Understanding the Purpose of Budgeting and Alternative Methods

This report discusses the purpose of developing a budget and explores alternative budgeting methods such as traditional budgeting, rolling budget, zero-based budgeting, and activity-based budgeting. It analyzes whether traditional or alternative budgetary systems are appropriate for Boat World Plc, a leisure company planning to open new outlets in Netherlands and Germany.

Business Finance

EXECUTIVE SUMMARY
The Report is based on Boat World Plc which is an international lesiure company that
provides boat on rent to holiday makers. It operates in UK and France. Headquarter of the
company is located in Woking, England. The firm is planning to open a new outlet in
Netherlands and Germany. It has been found out that there are various alternative methods of
budgeting like zero based budgets, activity based budgeting etc. Further, firm should use activity
based budgeting method in future.

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................2
PART 2............................................................................................................................................4
1) Understanding of the purpose of developing budget...............................................................4
2) Application of the methods......................................................................................................6
3) Analyse whether traditional or alternative budgetary system is appropriate...........................7
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

PART 2
1) Understanding of the purpose of developing budget.
Budget -
It is defined as a financial plan that is prepared for a specific period generally one year. It
may involve planned revenue, sales volume, quantity of resource, expenses, cash flow, liabilities
and assets. It may also involve a budget surplus providing money for use at a future point of time
or deficit in which expenditure is more than the income (Mahal and Hossain, 2015).
Role of budget in planning and control -
Budget plays an important role in conducting planning and controlling different activities.
Budget requires proper level of coordination among different types of activities of the company.
For example– Budget will help Boat World Plc to integrate planned expenditure, revenue plans,
requirement of assets such as boats and other need of finance for performing planning to open a
new outlet in Netherlands and two outlets in Germany. It will help to integrate planned activities
of the organization. The coordination function is one of the main advantage of preparing budget.
Traditional Budgeting-
The term traditional budgeting means the method which is used for making budget by the
firm for a particular period under consideration in which the budget of the previous year is
considered as the base by using the budget of the present year. It means that budget of current
year is made by making the changes in the budget of last year. Currently, Boat World Plc is
using traditional budgeting method for preparing budgets (O'Shea, 2018). The advantages and
disadvantages of this method is as follows-
Advantages:
 The role of traditional budgeting is to help in improving coordination between financial
activities of company. Budgeting creates a reference point. It offers a framework of
control that makes it easier to manage the activities.
 It promotes decentralization. As everyone in firm look at previous year spending then
they can decide upon the budget for coming year.
Disadvantage:
 It consumes lot of time and so many resources of the company. The method consumes
time because of spreadsheet.

Alternative Budget Methods -
Rolling Budget:
It refers to a continuous budget that is continuously updated when the previous period of
budget expires. It can also be defined as the extension of current period budget. It is also known
as budget roll-over. Boat World Plc may use different types of rolling budget such as-
Sales budget:
Under this, company will forecast the amount of sales in terms of volume and value.
While preparing this budget, Boat World Plc will consider factors like government policies,
trend of previous period etc.
Benefits-
 One of the major advantage is that planning and control activities will be based on more
accurate budget. It helps to reduce the level of uncertainty in the process of budgeting.
Limitations-
 These types of budgets are time-consuming and costlier than incremental budgets.
 An increase in the work of budgeting may leads to less control of the actual results.
Zero based budgets:
Under this type of budget the process of budgeting starts from zero it means that there is
no history of any expense head, revenue, any department etc. These budgets may be prepared by
Boat World Plc on the inputs provided by each manager with their experience (Ibrahim and et.al,
2017).
Advantage-
 It helps to save the cost related with inefficient operations. It leads to better utilization of the resources.
Disadvantage-
 It is very time-consuming process.
 Lot of paper work is involved in preparation of zero base budgeting.
Activity based budgets:
The budgeting is performed for every type of activity which is required to perform by the
business in order to attain objectives of the firm and develop plans to reduce the expenses on
activity so that, profits can be maximized.

Benefit- It allows balancing the operational requirements of the company. It also highlights the
sources of inefficiencies, imbalance and other areas for improvement.
Limitation-
 Source data is not always easily available from normal reports of accounting.
 Data produced may conflict with performance standard of management.
2) Application of the methods.
Traditional approach-
Under traditional budgeting company will use the budget of previous year and then adjust
the budget on the basis of rate of inflation and for further changes in the business. Boat World
Plc is currently using traditional budgeting approach under this it focuses on the revenue of
previous budget.
For example-
Under traditional method of budgeting Boat World Plc will have to take into
consideration the last year budget that includes last year revenue £250 million etc. This amount
will be adjusted by current year's inflation rate.
Rolling budget-
Under this, rolling budget of Boat World Plc. will include information regarding
expenses, revenue and profits of the company. It is a continuous budget that is modified
throughout the year (Heinrich, Garton and Martin, 2016).
For Example- If, Boat World Plc has prepared budget that covers the month January to
December. When this period ends firm may extend the budget for January.
Zero based budget-
Under this type of budgeting Boat World Plc is required to develop the budget for current
year by starting from zero every year to verify that all the elements of annual budget are relevant,
cost effective etc.
For Example- To prepare zero base budget Boat World Plc will start from zero without using
the actual amount of last year like revenue etc. Then, it will evaluate every source of expenses.
Activity based budget-

Under this, Boat World Plc will not consider last year's budget to develop budget for
current period.
For Example – Firstly, management of firm will identify direct cost related with providing boats
on rent. Then, it will determine indirect cost and then draws stimulation model.
3) Analyse whether traditional or alternative budgetary system is appropriate.
The appropriate approach of budgeting that should be used by Boat World Plc is activity
based budgeting. It will help the management to eliminate all types of unnecessary activities that
may be related with opening a new outlet for providing boats on rent in Netherlands and two
outlets in Germany. This type of budgeting will help company to provide boats at lower cost as
compared with other companies in the industry (Asogwa and Etim, 2017).
Further, activity based budgeting will also help to secure competitive position in the
market. With the help of activity based budgeting the management can easily adjust with the
change in the resources allocated and also helps to improve the transparency and traceability of
resource consumption. It will also provide a clear picture of interrelationship between activities
related with providing boats on rent and resources that are being used for providing boats such as
financial, human, physical and material resource. Moreover, activity based budget is more
appropriate because it offers better insight of the process, product, activity costing and effective
decision-making.
Further, lower level employee's and managers can easily discuss the operational terms
instead of financial terms. Firm should adopt activity based budgeting in future in place of
traditional budgeting because it will help to determine the resources required for producing and
offering boats on rent. Further, this approach of budgeting will support Boat World Plc to focus
on used and unused capacity such as fixed cost (Elias and Etim, 2017). Moreover, it will help
company to integrate the efforts made by different functional units like processes evaluation,
processes re-engineering towards the strategic objectives of the company.
CONCLUSION
From the above Report it has been found out that budget plays a major role in conducting
planning and controlling different activities. Further, the Report has described that traditional
budgeting method consumes time because of the use of spreadsheet. Activity based budgeting
the management to eliminate all types of unnecessary activities.

REFERENCES
Books and Journals -
Asogwa, I.E. and Etim, O.E., 2017. Traditional Budgeting in Today's Business Environment.
Journal of Applied Finance and Banking. 7(3). p.111.
Elias, I. and Etim, O., 2017. Traditional Budgeting in Today’ s Business Environment.
Journal of Applied Finance & Banking. 7(3). pp.1-7.
Heinrich, J., Garton, E. and Martin, B., 2016. Betting on Zero-Based Budgeting’s Trifecta. Bain
& Company. Pobrano z: http://www. bain. com/publications/articles/betting-on-zero-based-
budgetings-trifecta. aspx (8.03. 2017).
Ibrahim, M., and et.al, 2017. Zero-Based Budgeting is a Panacea to Fiscal Distress: Do the
Perceived Benefits Significantly Influence its Adoption in Borno State?. Saudi Journal of
Business and Management Studies. 2(10). pp.943-950.
Mahal, I. and Hossain, M.A., 2015. Activity-Based Costing (ABC)–An Effective Tool for Better
Management. Research Journal of Finance and Accounting. 6(4). pp.66-74.
O'Shea, J.P., 2018. Viability of Zero-Based Budgeting Methods in the City of Albuquerque.
Lorain, M.A., García Domonte, A. and Sastre Peláez, F., 2015. Traditional budgeting during
financial crisis.