Business Finance: Purpose, Process, and Traditional Budgeting Approaches

This document provides an in-depth analysis of business finance, focusing on the purpose and process of preparing a budget. It also explores the application and appropriateness of traditional budgeting approaches and discusses alternative budget methods like rolling budgets, zero-based budgets, and activity-based budgets. The content is relevant for students studying business finance or related subjects.

Running Head: BUSINESS FINANCE
BUSINESS FINANCE
Name of the Student
Name of the University
Author Note

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Table of Contents
Part 1..........................................................................................................................................2
Answer to Question i..............................................................................................................2
Purpose of Preparing Budget.............................................................................................2
Process of Preparing Budget..............................................................................................2
Development of the Business Model by Budget Process...................................................3
Answer to Question ii.............................................................................................................4
Application of Traditional Budgeting Approaches............................................................4
Answer to Question iii...........................................................................................................5
Appropriateness of Traditional Budgetary System............................................................5
Part 2..........................................................................................................................................6
Answer to Question iv............................................................................................................6
Alternative Budget Methods..............................................................................................6
Answer to Question v.............................................................................................................8
Application of the Alternative Budget Methods................................................................8
Answer to Question vi............................................................................................................9
Method appropriate for the Company................................................................................9
Reference..................................................................................................................................11

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Part 1
Answer to Question i.
Purpose of Preparing Budget
The term budget is defined as the detailed plan that is used to set out the plans, in
terms of money. The plan for the future period is prepared in advance in the form of budget
for the period that is based on the objectives that are agreed for that particular period. Budget
is the planned strategy for achieving those particular objectives (Drury, 2005).
The purpose of the budget is for serving the management needs that is in respect of
the decisions and the judgments, which is required for making and providing the basis for
planning and controlling functions of management. It basically provides the model to the
business for the way of it to perform, if there are certain events, plans and strategies have to
be performed. In order to construct the business plan, there is the attempt by the manager for
forecasting the income as well as the expenditure (Drury, 2005). Therefore the purpose of
budgeting can be divided into three aspects:
 Budgeting is considered for forecasting the income as well as the expenditure for
obtaining thereby profitability.
 It is the tool for making the decisions.
 It is the means for measuring the performance of the business.
Process of Preparing Budget
 The process of making the budget starts when the for the coming year managers
receives the marketing project objectives and forecast by the top management which
is along with the stated time table within which budgets must be completed. The
forecast by the top management serves as the guidelines with which the departments
have to prepare budgets (Drury, 2005).

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 The second step is the estimation of the sales; it is because the firm’s total activity
depends upon the sales. It involves assessment of the prevailing market situations and
the projected situations. For this, several internal and external factors are taken into
considerations.
 The prepared sales estimated are then submitted to the committee of budget by the
marketing manager.
 After the budget committee’s recommendations, organization’s president gives the
approval, and then it becomes the sales budget. This budget covers the selling and
distribution expenses. It gives the expected net revenue for the coming year.
 The next step after sales budget is preparation of production budget
 After the targeted productions decided, the production budget is converted into
production cost budget, which comprises of materials, labor, and overhead cost
budgets.
 Once the material cost, labor cost and overhead cost budget is prepared, the full
budget of production cost is prepared. It is generally in the form of cost sheet.
Development of the Business Model by Budget Process
Every business organizations use to prepare budget. Development and management of
the budget depends upon how successfully business allocates the income and expenditure and
how they track as well as plan the fiscal spending. Hence, the formal process of budgeting
helps in the foundation for the management of good business, development and growth. All
these factors help in the development of the model of business by the process of budget. It
helps in knowing where the expenses are more and where is less, how much to allocate cost
to each unit and so on (Drury, 2005).

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Answer to Question ii.
Application of Traditional Budgeting Approaches
The approach of the traditional budgeting is defined as the method of preparing the
budget, under which the budget of last year is taken as base. The budget of the current year is
prepared with the help of changing the budget if the previous year is adjusted to the
expenditure, which is based on the consumer demand, inflation rate, and market situation and
so on. The revenue and the cost of the past year form the integral part of the budget of the
current year. The items in the traditional budgeting are only justified which are over as well
as above to the budget of the last year (Atrill & McLaney, 2009). This approach of budgeting
is similar to the incremental budgeting. It is because; incremental budgeting is concerned
with the preparation of budget by using the budget of previous budget or based on actual
performance with the addition of incremental amount for the period of new budget. This
approach encourages the spending to the budget for ensuring the reasonable allocation for the
next year. The preparation of the traditional budget is done by addition of the incremental
amounts such as planned or the inflated increase in the sales in the price of sales and the cost
to the current annual budget (Atrill & McLaney, 2009).
In case of Snappy Drinks, the management of the company considers the traditional
budgeting system. This company applies the traditional budgeting approach for planning the
management of future cost for this particular business. The products and processes of this
particular business is budgeted to the traditional or incremental approach by taking into
consideration the sales trend of the company of the current year in order to make budget for
the nest year. In order to make the process of budget for the establishment of the new
manufacturing facilities in the locations of Gulf, Far East, North America, especially China,
the cost of the production of products and process that is considered in the current year will
be the base for the allocation of income and expenditure to the new manufacturing unit.

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Hence, the company will follow the same approach as it use to follow for allocation of
income and expenditure for the current year in order to budget for the next year (Atrill &
McLaney, 2009).
Answer to Question iii.
Appropriateness of Traditional Budgetary System
The traditional budgetary system is not appropriate to all or the any part of the
business in its planned future forms because of following reasons:
 Traditional approach of the budgeting takes very long time, consumes many resources
of the corporate and it takes too much costs. The process of budgeting of this
approach takes long time that ranges from six to eight month. There are certain
budgets that are detailed and it requires the input as well as negotiations of the people
throughout the company. In addition, this approach is influenced by the internal
politics that becomes important than customers with that of the managers and the self-
occupied employees (Atrill & McLaney, 2009).
 This budget is fixed and inflexible. It starts from top to bottom process for meeting
the fixed goals, whether realistic or unrealistic, the management sets that. Once the
budget is fixed, there are no further changes that have to be made. However, in the
real business situations, the economy may changes, the market changes or the
industrial situation may changes and the regulations may also be changed and there
may be new competitors enter in the organization. Apart from this, new business
concepts, innovations and repercussions of financial aspect may also occur. All of
these factors affect the traditional approach of inflexible budget (Atrill & McLaney,
2009).
 There may be the situation in which the employee of the company negotiates the
overly achievable benchmark of budget for minimizing the performance expectations,

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so that target can be achieved easily. Hence, the budget is influenced by the internal
negotiations with the management rather than development of the budget, which
realistically reflects the company’s view regarding where it is going and it ends with
being something that is largely arbitrary and fictitious (Atrill & McLaney, 2009).
Part 2
Answer to Question iv.
Alternative Budget Methods
Rolling Budgets
This approach of budget is the approach that is used to continually update as the
completion of the most recent period of budget. It involves existing model of budget for the
incremental extension. This helps the business for always having the budget, which extends
one year into future. The quarterly rolling forecast generally covers five to eight quarters.
These forecasts are revised regularly, which supports the ability of the managers for
determining the strategies, which continuously adapt to the fast changing conditions of
market. The advantages of rolling forecast as compare to traditional approach are support for
decentralization as well as initiatives of employee empowerment that is required in the fast
changing environment. This helps the managers for the wide discretion against making
decisions and obtaining the resources quickly apart from depending upon the centralized
allocations of resources (Drury, 2005).
The possible drawback related to this approach is similarity of preparation of the new
budgets repeatedly. It is not advisable for this approach in the circumstances of constant
change, limitless of the opportunities for employees in order to achieve the targets before
altering the budgets for accessing the performance of employees that is based on budgets of
rolling (Weetman, 2013).

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Zero based Budgets
This approach of budgeting is also known as priority based budgeting, which are
emerged for the attempt for overcoming the limitations of the incremental budgeting. It
requires the projections of the expenditure for existing activities that should starts from the
base zero as comparison to the budget of the previous year. The managers are required for
justifying the all-budgeting expenditure rather than just doing the changes from the last year
(Drury, 2005). As comparison of the traditional methods, the benefits of Zero based
budgeting are as follows:
 It avoids the shortcomings of the incremental budgeting by extrapolating the past by
adding the percentage increase in the current year.
 It creates the attitude of questioning rather than assuming the value of money for
current period.
 It focusses its attention on the outputs, which is in relation to the money’s value.
Despite of these advantages, the disadvantages of zero-based budgeting includes the
possibilities relating to resource intensiveness, manipulations by the perceptive managers and
biasness towards the short-term planning (Weetman, 2013).
Activity based Budgets
This is the budgeting framework that uses the cost drivers in the budgeting which
aims at the perpetual progressions in the performance and the costs. The implementations of
the activity based budgeting is done for effectively the managing the cost. The main objective
of activity based costing is authorizing the supply of the resources, which are needed for
performing the required activities for meeting the budgeted production and the sales volume.
The major advantage of activity-based budgets as compare to traditional approach includes
enhancement of the visibility that arises from highlighting of the activities cost and then

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shows the outcomes in the terms of the cost drivers from that of the budgeted expenditure.
Therefore, the information provided by it is useful for the estimation and planning of the
future expenditures (Drury, 2005).
However, the drawback related to the activity-based budgets includes same as that of
the zero based activity that is bias in short-term planning, manipulations by savvy managers
and the resource intensiveness possibilities (Weetman, 2013).
Answer to Question v.
Application of the Alternative Budget Methods
The possible applications of these methods to the company for the performance of the
elements of the budgets more effectively.
Rolling budgets should be applied to Snappy Drinks because this approach is against
the static outdated budget. This company uses the traditional approach of budgeting that is
static. Hence, it will help the company for providing the more constantly updating the latest
trend of the economy, demand of customer as well as data from the most recent quarter.
Apart from that, the forecast made through this approach avoids the behavior is dysfunctional
which occurs with the annual budget because the evaluation of the performance is not based
on achievement of fixed targets because the continuous update and change of the target
(Weetman, 2013).
Zero-based budgeting should be applied to the company because it helps in
overcoming the limitations placed by making the forecast or budget that is based on making
the base of previous year. As it focus on the activities as well as programs apart from
focusing on the departments, which is the case of traditional approach used by the company.
It also best suited for the support activities and the discretionary costs, which will not be
possible in case of the traditional approach. The discretionary cost helps the management for

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having certain discretion against particular activity that is in question (Atrill & McLaney,
2009).
Activity based budgeting should be applied to the company because if the company
continue to adopts the traditional budgeting then the majority of the expenditure of the
company that are associated with the activities base level are remains unchanged. This will
result in the company’s cost of its support activities remain fixed and will lead to the past
inefficiencies as well as waste that is inherent to the perpetuation of the current ways of doing
things (Weetman, 2013).
Answer to Question vi.
Method appropriate for the Company
The method of budget that should be more appropriate to the company is activity
based budgeting method. It is because the company is using the traditional approach of
budgeting which suffers from various disadvantages. Hence, if the company Snappy Drinks
will adopt this method of budget then the preparation of the budget will be based on using the
activity based costing after the consideration of the cost of overhead. Under this budgeting
the budget of the previous year will not be considered for arriving at the buidget of the
curernt year. The company is establishing the new facilities of manufacturing that will be the
new area for the company (Atrill & McLaney, 2009). If the company will consider the
traditional apptroach then the past budget will be considered, application of which will give
ambigous result and the company may go in loss and it will affect the company in the coming
years. As the rapidly changiung environment of the business requires to adapt the most
relaible and resonable system of budget which could be able to manage the inefficiencies
caused by the budget approach which is traditional in nature (Weetman, 2013). The
companhyh can apply the approach of activity-based budgeting approach by following steps:

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 Estimating of the volume of the ptoduction and sales by the individul customers and
projects.
 Estimation of the demand for the organisational activities.
 Determing the resources which are required for performing the activities of the
organisation.
 Estimating the quanties that is required for each resources that must be supplied for
meeting the demand.
 Taking the actions for adjusting the resources capacities for matching the supply that
are projected.
Therefore, Snappy Drinks should replace the method of traditional budgeting system by
the aternative budget sytem of activity based budgeting. This will help the company for
removing any bugs before the company goes thhrough any changes in the following years
(Drury, 2005).

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Reference
Atrill, P. and McLaney, E., 2009. Management accounting for decision makers. Pearson
Education.
Drury, C., 2005. Management accounting for business. Cengage Learning EMEA.
Weetman, P. (2013). Financial and management accounting. Pearson.