Importance of Zero Based Budgeting

The assignment discusses the significance of zero-based budgeting in business finance, emphasizing its role in effective planning, control, and resource management. It highlights how this approach can help businesses identify wasteful activities, motivate staff by providing more authority and responsibility, and increase communication among employees.

BUSINESS FINANCE

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................1
PART 1............................................................................................................................................1
(i) Role of budgets in the development of business model..........................................................1
(ii) Application of traditional budget approach for future cost management..............................3
(iii) Traditional budget is appropriate to all or some part of business in future form..................4
PART 2............................................................................................................................................5
(iv) Explanation of rolling, zero based and activity based budget...............................................5
(v) The potential application of above mentioned budgets..........................................................6
(vi) Analysis of zero based, activity based and rolling budgets in the context of snappy
company.......................................................................................................................................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

EXECUTIVE SUMMARY
The project summarise about business finance and and role of budgets in the context of
organisations. Eventually, it is important to manage the financial activities effectively because
without their management this would be difficult to efficient use of finance. Herein, the budgets
play important role in aspect of financial activities. These are helpful in making estimation of
income and expenses of future. Additionally, the project report abstract about the traditional
budgets which is being used by the Snappy drinks company. Apart from this, it also summarise
about other budgets like zero based budgets, rolling budgets etc.
PART 1.
(i) Role of budgets in the development of business model.
Budget is an estimation of future income and expense. Due to this organisation manage
their future and current activities as well as it plays a crucial role of measurement of the
performance(Anandarajan, Anandarajan and Srinivasan, 2012). It is also known by the financial
plan which is created for a particular time period. The Snappy company makes budgets as they
are planning to launch new drink product and to establish a new manufacturing venture.
Additionally budgets have multi-pal purpose which are mentioned below:
 Forecast of income and expenditure- Budgets are useful in forecasting the future
income and expenditure. This is done with the help of previous year's budgets
information and it becomes the basis of performance measurement. In the context of
Snappy company, budgets are very important because they are going to plan of opening
of new manufacturing plant. They can forecast future expenses of opening new venture.
Additionally, it is important in future planning due to their estimation of future income
and expenditure.
 Tool of decision making- Decision making a crucial process, one wrong step can result
in huge loss. Eventually, budgets help in taking decisions about the future. This is why
because budgets include all the needed information which is required during decision
making process(Burns and Dewhurst, 2016). If companies take decisions as per the
budgeted income and expenses then their decision can not be fail. The above company is
taking their decisions on the basis of budgets as well as going to take important futuristic
decision on the basis of budgets.
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 Monitor the business performance- Budgets are also helpful in monitoring the business
performance. Basically, performance measurement is very important because it evaluate
the efficiency of different activities. With the help of budgets organisations can analyse
their performance, this is possible because budgets consist level of estimated income and
expenditure. If actual income is more then budgeted target then performance will be best
and income is less in compare to standard then company will need to make changes in
their policies. Same as in the aspect of Snappy company, they evaluate their financial
performance by comparing actual cost occurred in the manufacturing with the budgeted
cost.
 Helpful in controlling- Budgets are important for controlling the different activities.
This is possible because it forces to the companies to expand under limit of budgeted
targets(.Scholes, 2015). As well as employees try to earn revenue above the budgeted
income level so it helps in controlling the activities of employees. Snappy drinks
company control their activities by eliminating those activities which are not beneficial
for them.
So these are the purpose of budgets. Apart from it, these budgets requires to follow a
proper step by step process. Process of budget preparation is mentioned below:
 Obtaining estimates- It is the primary step of the budget making which includes the
analysing the estimation from various kind of departments like production, sales,
previous budgets etc. Eventually, this step is the basis of budget making because on the
basis of it companies makes further decisions. If Snappy drinks company is trying to
make new budget they will need to collect information from their various other
departments and previous year's budgets.
 Coordinating estimation- In this step, estimation from different departments coordinate
with each others. This is an important step to take because budget can not be made in
reference to only single department, it requires equal coordination from all departments.
Snappy drink company can use the estimation from different departments for creation of
a new budget.
 Communicate the budget- Next step is of communicate the budget inside the
organisation to make any needed changes in the budget. With the help of this step, all the
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staff can give their feedback about the budget. The Snappy drink company communicates
their prepared budgets to the responsible persons to take their advice.
 Implementation of budget- It is the step in which budget is implemented and all the
activities directed as per the budget. This is the final and last step in budget making
process.
The budget making process is helpful in development of business model because budgets
are just like a future plan. On the basis of this plan companies develops their business model
because it contains all the needed financial information. As in the case of Snappy drink company
, they are going to take two big decisions. First one is launching of new drink and second is of
starting a new venture outside of UK. Herein, they need a budget so that they can effectively
develop a model. On the basis of budget, company can analyse about total expenditure which
will occur in the process of establishing new manufacturing venture.
(ii) Application of traditional budget approach for future cost management.
Traditional budget approach is a kind of budget making approach which is based on the
previous year's budgets. This is an old technique of budget making, it does not consider any
other elements in new budgets. The snappy drink company is using this budget making approach
from many past years and they are successful from last 15 years. Now they are planning for start
new manufacturing store in other countries. Herein, the traditional budget approach can help
them in proper management of cost as well as to earn estimated income. Eventually, traditional
budget approach includes many budgets which are as follows:
Incremental budget- Incremental budgets are those budgets which are made as per the
previous budgets and incremental amount is added in the new year's budget(McLean and Zhao,
2014). Eventually, this budget is important for those organisations which are going to plan new
venture or to launch any new product. Same as in the context of above mentioned company, they
are using the traditional approach for future planning.
The traditional approach of budgets are being used by the Snappy drinks company and
with the help of this they earned the revenue of £550 last year, it shows the role of traditional
budget approach. If they use this budgeting approach for further then it will surely help them in
proper cost manage because this approach is based on the previous information. As previous
scenario states that they are getting good revenue from this budgeting. For example company is
going to launch new drinks in the market and if they implements this budget approach then their
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cost will be under control. This is why because this budget approach focuses on use of past data ,
informations and the previous record of above company is successful.
(iii) Traditional budget is appropriate to all or some part of business in future form.
Traditional budget is an oldest technique of budget making and now these days its impact
is getting blur(Oakshott, 2012). This is why because there are many other budget techniques
which are quite fast and less time consuming. Though, the snappy drink company is using this
approach since many years but it is not guaranteed that it will help them further. As they are
planning for launching new drinks and new manufacturing venture then it is not sure that their
traditional approach of budgeting will help them. Herein, some advantage and disadvantage of
this budget approach are mentioned below:
Advantages-
 It provides a kind of framework for controlling the future cost same as in the
snappy drink company they are using this approach for future planning.
 This helps in spotting the issues easily and if above company gets any issue in
future then they can identify it easily.
 Traditional budget approach is easy to implement it does not include complexity.
Herein, the aspect of above company if they use this then it will be easy for them
to apply this easily.
Disadvantages-
 Lack of flexibility- This budget consists lack of flexibility and due to this it
becomes an issue for the companies(Rogers and Makonnen, 2014.). Like snappy
drink company can face the problem of flexibility if any unexpected event occurs.
 No priority of allocation of resources- Traditional budget does not focus on the
better allocation of resources, it just ignores this element. Due to this it becomes
difficult for the companies to better allocation of resources. Same as in the case of
snappy drink company, it can create difficulty for them if they do not use
efficient use of the resources.
 Time consuming- It is a traditional way of budgeting, it consumes too much time
in preparation of the budget.
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So on the basis of above advantages and disadvantages it can be said that traditional
budgetary approach can be appropriate for some part of the business. It can not be used for all
part of companies. Herein, the context of snappy drink company if they apply this budgetary
approach for their future plans then it can help them in some ways but not completely.
PART 2
(iv) Explanation of rolling, zero based and activity based budget.
Rolling budget- Rolling budget is newly updated financial plan which takes place when
previous budget expires(Morris, 2012). It is also known by continuous budget, eventually this
type of budget requires lot of time as well as cost. As well as it can be updated quarterly in a
particular year and it works as the completion of year.
Basically, this type of budget can be beneficial for the companies in compare to
traditional budget because it offers quite flexibility through which organisations can change as
per their suitability. On the other hand traditional budget does not provide any flexibility which
can result in lose.
Apart from it, the rolling budget has some drawbacks like it is expensive to maintain
because this requires continuous updates. Additionally, this type of budget can not be used by all
kind of organisations, it can be used by large ventures who can bear its expense and time.
Zero based budget- Zero based budget is a kind of budget which starts from a zero level
and each activity is justified before entering into the budget(Storey, 2016). It does not based on
the previous year's budgets. Additionally, each and activity is analysed as per its needs and costs.
This budget involves re-evaluation of each item of cash flow and after that justify each
expenditure.
Eventually, this zero based budget is quite ahead in compare to the traditional budgets.
This is why because it removes the possibilities of errors in the budgets. As well as each activity
has its own justification and due to this possibility of complexity reduce automatically.
Additionally, traditional budget does not focus on efficient allocation of resources but ZBB
involves the better utilization of resources.
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On the other hand, this budget has some limitations like it consumes too much time as
well as cost. Due to justification of each activity, paper work also increase. As well as it brings
complexity because of different justifications of activities.
Activity based budget- Activity based budget is a kind of budget that is based on the
activity based costing. This type of budget does not use the previous year's budgets, it majorly
focuses on the cost associated with the activities(Vasant, 2012). Under this type of budget, each
activity's cost is evaluated before entering into the budgets and main purpose of this budget is to
reduce and control the cost and expenditure.
This budget is better than traditional budgets because it emphasis on reducing the cost of
manufacturing and due to this companies keep their price low. In addition, this budget is
important for maintaining the good relationship with the customers by keeping prices low. On
the other hand, traditional budget does not focus on reducing the cost.
Apart from these features, this budget has some disadvantages like it is short term budget
and can not be used for long time process. As well as it provides just supplement information and
due to this it works as a panacea not as a tool. So this budget has these drawbacks which is a
serious issue.
(v) The potential application of above mentioned budgets.
The above mentioned budgets are very crucial in the context of above mentioned
company. With the use of these methods the elements of budgeting can be performed very well.
Like in zero based budget, it consists the budgeting process from starting level(Laitinen, 2013).
For example the elements of zero based budgeting can improve the entire budgeting process. It
consists the elements as follows:
Accuracy- It brings accuracy in the budgeting process by justification of each activity.
Safe and secure- This makes possible safe and secure budgeted activities in the budgets.
Less costly- Due to this element, entire budget process occurs less costly..
So these are the some elements of zero based budget which can impact entire budget
process positively. Eventually, these modern approach of the budgets can reduce the time and
cost of companies. If above mentioned company, snappy drink company adopts these elements
of modern budget then surely their performance of existing budget will influence. Additionally,
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it is important to use these modern approached budgets effectively and as per the need of
organisation.
(vi) Analysis of zero based, activity based and rolling budgets in the context of snappy company.
On the basis of situation of snappy drink company, they are going to start a new
manufacturing plant outside of UK as well as to launch a new drink in the market. Herein, Zero
based budget will be appropriate and suitable because it is a kind of budget which starts from a
zero level. As well as each activity has its justification on the basis of its need and cost. On the
other hand, company is using the traditional approach budgets from last many years so they need
a change because plan is too big. There are some reasons which states the role of zero based
budget in the aspect of above company:
 Efficient allocation of resources- This type of budget focuses on efficient allocation of
the resources. If snappy drink company will apply this budget in both decisions(for new
manufacturing plant and launch of new drink) then it will be easy for them to use
available resources effectively.
 Increase communication- On the other hand, this type of budget is useful in increasing
the communication and coordination among the staff(About zero based budget,2018).
The snappy drink company can use this budget for increasing communication and
coordination among the staff members. It will certainly help to the company in more
productivity.
 Identify wasteful activities- Eventually, zero based budget is important in identifying and
eliminating those activities which are wasteful for the company. As well as it emphasis
on those activities that are beneficial. In the context of snappy drink company if they
apply this budget then they will be able to analyse those activities which are beneficial.
As well as they can reduce those activities which are not important.
 Motivate staff by providing more authority and responsibility- Apart from above, it can
help to the companies in motivating the employees by offering them more responsibilities
and rights. The snappy company can take the benefit of this if they implements this
budget.
So these are the importance of zero based budgeting which prove that this budgeting is
appropriate for the company as they wants to expand their business.
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CONCLUSION
From above project report it has been concluded that businesses can not run in the
absence of finance and its proper management. As well as budgets are important in the context of
effective planning and control. The traditional approach of the budget is useful at a certain level
but now these days its role is decreasing. It is replaced by modern approached budgets like zero
based budget, rolling budget and activity based budget.
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REFERENCES
Books and journals:
Anandarajan, M., Anandarajan, A. and Srinivasan, C .A. eds., 2012.Business intelligence
techniques: a perspective from accounting and finance. Springer Science & Business
Media.
Burns, P. and Dewhurst, J. eds., 2016.Small business and entrepreneurship. Macmillan
International Higher Education.
Scholes, M. S., 2015.Taxes and business strategy. Prentice Hall.
McLean, R. D. and Zhao, M., 2014. The business cycle, investor sentiment, and costly external
finance.The Journal of Finance. 69(3). pp.1377-1409.
Oakshott, L., 2012.Essential quantitative methods: For business, management and finance.
Macmillan International Higher Education.
Morris, T., 2012.Innovations in Banking (RLE: Banking & Finance): Business Strategies and
Employee Relations. Routledge.
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.
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.
Rogers, S. and Makonnen, R., 2014.Entrepreneurial finance: Finance and business strategies for
the serious entrepreneur. New York: McGraw-Hill Education.
Online :
About zero based budget.2018.[online]. Available through:
<https://www.turfmagazine.com/business-management/zero-based-budgeting/>
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