Budgeting Techniques and Strategies

This assignment delves into the crucial role of financial management in business success. It examines various budgeting techniques employed by companies, highlighting their respective advantages and disadvantages. The report also provides insights into the diverse range of budgets utilized by different organizations, offering a comprehensive understanding of budget planning and implementation.

BUSINESS FINANCE

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

EXECUTIVE SUMMARY
This report summaries about the importance of business finance and how it is essential in
taking decisions in order to improve the financial position of the company (McLean and Zhao,
2014). This report also highlights the importance of budget report and its role in decision making
process and the application of budgeting approach. It also states the various alternative used by
mangers in preparing the budget for the company and the application of these methods in
decision making process. This report concise about the application of these methods in order to
improve the performance of the company and sustain its position in the market.
PART 1
i) Role of Budget in business development
A financial limit is a device utilized by setting up an estimation of company,s income and
use, it is an apparatus which is utilized inside to assess the organization's presentation over a
particular timeframe (Slutsky and Ragusa, 2012). Mangers prepare budget to calculate the
company's estimated revenue which a company can generate from its revenue and the estimation
of expense which will be incurred by a company in order to generate the revenue. Mangers of
Snappy Drinks Plc also prepares the budget for the product launch of its new health led drink and
also to establish a new venture for manufacturing its new product. Following are some purposes
of budget:
 Tool for Decision Making: Budget provide the estimation of company's financial health
and the sources of income and expense. It plays a crucial part in decision-making process
as the mangers analyses these budgets and formulate new strategies in order to achieve its
estimate budget. It helps managers to keep track on the implementation of budget and
improve the efficiency of its business operations. Snappy Drinks Plc also uses budget to
take necessary decisions in order to improve its operational efficiency and maximize its
profit.
 Forecast of Income and Expenditure: Budget provide the estimated income and
expense of a company over a specific period of time, it help mangers to forecast
company's income and expense which a company will incur over a specific period of
time. Managers use previous years budgets to analyse the reasons due to which company
could not achieve its budget income and formulate new strategies to achieve its budgeted
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profit. Snappy Drinks Plc mangers uses budget to forecast the profit which can be
incurred after the launch of its new health led energy drink.
 Helpful in Controlling: Budget plays an important role in the controlling of its business
activities (Chohan and Jacobs, 2016). It help mangers to control the unnecessary expense
which can be reduced in order to reduce the cost of products. It provide a complete
framework of its business expenses and income which is analysed by mangers to
implement proper control over its operations and various other activities. In Snappy
Drinks Plc managers uses budget to keep a check on its business operations and control
the unnecessary expenses.
 Monitor Business Performance: Budgets also helps in monitoring the performance of
the company as it provides the framework of company's expected income and
expenditure. If an organization acquires more income than the normal it demonstrates
that organization's exhibition is improved and on the off chance that it neglects to
accomplish the normal income troughs attempt to discover the issues and define new
methodologies to improve its company,s execution ( Slutsky and Ragusa, 2012).
In order to prepare the budget company has to follow a process of steps. Following are
the steps involved in budget preparation:
 Obtaining Estimates: The primary step involved in the making of budget is to obtain
estimates from various departments such as sales department, production department,
purchase departments etc. and previous budgets. In this step managers analyse previous
budgets and estimates to calculate the expected revenue and expenses incurred by a
company in manufacturing of its product. In Snappy Drinks Plc managers collect all the
information from its various departments and previous budgets to make a new and
effective budget in order to achieve the organisational goal.
 Coordinating Estimation: The second step involved in the budget formation is the
coordinating as per the estimates. In this step managers coordinate the estimates given by
various department by allocating the amount which is to incurred by those departments
and prepare a budget. Mangers of Snappy Drinks Plc also coordinate with different
departments involved in the product of its energy drinks and allocate the resources as per
the needs and follow the budget.
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 Communication of Budget: Following stage associated with the spending making
procedure is the correspondence of spending plan, as it is significant part to discuss the
financial limit with various divisions and its workers (Hyatt and Taylor, 2016). It is
considered as an important part in the formation of budget as managers take feedback
from its staff about the budget and make necessary changes. In Snappy Drinks Plc
managers circulate its budget to the required parties and make any amendments in it if
required to achieve its organisational goal.
 Implementation of Budget: In this step managers implement the budget and provide a
direction in which the budgeted profit can be achieved. It is the last step involved in the
budget making process.
Budget making process can be helpful in the development of business as it provides the
framework to the managers to achieve its targeted profit and improve its financial position. In
budget making process managers collect all the information from various department and make
budget which help them to achieve its target. In Snappy Drinks Plc managers also take
information from different departments and develop new ways in which they can improve its
efficiency and its position in the market.
ii) Application of traditional budgeting approach in planning of future cost management
Traditional Budget is a method in which a new budget is prepared on the basis of last
years budget taken as a base for preparing new budget. In this sort of planning technique troughs
roll out fundamental improvements in the earlier years spending plan by modifying diverse cost
which organization may happen because of the swelling rate, change in shoppers request, taste
and inclination, advertise circumstance (Zapico-Goñi, 2017). The revenues generated and the
cost incurred to generate those revenue plays an important part in the preparation of current
year's budget as they form an integral part, and mangers only need to adjust those items in the
budget. Traditional budget is similar in nature to incremental budget which is as follows:
Incremental Budget: Incremental Budgets are the budgets which are prepared on the
basis of the data of previous budget after adding the incremented amount in the new budget. This
type of budget are commonly used by the business who intend to set up a new venture or launch
its new product range. In the given case Snappy Drinks Plc is planning to launch its new product
range of health led energy drinks and start its new venture to set up a new manufacturing plant.
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Snappy Drinks Plc uses the traditional budget approach and this approach has provided
the benefit in making company successful from the last 15 years. With the help of this budgeting
approach company earned a revenue of £550 millions in the last year. This budgeting approach
helps mangers of Snappy Drinks Ltd to properly analyse their cost and increase the efficiency of
its operations and minimize the cost in order to increase the profit of the company.
(iii) Analysis of traditional budgetary system
Customary Budget is considered as a most established system of planning spending plan
for the organization yet after the new ways and current procedures of spending development has
discounted this methodology of getting ready spending plan (Pyhrr, 2012). As new budgeting
approaches are cost effective and less time consuming many business has adopted new and
modern approaches of budget formation. As in the case of Snappy Drinks Plc company still uses
this traditional budget approach, due to change in technology and new methods of budget
formation company may face problems in future by using the same approach. As given in the
case that company is launching its new health led drinks, company will not be able to prepare the
budget using the traditional approach as they are launching a new product line and they also do
not have any previous information regarding its new product. Following are the various
advantages and disadvantages of using traditional budgetary system:
Advantages:
 This provide a framework which help mangers to control their cost of production
and improve its operational efficiency.
 It help mangers to easily identify the problems due to which company could
achieve its previous years budgeted profit.
 This budget approach does not include any complexity and is easy to implement.
Disadvantages:
 The main disadvantage of traditional budget is that it lack flexibility, it become
difficult for manager to make amendments in the budget.
 It does not focus on the allocation of resources which becomes difficult for the
companies to utilise their resources in effective and efficient manner to improve
its business efficiency.
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 Traditional Budget consumes more time as compared to other methods of
preparation of budget which incurs additional cost for the company resulting in
the low profit margin.
The above analysis states that the traditional budgetary method is beneficial for some
parts of business. Whereas for expansion of business project company need to follow other ways
of budget methods. To survive in the long run Snappy Drinks Plc has to change its method of
budget preparation and expand its business by lancing its new product range of Health led drinks.
PART 2
iv) Explanation of various alternative Budget Methods
Zero Based Budget: Zero base budget is a budget which is prepared by the mangers
from the scratch. In this type of budget mangers prepare the budget from the zero level and
justify the estimates before adding it to the budget. This is prepared after the complete analysis
of various cost incurred by each department in generating revenue for the company. Before
making zero based spending troughs examine and reexamine each thing of income and give
legitimization of each consumption (Bhimani, Sivabalan and Soonawalla, 2018).
Zero budget is totally different from traditional budget as it provides the justification of
item added to the budget, whereas in the traditional budget only necessary changes are made. It a
system, which provides the complete information about the company’s, expected revenue and
expenses which will be incurred.
The main limitation of this type of budget is that it starts from zero and consumes extra
time in justification of new added cost. It also increase the paper work and complexity of budget
and is difficult to interpret.
Activity Based Budget: Activity based budget is a budget which is prepared as per the
activities involved in the process of production of that particular product (Harcourt, 2013). In this
type of budget separate budgets are made for every activity to properly allocate the cost incurred
by different department in producing a product. This budget does not uses previous data and
helps the mangers to identify the problems related to each activity involved in the product
process.
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This type of budget mainly focuses on the reduction of cost by evaluating each activity
involved in manufacturing process. It shows the proper allocation of resources required in each
activity whereas in traditional budget no proper allocation of resources are considered.
On the other hand the limitation of this type of budget system is that it cannot be used for
long term, this budget allocate the resources for short run. This type of budget only provide the
supplementary information and cannot be used as a tool for decision making.
Rolling Budget: It is a spending which is refreshed routinely because of the adjustment
in the expense of crude material taste and inclination of the clients and different components
(Ghysels and Ozkan, 2015). It a budget which is updated by mangers to include the cost which
they missed in the original budget. This budget can be amended any time to include new cost and
sources through which company can generate its revenue.
In comparison with traditional budget this budget is beneficial for the companies as they
can add sudden expenses and future expense which are ignored previously while preparing the
original budget.
Limitation which are attached to rolling budget is that it is expensive in nature and
involves additional time and continuous updates are required in this type of budget.
v) Potential application of various budgeting methods
The above mentioned budgets can be used in the company to improve its financial
position and sustain in the competitive market. Company can use zero based budgeting approach
as it starts from zero it gives a proper allocation of its resources. If Snappy Drinks Plc uses this
method for the preparation of its budget to launch a new product following are the elements
which can be helpful for the company to increase it profit margin.
 Accuracy: This sort of spending plan brings the precision as it gives the avocation of the
cost which are included the financial limit and supervisors can concentrate on the
decrease of expense by improving its operational proficiency (Mao and Humphrey,
2013).
 Safe and Secure: This type of budget provides the safety and is secure as it provides the
justification of various sources through which company can generate its revenue.
 Cost Effective: This type of budget does not attract must cost in the preparation of
budgets.
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Some elements of this type of budget can be used by the Snappy Drinks Plc as they want
to launch the new product and enter into a new venture to set up their manufacturing plant. This
budget will be helpful as they require the justification of various cost related to launch of new
product and joint venture.
vi) Analysis of various budget methods in context of Snappy Drinks Plc
In the above given case snappy drinks plc is planning a new product launch and entering
into new venture to set up their new manufacturing plant outside UK. After the analysis of
various budget methods, it can be recommended that it can use zero based budget as they want to
enter into new market and this type of budget provides the justification of every element of the
cost. Following are the reasons on the basis of this type of budget can be recommended:
 Efficient allocation of resources: This type of budget provides the proper allocation of
resources. As in the case of Snappy Drinks Plc it is planning a new product launch it will
be required by the company to properly allocate its resources to minimize the cost of
production.
 Increase Communication: This type of budget is used by to increase the communication
as this budget starts from zero level.
 Identifying wasteful activities: Zero based budget is made for ground level and
justification is required of every cost added to the budget it help managers to identify the
wasteful activities and implement new strategies to reduce it.
CONCLUSION
From the above file it can be concluded that finance is an essential part for every business
and its is very important for a business to manger its finance. The above report also concludes
about the various types of budgets used by different companies. It also explains the various
advantages and disadvantages of different budgeting techniques.
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REFERENCES
Books and Journals
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.
Slutsky, E.E. and Ragusa, O., 2012. On the Theory of the Budget of the Consumer. Giornale
degli Economisti e Annali di Economia. 71(2/3). pp.173-200.
Chohan, U. and Jacobs, K., 2016. A parliamentary budget office in Fiji: Scope and
possibility. Australasian Parliamentary Review. 31(2). p.117.
Slutsky, E .E. and Ragusa, O., 2012. On the Theory of the Budget of the Consumer. Giornale
degli Economisti e Annali di Economia. 71(2/3). pp.173-200.
Hyatt, T. A. and Taylor, M. H., 2013. The effects of time budget pressure and intentionality on
audit supervisors' response to audit staff false sign‐off. International Journal of
Auditing, 17(1), pp.38-53.
Zapico-Goñi, E., 2017. Performance monitoring for budget management: A new role of the
budget center. In Monitoring performance in the public sector. (pp. 67-100). Routledge.
Pyhrr, P.A., 2012. Zero‐Based Budgeting. Handbook of Budgeting, pp.677-696.
Bhimani, A., Sivabalan, P. and Soonawalla, K., 2018. A study of the linkages between rolling
budget forms, uncertainty and strategy. The British Accounting Review. 50(3). pp.306-
323.
Ghysels, E. and Ozkan, N., 2015. Real-time forecasting of the US federal government budget: A
simple mixed frequency data regression approach. International Journal of Forecasting.
31(4). pp.1009-1020.
Mao, M. and Humphrey, M., 2013, May. Scaling and scheduling to maximize application
performance within budget constraints in cloud workflows. In 2013 IEEE 27th
International Symposium on Parallel and Distributed Processing. (pp. 67-78). IEEE.
Harcourt, G.C., 2013. The ABC of G and T. Economic and Labour Relations Review, The. 24(3).
p.456.
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