the company will be able to learn the market ell as
compared to budgeting for the whole financial year.
Through the use of activity-based budget, Snappy Drinks will be able to write off some
expenses included in the past financial year’s budget which may have been the root cause of
reduced income enjoyed by the company. Tracking and introducing integrity in every process as
activity-based budget advocates will hold in coming up with the best budget for Snappy Drinks
to the next year. More so the company can combine both rolling and activity-based budgeting to
have the best-desired result after every quarter or after every budget service period (Zezhong
Xiao, Weetman and Sun, 2014 pp76-90). A combination of the two budgeting process will help
the company to generate more revenue and have a better market share as compared to those firms
using incremental budgeting process.

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Conclusion
Budgeting refers to the planning process, preparation, the control procedure and any other
activity or procedure involved in this whole process of preparing a budget. The primary and
overall purpose of a budget is to help an organization nation or even an institution to plan the
different operational phases in a business, a country or an institution, coordination of various
activities in the available departments of the firm, nation or of the institution to ensure that
adequate control is achieved. The initial stage of budget preparation in Snappy Drinks will be
sales estimate preparation. After the sales budget is prepared, the firms’ production budget is also
developed. Once all the budgets are ready, the master budget is then made.
Traditional budgeting refers to a method of preparing a budget whereby the ended year
budget is taken into consideration and acts as the base. A rolling budget is used to replace the
previous year in a continuous budgeting system. On the other hand, activity-based budgeting is a
process of budgeting which researches, records and makes the analysis of the activities that leads
to business expenses (Drury, C. 2005 p98). Finally, Zero-based budgeting is a budgeting process
which starts at zero every time a new budget is being drafted each budget for every department is
expected to be justifiable in zero-based budgeting.

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