Public Budgeting Theories and Practices

This assignment delves into the field of public budgeting, examining diverse theoretical frameworks and practical applications. It covers historical perspectives, prominent theories like zero-based budgeting, performance budgeting, and integrated budgetary politics. The analysis includes empirical studies on budgetary processes and the influence of factors such as political power and economic conditions. Real-world examples from different countries illustrate how budgeting systems are implemented and their impact on public sector management.

Business Finance

Table of Contents
INTRODUCTION......................................................................................................................3
PART 1.......................................................................................................................................3
1. Understanding the importance of budget and its process for the business development...3
2. Application of traditional budgeting approaches to the business.......................................5
3. Analyzing whether traditional budgeting approach is appropriate to the business............6
PART 2.......................................................................................................................................7
1. Understanding of alternative budgeting system and its benefits for Leeworthy Ices Ltd..7
2. Application of alternative budgeting system to Leeworthy ices........................................9
4. Assessing one or combination of methods which are highly suitable to the business. .10
CONCLUSION........................................................................................................................10
REFERENCES.........................................................................................................................12

INTRODUCTION
Business finance is corporate area that deals with the financing related activities like
fund gathering, devise financial plans and policies for its management, future year forecasting
and so on. It gains a critical importance in the entrepreneurial success through having enough
or adequate financial source to meet sudden financial consequences that may cause due to
sudden and drastic changes in the market environment. In the report, a leading manufacturing
company or supplier of organic dairy ice cream products, named Leeworthy Ices Ltd has
been taken into account. The present assignment is designing with the aim of understanding
the traditional as well as modern budgeting requirement of the company for the better
financial status in the competitive marketplace.
PART 1
1. Understanding the importance of budget and its process for the business development
As per the stated case study, Leeworthy Ices Ltd manufactures different organic dairy
ice creams in processing and packaging in Devon, Derbyshire and Wiltshire and
headquartered near Watford. It has number of supermarkets from where it offers their goods
and services and also has sales offices in Berlin, Prague and Copenhagen. On 23rd June 2016,
refendum or separation of UK from EU, Leeworthy Ices owner is concerned about the
potential changes in manufacturing process which may be possible without EU restrictions
i.e. investment in new machinery, expansion of production capacity and so on. The entity also
wants to step up efforts to market into Gulf, North America and Far East and recently
approached by US food producers who are interested in establishing a joint veture (JV)
agreement to pursue these markets after withdrawal of EU membership. Scenario clearly
presented that Leeworthy’s finance manager, Vinita has utilized traditional budgeting system
from the last 3 years.
Budgeting: In corporate sector, financial manager is often concerned with the future
financial planning through projecting the expected results of future business activities &
operations (Breunig and Jones, 2011). There are various methods of budgetary planning that
might be used by the finance manager for making the estimation of revenues and
expenditures regarding future period. Budgetary planning and controlling is a process
whereby Leeworthy Ices Ltd can compare the standard sets with the actual results and

examine the same for making viable decisions and right business strategies for the future
success (Ferry and Eckersley, 2011). It is important for the establishment to prepare budget
due to the following reasons, pointed out hereunder:
1. It facilitates Leeworthy Ices Ltd to forecast their future earnings and expenditures and
helps to devise necessary policies, plans and strategies on prior basis.
2. It works as warning indicator that warns the firm against possible financial risk that
may cause in the forthcoming period. As a result, policies and plans can be prepared
on right time to overcome any prospective risk and gain win position.
3. Cash budgets provides essential information about the drive-in cash and its outgoing,
as a result, Leeworthy Ices Ltd can easily detect that whether it will have sufficient
cash funds or not to continue their regular business activities (Lapsley and et.al.,
2011). With this, proper cash management strategy can be devised without any delay
for the sufficient cash availability.
4. Comparison of the decided targets with the actual performance assist Leeworthy Ices
Ltd to determine the areas with the reasons why targets had not been achieved. As a
result, management can set appropriate plans for overcome negative deviations and
reach success (Jones, Zalányi and Érdi, 2014).
5. It helps to create business growth & expansion plans and strategies through proper
financial management. It also assist Leeworty Ices Ltd to maximize revenues through
quality offerings at right prices, whilst, cost can be minimized through better and
effective monitoring and controlling operations.
Budgeting process: The process defines the steps that Leeworthy managers are involved or
engaged for the creation of budgets and its implementation in the business, described
underneath:
Budget assumptions: During the first stage, budgeting committee of the company have to
make necessary assumptions that will be followed during the preparation of budgets. It is
important for the business to follow these assumptions while plan their budgeting (Jones and
Baumgartner, 2012).

Forecasting: After this, Leeworthy’s top managers, directors, executives & others have to
forecast or predict the results of future course of actions that will either drive income to the
business or incur expenses.
Budget formulation: With the help of forecasted results, committee will make budget
incorporating the expected income as well as expenditures and reflecting the net results.
There are number of budgets that are required to be constructed in Leeworthy Ices Ltd such
as manufacturing, direct material, direct labor, overhead, cash & others. It helps to create a
right plans and devise strategic decisions for the prospective growth.
Approval: After it, the developed budget is sent to the committee’s chairman for the
approval & consent, he/she verifies each component of the budget by looking to the
justification for every item and its expected results also (Schick, 2014). If they considers that
the budget is appropriate and suitable and sent to all the departments of Leeworthy, whose
managers are responsible to create required set of policies to reach the targets.
Actual performance: After the completion of the budgeted period, Leeworthy’s actual
performance is determined by the preparation of financial accounts i.e. income statement,
cash flow statement and balance sheet as well.
Deviation analysis: With the comparison of actual performance with the standards goals,
variances are determined whether favorable or unfavorable. First indicates greater revenue
and less payments whereas later indicates less income and excessive spending. This step
gains significant importance because identifying the causes of deviations assist manager to
determine that why they did not achieved targets.
Decisions-Making: After variance analysis, Leeworthy’s departmental managers take
corrective or remedial actions and plans to combat negative deviations and reach goals.
2. Application of traditional budgeting approaches to the business
In the scenario, it is given that the finance manager of Leeworthy Ices Ltd, Vinita is
using traditional budgeting approaches for the budget preparation. As the name of the
method, this budgeting technique adds some incremental percentage or amount to either the
historical period budget or actual performance of the past year to arrive a new budget
(Cottrell, 2012). Thus, every year, Leeworthy Ice Ltd creates budget or forecast future year’s
result considering the past year’s as base and make very little adjustments.

This method is very simple way of budget construction because it add some value to
the past period without conducting an extensive or deeply market research. The given case
situation presents that finance manager of Leeworthy Ice is using traditional or incremental
budgeting approach from the last 3 years. According to such budgeting approach manager
makes increment in the cash inflow or outflow on the basis of current trend (Lavarda and
et.al., 2016). In this, manager does not make any kind of changes during the year. Budget
provides guidance to the personnel about the manner in which they need to spend money
while performing the activities. However, such method is criticized on the basis of aspect that
financial needs are not same in the each month or year. Along with this, with the rise in
technological advancements now there are several alternatives are available to the business
unit which in turn helps in making control on cost level. Thus, manager of Leeworthy Ice is
required to make changes in the existing budgeting process of budgeting.
Now, several alternative systems are available to the business such as zero base,
activity based budgeting which in turn helps in framing highly competent framework. Both
such modern aspects of budgeting will help manager of Leeworthy Ice in overcoming the
drawbacks of incremental budgeting system to the significant level (Lim and Oh, 2016).
Thus, existing budgeting process is the key area which business unit needs to improve for
attaining success in the highly strategic business arena.
3. Analyzing whether traditional budgeting approach is appropriate to the business
In the present times, changes take place in the business environment with the very
high pace. In this, traditional budgeting system does not provide high level of assistance to
the business in making proper usage of funds. Moreover, there are drawbacks which are
associated with the traditional budgeting system. Lack of flexibility is one of main elements
which in turn closely influence the significance of such method. In this, business unit takes
fixed level of income or spending (Singh and et.al., 2016). In such kind of system finance
manager does not consider current trend or aspect. Cited case situation entails that Leeworthy
Ice is facing difficulty in relation to managing finance due to the employment of traditional
budgeting system. Moreover, in traditional budgeting, financial frameworks are highly based
on the historical values or figures.
On the contrary to this, in the current time, business unit spends money according to
the market trends or requirements. For instance: During winter, Leeworthy Ice is required to
place more emphasis on promotional aspects which in turn helps in raising demand for ice-

cream. This aspect shows that traditional budgeting system is not appropriate for the future
aspect of Leeworthy Ice. Moreover, suitable allocation enables firm to invest additional
capital in the other investment opportunities and thereby get high profit margin (Moreira,
2017). In this way, by making modifications in the existing budgeting system Leeworthy Ice
can make contribution in attainment of organizational goals and objectives.
PART 2
1. Understanding of alternative budgeting system and its benefits for Leeworthy Ices Ltd
As per the scenario, it is clearly stated that Leeworthy Finance manager, Vinita is
using traditional budgeting system since the last three years, however, it is concerned with the
budgeting approaches because market environmental changes bring significant challenges
and threat for the corporations in the future years. As an alternative approach, Leeworthy Ices
Ltd can utilized following budgeting system to eliminate the shortfalls of traditional,
incremental budgeting system and bring improvements over the current approaches, that are
discussed here as under:
Zero-based budgeting:
ZBB technique is a method of budget preparation taking base as zero. Under this
process, management of the Leeworthy Ices Ltd needs to re-evaluate and analyze each and
every product lines through external market analysis and make forecast of the future results
with proper justifications. This budgeting method involves estimation and forecasting of
forthcoming years revenues and expenditures that are expected to be generate or incur by
Leeworthy. This method favours the proper justifications of each and every activities that are
taken into consideration for arriving a new budget for the upcoming period (Good, 2011).
Advantages of ZBB:
1. Accuracy: It overcomes the limitation of incremental budgeting which only make
some arbitrary or little changes to the past year’s budget. However, ZBB relooks and
analyze each activity of the revenue and expenditures item and forecast through the
market evaluation, hence, accurate estimation can be made.
2. Efficiency: It facilitates Leeworthy’s managers in allocating resources optimally
based on actual needs instead on historical basis.
3. Elimination of redundant tasks: It identifies opportunities and rationalized cost-
effective measures to minimize cost through removal of unproductive activities that
do not drive any benefit to Leeworthy Ice.
4. Inflation: It overcomes the limitation of traditional budgeting by putting right

adjustments regarding inflation rate.
5. Coordination: It assists managers of the Leeworthy to maintain co-ordination within
all the departments or divisions and boost staff motivation by allowing them to
participate in the decision-making purpose (Tavakol and et.al., 2011).
Rolling budgeting:
As name implies, this budgeting method is like continual updating the historical
period’s budget to arrive the latest budget for the future period. It is just like to the
incremental extension of the current or existing budget and favours an extension of the
current budget over the years. Leeworthy Ice Ltd can construct their budget for a given
accounting period and roll over it for the future years by necessary amendments to showcase
variances that caused due to the changing market circumstances (Lauth, 2014).
Advantages/benefits of rolling budgeting
1. Flexibility: Rolling budgets helps to incorporate or indulge required changes in the
constructed budget to create a new budget. Thus, it makes up-to-date changes in the
static budget developed and consider the market changes in the figures which
provides greater flexibility.
2. Responsiveness: It helps to become more responsive through allowing Leeworthy
Ices Ltd’s managers to make necessary adjustments for the upcoming period (Hansen,
2011). With the help of rolling budget, managers can evaluate the performance against
rationalized targets made in the budget and made decisions accordingly to maximize
performance.
3. Administrations: It helps in administrative functioning also, because, executives,
managers and others can create a logical spending plan to allocate their funds properly
in all the activities and drive opportunities for the Leeworthy Ices that would be
beneficial for the growth (Marcel, 2014).
Activity-based budgeting:
Another modern technique of budgeting is Activity based budgeting (ABB) which lay
emphasizes on providing greater level of transparency to Leeworthy in the budgeting creation
and development process. As its name suggested, the method prefers to allocate revenues
gathered from the instructional activities to its directly related responsible activities (Goode
and Malik, 2011). This method records each & every cost that are expected to incur in any
operational or functional area. It not only adjust the prior period budgets and accounts
necessary changes like inflation, growth plans and others, but also aims at maximizing
efficiencies through right allocation of the revenues (Mikesell and Mullins, 2011).

Advantages of ABB:
Greater control: The most important benefits of the ABB is that it allows Leeworthy Ices
Ltd’s mangers to put greater control to the process of budgeting as they can align each &
every function with the overall business targets and goals.
Eliminating unproductive functions: It also facilitates top managers to eliminate or
remove unnecessary factors to promote saving as a way of cost-cutting strategy. With the help
of this, money can be utilized properly and Leeworthy Ices will have enough or proper
availability of u fund for carrying out operations successfully (Marcel, 2014).
Strategic planning: It assist an entrepreneur in formulating organizational strategies
because everyone is well-aware with the fact that customer is the most important
stakeholders, therefore, every plans will be devised targeting customer satisfaction.
Promote saving: Saving by elimination of unproductive activities helps to maximize
financial resources that can be utilized by Leeoworthy Ices Ltd in future growth plans.
Teamwork: It also promotes team-working & collaborating practices within various
business divisions & departments like sales, marketing, finance, Human resources and others.
2. Application of alternative budgeting system to Leeworthy ices
In the business organization, application of zero base budgeting is highly wide. On the
basis of such budgeting technique, Leeworthy Ice manager needs to start with zero base and
makes effort to identify the activity which they need to perform during the year. Thereafter,
manager is required to assess each possible alternative way of performing the task. In this
way, ZBB technique helps in allocating funding on the basis of program efficiency. Under
this, manager completely avoids the past history of budgeting (Ohemeng, 2016). Hence, the
main problem associated with zero base budgeting is that business unit requires highly skilled
manpower for this purpose. Hence, it can be stated that Leeworthy Ice can get benefit from
such technique only when it has highly talented workforce (Zero Based Budgeting
Disadvantages, 2017).
Under activity based costing technique manager is need to primarily assess cost driver
on the basis of activities performed. Thereafter, manager makes assessment of the overhead
cost per unit in accordance with the level of activities identified. Thus, it can be stated that by
using such technique manager of Leeworthy Ice can determine suitable per unit overhead
cost. In this way, such technique will enable manager take suitable decision regarding cost
and pricing aspect in an effectual way (Singh and et.al., 2016). However, problem of
management will arise in this case because higher management has to spend more time in

such budgeting technique. In this, managers would not become able to devote their time in
other activities which are equally important.
4. Assessing one or combination of methods which are highly suitable to the business
Leeowrthy Ices should employ combination of methods of budgeting which in turn
helps it in making optimum use of financial resource. By considering the benefits and
drawbacks of different types of methods it can be stated that zero base and activity based
budgeting system proves to be more beneficial for the firm (Rogulenko and et.al., 2016).
Moreover, under zero base budgeting finance manager allocates money to the various
activities after making in-depth evaluation of each and every aspect. Such budgeting system
is highly suitable for the business because in this manager makes effort to assess each
possible alternative of performing the activities. In this way, by allocating suitable amount to
each activity, Vinita, finance manager can facilitate effective use of financial resources.
Moreover, it helps in removing unproductive activities or task company can get the desired
level of outcome or success.
Along with ABB is the most effectual budgeting system which in turn helps in
getting suitable view of cost level. In this, activities are recorded by the manager that highly
associated with the cost level. Hence, by assessing the relationship that takes place between
the cost and activity finance manager of Leeworthy Ices can find out suitable cost of
overhead. Such budgeting system is highly effective which in turn helps in exerting greater
control on overall process (de Campos and Rodrigues, 2016). In this way, such budgeting
technique is highly aligned with the organizational goals and objectives. Further, such
budgeting system offers opportunity to make use of savings in the future plans or expansion
related activities.
CONCLUSION
From the findings of the report, it can be concluded that traditional budgeting system
that is incremental budgeting is although simplest way of budget preparation as it makes a
little bit changes in the historical period budget, still, inaccurate and improper justification of
the forecasted figures are the main downfall side of it. Therefore, zero based budgeting
overcomes its shortcomings as it make projection using zero as a base with proper and
appropriate justifications also. It is the effective way of budget construction that provides
assistance to the establishment to make right forecasting about future period. Apart from this,

it also summarized that activity-based budgeting and rolling budgeting are also the modern
budgeting techniques that can be adopted by Leeworthy Ices Ltd to combat the issues in
traditional budgeting system and make better business plans and decisions as well.

REFERENCES
Books and Journals
de Campos, C. M. P. and Rodrigues, L. L., 2016. Budgeting Techniques: Incremental Based,
Performance Based, Activity Based, Zero Based, and Priority Based. In Global
Encyclopedia of Public Administration, Public Policy, and Governance (pp. 1-10).
Springer International Publishing.
Lauth, T.P., 2014. Zero‐Base Budgeting Redux in Georgia: Efficiency or Ideology?. Public
Budgeting & Finance. 34(1). pp.1-17.
Hansen, S.C., 2011. A theoretical analysis of the impact of adopting rolling budgets,
activity-based budgeting and beyond budgeting. European Accounting Review. 20(2).
pp.289-319.
Goode, M. and Malik, A., 2011. Beyond budgeting: the way forward. Pakistan Journal of
Social Sciences. 31(2). pp.207-214.
Marcel, M., 2014. Budgeting for fiscal space and government performance beyond the
great recession. OECD Journal on Budgeting. 13(2). p.1A.
Tavakol, P. and et.al., 2011. Effects of outsourcing magnetic resonance examinations from
a public university hospital to a private agent. Acta Radiologica. 52(1). pp.81-85.
Mikesell, J.L. and Mullins, D.R., 2011. Reforms for Improved Efficiency in Public
Budgeting and Finance: Improvements, Disappointments, and Work‐in‐Progress. Public
Budgeting & Finance. 31(4). pp.1-30.
Good, D.A., 2011. Still budgeting by muddling through: Why disjointed incrementalism
lasts. Policy and Society. 30(1). pp.41-51.
Cottrell, T., 2012. Three phantom budget cuts and how to avoid them. The Bottom
Line. 25(1). pp.16-20.
Jones, B.D., Zalányi, L. and Érdi, P., 2014. An integrated theory of budgetary politics and
some empirical tests: the US national budget, 1791–2010. American Journal of Political
Science. 58(3). pp.561-578.
Ferry, L. and Eckersley, P., 2011. Budgeting and governing for deficit reduction in the UK
public sector: act one ‘the Comprehensive Spending Review’. Journal of Finance and
Management in the Public Services. 10(1). pp.14-23.
Breunig, C. and Jones, B.D., 2011. Stochastic process methods with an application to

budgetary data. Political Analysis. 19(1). pp.103-117.
Lapsley, I. and et.al., 2011. Government budgeting, power and negotiated
order. Management Accounting Research. 22(1). pp.16-25.
Schick, A., 2014. The metamorphoses of performance budgeting. OECD Journal on
Budgeting. 13(2). p.1B.
Jones, B.D. and Baumgartner, F.R., 2012. From there to here: Punctuated equilibrium to
the general punctuation thesis to a theory of government information processing. Policy
Studies Journal. 40(1). pp.1-20.
Lavarda, C. E. F. and et.al., 2016. The Influence of Contingency Factors on the Development
of a Budgeting System in a Brazilian Textile Manufacturing Company. Revista Gestão.
Org. 14(1). pp.115-124.
Lim, S. and Oh, Y., 2016. Online Versus Offline Participation: Has the Democratic Potential
of the Internet Been Realized? Analysis of a Participatory Budgeting System in Korea.
Public Performance & Management Review. 39(3). pp.676-700.
Moreira, M. E., 2017. Promoting Agile Budgeting. In The Agile Enterprise (pp. 217-231).
Apress.
Ohemeng, F. L. K., 2016. 5 Reforming the Ghanaian Budget System from Activity-based
Budgeting to Performance-based Budgeting: Eureka, or another Reform Illusion?. Public
Budgeting in African Nations: Fiscal Analysis in Development Management. p.114.
Rogulenko, T. and et.al., 2016. Budgeting-Based Organization of Internal Control.
International Journal of Environmental and Science Education. 11(11). pp.4104-4117.
Singh, R. J. and et.al., 2016. Energy budgeting and emergy synthesis of rainfed maize–wheat
rotation system with different soil amendment applications. Ecological Indicators. 61.
pp.753-765.
Singh, R. J. and et.al., 2016. Energy budgeting and emergy synthesis of rainfed maize–wheat
rotation system with different soil amendment applications. Ecological Indicators. 61.
pp.753-765.
Online

Zero Based Budgeting Disadvantages. 2017. Online. Available through:
<https://efinancemanagement.com/budgeting/zero-based-budgeting-meaning-advantages-
disadvantages>. [Accessed on 23rd March 2017].