Zero-Based Budget: A Framework for Efficient Business Operations

The provided report discusses the importance of budgeting in business operations, highlighting the use of zero-based budgeting as a framework for controlling costs and increasing efficiency. The report explores various modern techniques and methods used by companies to prepare budgets, including identifying wasteful activities and allocating resources efficiently. It also emphasizes the benefits of increased communication in business operations. The report concludes that budgeting provides a framework for companies to control their operations and increase efficiency, resulting in reduced costs and improved profit margins.

BUDGET - REPORT

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................1
PART 1............................................................................................................................................1
i) Role of Budget in development of business.............................................................................1
ii) Application of traditional budgeting approach to plan for future cost management...............3
(iii) Analysis of traditional budgetary system..............................................................................4
PART 2............................................................................................................................................5
iv) Evaluation of alternative Budget Methods.............................................................................5
v) Potential application of different budgeting method...............................................................6
vi) Analysis of various budgeting methods in context of Snappy Drinks Plc.............................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

EXECUTIVE SUMMARY
This report summaries about the Budget report, it is a report which is used internally by
the managers to compare the actual performance with the budgeted performance. Basically a
budget report is designed to find out the difference in the actual performance and the estimated
or budgeted projections for an specific period of time. The following report contains the detailed
analysis of traditional budget and the role of budget in development of business. It also states the
other different alternative methods which can be used in preparation of budget. It also shows the
application of different methods in order to enhance the company's financial position.
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PART 1
i) Role of Budget in development of business
A budget is a list of all expected expenses which a company can incur and the revenues
which a company can generate over a specific period of time (Bentley, Omer and Sharp, 2013).
It is a formal report which shows the company's performance and profit which a company can
generate from its operations during an accounting period. Managers use it as a tool to identify the
problems and improve the efficiency of its business operations in order to improve its financial
position. In Snappy Drinks Plc, managers also uses budget as a tool to find out the variance in
the estimated and actual performance of a company. It also prepares budget to find out the
expected revenue which it can generate after the launch of its new product and setting up of a
new venture. Some of the purpose of budget is as discussed below:
 Forecast of Expenditure and Income: Budget is used as a tool for forecasting expenses
which can be incurred by company to generate its revenue from its business operations.
Managers uses previous year's budget to analyse the company's performance and identify
the reasons due to which company was not able to achieve its expected performance. In
Snappy Drinks Plc company manager forecast the sales of its new product health led
energy Drinks. As well as the expense which can incur in the establishment of new
venture.
 Helpful in Controlling: Budget provide a complete framework to the managers which
can be used to control the expense and improve the efficiency of its business operation to
reduce the cost of production and increase its profit margin. It help managers to control
all the unnecessary cost and keep a track of uses of its funds flow. In Snappy Drinks Plc,
managers control all unnecessary expenses and keep a check on its business operations to
improve the financial position of the company.
 Tool for Decision Making: Budget is used as a tool in decision making process because
it provides all the needed information for decision making. (Chan, Chang and Chang,
2013). Managers uses budget to identify problems and formulate new and effective
policy and strategies to overcome these problems and enhance its efficiency of business
operations. In Snappy Drinks Plc managers analyse the previous budgets and uses those
budget in the decision making process to launch its new and health led drink.
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Above are the various roles of budget which help company to improve its financial
position and sustainability in the market. In order to prepare the budget, company has to follow
the step by step process of budget formation. Following are the steps involved:
 Obtaining estimates: The first step involved in the process of budget formation is to
collect the estimates from different department involved in the production process in
order to estimate the expense which company may incur during its operations. In Snappy
Drinks Plc managers gather all the required information from various department which
are involved in the product in process.
 Coordination of Estimates: The second most important step involved in the preparation
of budget is to coordinate amongst the various estimates collected from different
departments. In Snappy Drinks Plc managers coordinate amongst the various departments
which are involved in the manufacturing of its new product.
 Communication of Budget: The third most important step of budget preparation is the
communication of budget, it is important for the company to communicate its budget to
the responsible person. Communication of budget is important as manger collect the
feedbacks and suggestions from different departments and employees and make
necessary corrections. In Snappy Drinks Plc managers communicate its budget to the top
level of management and different departments to make necessary changes in order to
achieve its organisational goal.
 Implementation of Budget: Implementation of the budget is the final step involved in a
process of formation of a budget. In this step, managers implement the budget after
considering all feedbacks and suggestion from various departments and employees. In
Snappy Drinks Plc managers implement the budget and try to continue its operations as
per the estimates given in the budget in order to achieve the desired, expected result.
Steps involved in budget making process can be helpful for the companies to achieve its
organisational goal along with its business development (David and Halbert, 2014). Budget
making process provides the various estimates from each departments which help managers to
find out the problems and the department which is incurring extra cost and make proper
strategies to overcome those problems and achieve its organisational goal and develop its
business. The budget process assist the administration to make the production process more
smooth and flexible and provide desired benefits for sustainable growth of business.
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ii) Application of traditional budgeting approach to plan for future cost management
Traditional budget is a method of preparing budget for the company in which the budget
made in the previous year is taken as a base for preparing a new budget. While preparing budget
with the help of this method companies prepare budget by making necessary change in the
previous budget arises due to the inflation rate. Following is the type of budget similar to
traditional budget:
Incremental Budget: Incremental Budget is a types of budget in which the new budget
is formed on the basis previous year data after adding the incremented amount. This type of
budgets help the managers to identify the problems and implement new strategies to overcome
these problems and enhance the operational efficiency of a business to reduce its cost of
production and increase the profit margin resulting in the improvement of its financial position
(Laitinen, 2013). As in the case of Snappy Drinks Plc, it is also planning to launch its new range
of product health led energy drinks. It is also planning to set up a new manufacturing plan by
entering into a new business venture.
Flexible budget- The flexible budget is a type of budget that can change as the change in
sells and volume. Eventually, this budget is easy to use because it allows to the companies to do
change as their need. Herein, the aspect of Snappy drink company they can make this budget for
new venture because they do not know about the future sells and growth of their new business.
As well as this new budget can help them in making suitable change as their sell and other
factors change.
In the above given case, Snappy Drinks Plc uses the traditional budget approach to
prepare its budget and it has proved to be successful since the last 15 years. With the help of this
budget, company has grow its business to an international level and now its planing to launch a
new health drink. The revenue generated with the help of this budget in the last year was
recorded as £550 millions. The budgeting approach help managers of Snappy Drinks Plc to
identify the areas in which it can reduce its cost and maximize its profit margin to improve its
financial conditions. As well as traditional budget approach can help them in proper cost
management in future. This is why because they are using this budget approach since 15 years
and they are success. For example if they make budget on the basis of traditional budgeted
approach for their new drink products then they would be able to use optimal utilization of the
resources.
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(iii) Analysis of traditional budgetary system
Traditional budget is considered as one of the oldest techniques which is used by
companies to prepare budgets for the company. In this type of budget approach managers only
adjusts various expense and add new expenses in it and adjust the changes which it can incur in
its income (Mullins, 2014). The expense incurred in the previous year to generate the revenue
from its business operations form an integral part in the preparation of budget for the current
year. This type of budget is mostly used by companies who are going into a new venture or
launching new product. Now there are several budget formation techniques commonly used by
companies to improve its business operations and reduce the cost of product to maximize its
profit. But in the case of Snappy Drinks plc company is entering in to a new venture and cannot
use traditional method in order to calculate the estimated income which it can generate with the
launch of its new product and the expenses which can be incurred. Following are the various
advantages and disadvantages of it:
Advantages:
 It is a type of budget which helps managers to keep check on its business expenditure in
order to control the cost and increase its profit margin.
 It act as a framework which help managers to properly control its operations and identify
the problems.
 This type of budget requires previous data and is easy to implement and also it does not
include complexity.
Disadvantages:
 One of the main disadvantage of this type of method is that it does not focuses on the
proper allocation of resources. It only make adjustments in the new budgets and does not
focus on the effective and efficient use of its resources.
 Traditional budget is made on the basis of previous budget therefore it lacks flexibility
making its difficult for the managers make changes.
 As compared to modern techniques of budget formation it consumes more time in
formation of new budget.
The above analysis of traditional budgetary system states that Snappy Drinks Plc can use
traditional budget system. if it wants to increase efficiency in operations then it needs to start
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new product line. New venture to set up its manufacturing plant to enhance its products in order
to survive in the long run company needs to change its budgeting methods.
PART 2
iv) Evaluation of alternative Budget Methods
The alternative budget methods are as follows:-
Activity Based Budget: Activity Based Budget is a methods in which company prepares
the budget on the basis of various activities involved in the business operations. It a method used
by companies to identify the individual cost of each activity through which a product passes
during manufacturing process (Rogers and Makonnen, 2014). It help managers to identify the
activity due to which company is incurring additional cost and reduce the activities not required.
This type of budget help managers to allocate its cost to every activity and identify the
activity resulting in the additional cost and implement strategies to over come that activity and
improve its operational activities.
This budget is not suitable for long time period. It can be beneficial for short time period.
Rolling Budget: Rolling budget is a techniques of preparation of budget in which a
budget is updated regularly. The change may arise due to change in the cost of procurement of
raw material, inflation and various other factors. This type of budget is used by companies to add
sudden expense which were missed during the preparation of original budget. This type of
budget can be changed at any time required by the managers.
The main benefit of the using the rolling budget is that it can be changed at any time and
all the cost and various expense can be added which were missed during the preparation of
original budget.
The limitation of this type of budget is that it becomes very expensive for the companies
as it is updated regularly which increases the paper work for the company.
Zero Based Budget: Zero based budget is a type of budget in which managers produce
the budget from the zero level (About zero based budget. 2018.). In this type of budget formation
approach where managers analyses the budget of past years and formulate new budget for a
specific period of time. In this type of budget every entry in the budget needs a justification. It
also re evaluate the cash flow items to reduce the cost of production and improve company's
financial position.
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This type of budget is very different from traditional budget, it includes various cash flow
item and the source where company can incur expense with a clear justification.
v) Potential application of different budgeting method
There are various types of budget which can help company to improve its operational
efficiency and reduce its cost (Storey, 2016). As given in the case that Snappy Drinks Plc wants
to launch a new product in that case zero based budgeting method is the most suitable method
which can help company to prepare its budget and identify the problems and formulate new
strategies to overcome those problems. Following are the benefits of using zero based budget:
 Accuracy: This type of budget provides the accurate data and brings accuracy in the
working as it gives a clear justification of every enter present in the budget.
 Cost Effective: This type of budget preparation does not involve additional cost and is
very cost effective.
 Safe and Secure: In this of budget data are safe and secure as this budget also provides a
clear justification of every entry.
This type of budget is helpful for the company as they want to set up a new
manufacturing unit and launch its new product which requires justification of every entry. Apart
from it the above mentioned budgets are very crucial in the context of Snappy drink company's
new manufacturing venture and for new businesses. Among these budget zero based budget can
be beneficial for the company because it provides accuracy in the result as well as in this each
activity has the justification. If above drink company applies this budget then it can be beneficial
for them.
vi) Analysis of various budgeting methods in context of Snappy Drinks Plc
As given in the case company, Snappy Drinks Plc wants to establish a new venture in
order to set up a new manufacturing plant and it is also planing to launch a new health led energy
drink and enter into new market (Vasant, 2012). From the above analysis of various new and
modern budgeting methods it can be recommended that company should follow the zero based
budget as they want to launch a product they need a justification for every cost added in the
budget and various sources through which it can generate its revenue. The reasons for this
suggestion are as discussed below:
 Proper Allocation of Resources: The resource are allocated efficiently using this type of
method of budget as it does not uses previous data it starts from the zero level and
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provides the justification of every entry added in the budget. managers identify the need
of resources and properly allocate its resource for optimum utilization.
 Identifying Wasteful Activities: It is a type of budget which is used by managers to
identify the resources which are incurring additional cost, managers identify those
activities and take strategic decisions to reduce those activities.
 Increased Communication: With the help of this type of budget company can increase
its efficiency in communication as it will provide the justification of every entry of
expense in operations (Morris, 2012).
CONCLUSION
From the above report, it can be concluded that budget provides a framework to the
companies to control its business operations and increase its efficiency resulting in the reduction
of the cost and increase its profit margin. This report also highlights the various new and modern
techniques used by companies to prepare the budget. This report also explains the various
alternative methods of budget formation and process which are involved in the process of
making budget for company.
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REFERENCES
Books and Journals
Bentley, K. A., Omer, T. C. and Sharp, N. Y., 2013. Business strategy, financial reporting
irregularities, and audit effort. Contemporary Accounting Research. 30(2). pp.780-817.
Chan, K. C., Chang, C. H. and Chang, Y., 2013. Ranking of finance journals: Some Google
Scholar citation perspectives. Journal of Empirical Finance. 21. pp.241-250.
David, L. and Halbert, L., 2014. Finance capital, actor-network theory and the struggle over
calculative agencies in the business property markets of Mexico City Metropolitan
Region. Regional Studies. 48(3). pp.516-529.
Laitinen, E .K., 2013. Financial and non-financial variables in predicting failure of small
business reorganisation.International Journal of Accounting and Finance. 4(1) pp.1-34.
Morris, T., 2012.Innovations in Banking (RLE: Banking & Finance): Business Strategies and
Employee Relations. Routledge.
Mullins, J., 2014. The customer-funded business: Start, finance, or grow your company with your
customers' cash. John Wiley & Sons.
Rogers, S. and Makonnen, R., 2014.Entrepreneurial finance: Finance and business strategies for
the serious entrepreneur. New York: McGraw-Hill Education.
Storey, D. J., 2016.Understanding the small business sector. Routledge.
Vasant, P .M. ed., 2012.Meta-heuristics optimization algorithms in engineering, business,
economics, and finance. IGI Global.
Online :
About zero based budget. 2018. [online]. Available through:
<https://www.turfmagazine.com/business-management/zero-based-budgeting/>
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