MOD003319 Business Finance

Business Finance
MOD003319
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Part 1: Traditional Budgeting Approaches
Executive Summary
The purpose of this part of assignment is to analyse the purpose and process of preparing
the budgets and budgeting process can be helpful developing the business model. This part also
explains application of traditional budgeting/incremental budgeting on the given scenario of
VisionMix Plc. After analyzing the application of traditional budgeting on VisionMix Plc, it has
been evaluated the applicability of traditional budgeting system on all or any part of the business
as per future requirement of the business.
Section (i): Purpose & Process of Preparing a Budget and the use of Budgeting process in
developing business model
‘Budget’ can be described as method of developing the financial forecast by a company
in order to develop an estimate of the future income and expenses within a given period of time.
It can be described as a financial plan that is developed for a specific period of time for planning
the future organizational goals and objectives regarding the planned sales, revenue, costs,
expenses and cash flows. As such, the main purpose for developing a budget is to develop a
measurement tool for having a visual depiction of the future sales and expenses in order to
develop effective strategies for reducing business expenses and increasing its profitability
position.
The company need to adopt the following steps for developing a budget as stated as
follows:
Developing the budget: This step involves the selection of the type of budget to be
prepared by the financial manager such as zero-based budgets and traditional
budgets. The selection is done on the basis of the type of estimate to be determined
by developing the budget such as forecasting the future sales or monitoring the costs.
The type of budget selected to be prepared depends mainly on the fiscal targets to be
achieved (Haerifar, 2012).
Allocation of Resources: This is the second step in the method of budget preparation
after determination of the type of budget to be developed. The resources allocation
should be done on the basis of financial targets and policies that help in achievement
of determined targets. The resources allocated should be done in a manner that leads
to maximizing the operational efficiency and helps in attaining the determined goals
and objectives.
Evaluation and Monitoring of Budget: The successful implementation of budget
developed depends on its continuous monitoring and evaluation for ascertaining that
the target determined are effectively achieved. The budget monitoring should be done
on the basis of linking the budget developed to the forecasted aims and objective to
be attained. The continuous evaluation of the budget effectiveness will help in
identifying the loopholes in advance so that measure could be developed in advance
for attaining the determined targets.
The most significant use of budgeting process can be stated to be in the development of
business model. Business model can be defined as the plan developed for successfully carrying
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out business in the future context by identification of its potential source of revenue and thus
assessing the future growth and development of the company. As such, the process of budgeting
helps in creation of business model by development of a structured plan for carrying out daily
and future business activities. Thus, the development of a budget helps the business managers in
structuring the future growth plan of the company by taking decisions relating to the assets that
are worthy of investing. Budget helps in developing the conceptual structure of a business model
by determining the viability of a company and explaining the ways of carrying out operational
activities in future direction as per the intended framework of business developed through
business model (Shim, Siegel and Siegel, 2011).
Section (ii): Application of traditional budgeting approaches in the given business scenario
VisionMix Plc is currently using traditional budgeting method to prepare its budgets for
every department. Under traditional budgets there are various methods that can be used but
VisionMix Plc can apply only incremental budgeting approach as this company is already
established company with many departments and there are certain changes that need to be made
in the current year in respect to previous year. VisionMix Plc has currently operating at location:
headquarter at Bath and design & manufacturing operations in Hereford. At headquarter main
functions such as management, sales, HR and finance are being carried out. In coming budgeting
year company is expecting some new products and also a new manufacturing facility to maintain
the supply of goods. Using traditional budgeting together with incremental budgeting will help
the company to consider all the new additions in the budgets as incremental budgets uses past
year data with addition or subtracting any changes for the budgeting year (Dugdale and Lyne,
2010).
Incremental budgeting can be applicable only when there are minor changes in the
existing budget. In incremental budget only the incremental values are added to arrive at the new
budgets numbers. There is assumption that all the departments in the company will continue to
operate at the existing level and if any addition is required it is performed as per the
requirements. In case of VisionMix Plc there is no change in number of departments, only there
is requirement to add the products to the existing budgets. As such there is no fixed standard
method to arrive at the incremental budgets but there is an approach that needs to be followed. It
can be understood through application of incremental budgeting in VisionMix Plc through an
example. In an example, it is important to consider how the products and processes of
VisionMix will be accounted for. In the coming budgeted year, there will be addition of new
products, so while preparing the budgets through using the incremental budget existing variable
cost expenses of old products will allocated as it is and variable cost expenses of new products
are estimated on the basis of new information gathered for such new old products. The problem
will arise while allocating the fixed cost to the existing products and to new products. To make it
is simple it will be easy to choose a common base of allocation of fixed cost under old and new
products. In this way existing budgeted data has been used to allocate the cost to old as well as
new products (Dugdale and Lyne, 2010).
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