Business Finance - Snappy Drinks Plc Assignment

BUSINESS FINANCE

Table of Contents
INTRODUCTION.............................................................................................................................3
MAIN BODY....................................................................................................................................3
PART 1..............................................................................................................................................3
1. Purpose and process of preparing a budget...............................................................................3
2. Application of traditional budgeting approach for future cost management............................5
3. Analyse the appropriateness of traditional budget system........................................................5
PART 2..............................................................................................................................................6
4. Evaluation of different budget methods....................................................................................6
5. Application of budget methods in company.............................................................................8
6. Analyse the suitable method for the company..........................................................................9
CONCLUSION.................................................................................................................................9
REFERENCES................................................................................................................................10

INTRODUCTION
Every business organization requires funds and money for conducting commercial as well as
trading activities. Financial requirements of company should be fulfilled by making sound
business and financial policies and plans. Proper allocation and effective utilization of financial
and business resources helps in growth of business, improves profitability, market position and
performance level as well. The present report is about Snappy Drinks Plc which is leading
international manufacturer of soft drinks. The company wants to expand it business operations by
launching 15 new products related to health led drinks of variety of low fruit exotic fruit flavors.
For which Snappy is required to additionally increase its plant and manufacturing capacity. This
report will define the process & purpose of preparing budget. How traditional budget is leading to
future cost management will be discussed in report. Also, report will focus on applications of
alternative budget methods to the company. Furthermore, the report will shed light on suggesting
the best suitable budgeting method for Snappy Drinks Plc.
MAIN BODY
PART 1
1. Purpose and process of preparing a budget
Budget is the financial statement that is prepared by the company which contains income
and expenses based on plans and objectives that are needed to be achieved by the company. It is
considered to be the tool for decision making. The company needs to make budget for different
purposes which are -
Forecasting income and expenditure – The most critical and important part of the
business is to prepare a budget as it plays an important role in business planning process.
Company when is launching a new product line need or driving change in existing product need to
prepare a budget. As Snappy drinks Plc is launching new product line, therefore it is important for
the company to create a budget which will help it in forecasting income and expenditure of the
product and will also provide a rough idea of how business will perform after launching the new
product and how much additional plant will cost and other costings as well.
Decision making tool – The other purposes of Snappy drinks Plc to prepare the budget is
that it will help the company in providing financial framework and decisions related to it (Van der
Stede, 2015). As the company is launching new product and it needs additional plant for

manufacturing the product in 12 months so the company can afford it or not is assessed by making
with the help of budget.
Monitoring business performance – Budget helps the company in measuring actual
performance with estimated performance which will help the company in knowing that the
business is living up to the expectations or not. As the company is launching health led drinks
along with 15 new products will need new marketing campaign as well as new plant for
manufacturing along with new employees and therefore costing of all these need to less than
revenue generated by the company after launching the product.
Control finances of the business – The budget helps the company in controlling finances
of the business. Snappy drinks Plc launching the product which will need employees,
advertisements, other promotional tactics etc. but the amount of finance which each activity will
need can be decided by budget which will make sure that resources of the company do not get
over utilized.
Process of budgeting
The processes which Snappy Drinks needs to follow are mentioned below:
Setting up of objective – Before preparing budget, the company should have clear and
specific goals and objectives which it wants to achieve. The goal of the company need to be
specific and measurable within the specific time frame so that the resources of the company can
be fully utilized and company can maximize its sales and profit. As Snappy drinks Plc launching
new product therefore it is necessary for the company to set up an objective. The objective of the
company can be to increase the sales of the company with 40 % and to increase its market share to
30 %
Determining available resources – The company must analyze its available resources and
determine their availability in reaching the targets. Unless the company does not have proper
resources, the budget cannot be prepared. Snappy drinks Plc to check its availability of resources
checks its cash resources along with additional outside investment (Bogsnes, 2016).
Projecting future needs – Budget is forward looking and needs some estimation. It cannot
be accurate but with the help of past data of company, data of competitors can help the company
in estimating budget. Snappy drinks use its past data on its sales, employee turnover etc. to
estimate cost and profit.
Match objectives and resources available - The available resources of the company not
always fit with the objectives set by the company. At this stage, the finance department of Snappy

Drink Plc need to be very careful and need to do negotiation among various departments of the
company in allocating the cost for utilization of the resources at maximum level.
Final approval – After the budget get prepared, the next step is to acquire approval from
the committee or whoever in the company make decisions on the budget. In Snappy drink plc the
finance manager takes the decision of passing the budget and also the more the budget is focused
on stakeholders, the smoother its process would be.
Distribution of funds – After the budget is being finalized the next step is to distribute the
allocated funds to the various departments by financial officer. In snappy drink Plc the fund gets
distributed among management, sales, finance, HR and administration department (Kamau,
Rotich and Anyango, 2017).
Monitoring and evaluating – Once the funds are distributed and budget is passed the most
important step is to monitor the budget. The Snappy drinks plc need to keep the track of the
success of the budget and need to look for the areas where resources are need or where resources
are getting wasted. With the help of budget formulation, Snappy can make sales and revenue
projections related to the set defined goals and business objectives. Also, budgeting will help
company in estimating the cost expenditure which is going to incur for achieving the set business
goals. Budget can assist Snappy in eradicating cost associated with all the unnecessary and
unproductive business operations thereby helps company in increasing its profits and reducing
wastage of business resources as well as human efforts.
2. Application of traditional budgeting approach for future cost management
Traditional budgeting sets out income and expenditure plan and is not that flexible when it
comes to apply changes. Incremental budgeting is based on slightest change that was occurred in
the preceding period's result. Under this approach the management does not spend too much time
in formulating budget and also do not believe in revaluing the budget.Traditional Budgeting
approach is defined as a process in which budget is formulated for the current year by considering
the previous year budget as a base. Changes are made in the previous year budget by making all
the adjustments related to the expenses of business operations such as rate of inflation, customer
taste and preferences, market demands and situation etc. These factors are considered essential for
framing new period budget under the traditional budgeting approach.
The application of traditional budgeting is that it helps in decision making process to
Snappy by focusing on the issues & bringing necessary changes to them. This budgeting approach

helps company in making sales projections, amount of revenue to be earned from future business
operations. Also, it supports company by forecasting cost expenses for the future.
In Incremental Budgeting approach, the budget for company is prepared on the basis of
the achievement of actual business performance. Incremental addition is done for formulation of
new budget plan for the period. Snappy Drinks Plc is planning to expand its business operations
by with launch of new product which can be done by using of appropriate budgeting method (de
Campos and Rodrigues, 2016). It provides funding and operational stability for working of
Snappy Drinks Plc departments without making detailed analysis of funds requirement. This
helps company in completion of its business task in a cost effective manner.
Example - Snappy Drinks Plc by using Incremental budgeting approach can plan for
introducing new product in the market as per the market and customer demand and also for
expanding its business operations. It helps company in projection of sales & revenue amount,
cost of producing such product. It also assists company in evaluating and understanding of
business strategies adopted by competitor, current market situation which are important
factors in formulation of new budget.
3. Analyse the appropriateness of traditional budget system
The traditional budgetary system is not appropriate to all the part of the business as the
chances of human error is really high in traditional budgeting process as it involves about looking
at a lot of spreadsheets and sometimes the errors lead to cost maximization for the business. The
other problem of the traditional budgeting system that it is time consuming and takes a lot of time
to sort out problems and compare previous year's spending with expected expenditure of the
company. As it takes data of preceding year, the budget predictions for next year can't reach
accuracy which creates trouble for the company (Sridhar, 2017).
Also, if a company wants to promote innovative and loyal behaviors the company need to
put more budget in the department where the employees are loyal and work towards
organizational goals but traditional budgeting do not support expected behaviors as it depends on
spending of the previous year. But on the contrary, in case of fewer overheads the traditional
method can be used in the company for making budget. It can be used when company has a lot of
cash reserve, then the top management of the company does not have to think about next year's
budget and as a result they can concentrate on high value tasks. It can be used when company is
launching new product and for that specific product traditional budgeting can be used.

PART 2
4. Evaluation of different budget methods
Alternative budgeting approaches for Snappy Drinks can be the modern budgeting approaches and
some of those are mentioned below:
Rolling budget – Rolling budget is revised and new set of financial plans for next period
of accounting in the place of current budgeting system of the company. It is a newly updated
budget that takes place of old budget when it expires. Most companies prepare budgets on
monthly basis and most on annual basis. These plans are used to set financial and performance
goals by setting specific benchmarks for the future (de Campos and Rodrigues, 2016).
It is better than the traditional budgeting method as traditional method take previous year
budget and make plan for entire fiscal year whereas rolling budget is live document in which
company do not wait for annual budget but make decisions throughout the year. Rolling budget
also allow company to adjust its forecast to accommodate with recent trends and changes whereas
traditional budget does not allow doing that.
Advantages Disadvantages
 This budgeting method helps Snappy in
increasing the effectiveness by
analyzing the outcomes & its suitable
actions so as to deal with the
unexpected variances.
 It assists company by formulating future
forecast for identifying the impact of
risk associated with the economical,
business and financial changes.
 When business environment is
continuously changing then rolling
budget method is not adequate as it will
lead to waste of time and resources.
 It is not a good method to evaluate
employee's performance as employee
may did not get enough time to improve
performance.
Zero based budgeting – It allows organization to start with zero for each item in their
budgeting list therefore there is no chance of error if right factors are taken into consideration. As
the company wants to invest in marketing for launching new product this year therefore I can

invest more money on that as it starts from zero. This budgeting items becomes the direct result of
whether it generates profits or not for example if human resource department of the company did
not generate profit for last few years then it will get less funding this year.
In traditional budgeting, the costs are not minimal since previous year expenditure
whereas in ZBB the cost can really be minimal as starting point in considered to be zero. Also, the
traditional method budgeting is based on historical information whereas ZBB is based on
estimated information.
Advantages Disadvantages
 The budget under zero based budgeting
method is prepared by taking the base as
Zero or starting from scratch.
 It is very complex method as compared
to the traditional form of budgeting
which ic very simple and easy to
understand as well as implement.
 It helps Snappy in preparation of budget
by considering each item or data as the
new economical appraisal.
 It provides better estimation that which
department will earn more profit
whereas traditional budgeting is based
on assumptions of previous year only.
 This approach is highly time consuming
(O'Shea, 2018).
 The foundation of itself is a zero.
Budget under this concept is planned
from the start and require involvement
of large number of employees which
lead to high labor turnover.
 This method is considered as costly one
as the budget is prepared by taking base
as zero.
Activity based budgeting – ABB records, analyze and research activities that lead to costs of
business. This budgeting method do not take historical information for preparation of the budget.
Advantages Disadvantages
 The activity based budgeting method  This method could lead to insufficient

helps in reducing the cost associated
with the unnecessary business
activities of the company
(Sangiumvibool and Chonglerttham,
2017).
 By removing all the unproductive
business activities Snappy Drinks Plc
can save cost expenditure and use this
cost amount for serving its customer
with better price and quality which
improves company and customer
relationship.
resources allocated it no proper
understanding of business activities is
done.
 It is considered as complex and time
consuming method.
5. Application of budget methods in company
The budget methods include Rolling budget, Zero based budget and Activity based
budgets with the help of which Snappy Drinks Plc can make projections of sales and revenue
amount as well as cost expenditure for the future time period. The application of these budgeting
methods are as follows:
1. Rolling Budget – It helps company in formulation of budget by making the required
changes or updation so as add the next budget period by completing the current period
budget. This budgeting methods ensures the continuity of workflow in the business
(Saarinen, 2017). Rolling budgets are more up-to-date as it involves an incremental
extension of the current budget plan. It also responds to the unexpected changes by
making proper adjustments. Example - Adopting 12 month financial planning horizons
with initial budget beginning from January to December.
2. Zero based Budget – Under this budgeting method, Snappy Drinks Plc can prepare its
budget by considering the previous year budget & starting it from scratch base or by
starting the budget at zero based. In this method all business cost expenses are justified or
examined to assess whether it is essential in respect of company's operations before adding
to the new budget. This helps in making reduction in the cost expense by determining
where any business operation or activity is working towards business goals or is

unproductive one. It helps in proper allocation of business & financial resources. Also,
supports accomplishment of business goal in a cost effective manner by making
identifying & reducing wastage and removes out dated business processes.
3. Activity based Budget – This budgeting method records, makes statements and helps in
analyzing those business activities which are increasing the cost factor of the business. It
ensures that Snappy Drinks Plc is providing the product & services of better quality,
conducting its business operations efficiently, better allocation of resource has been made
as per the requirements of business priorities by making balance between the operational
requirements of the business (Ellegård and Glenngård, 2019). This method also
emphasizes on minimizing those unproductive and infeasible business activities and cost
associated in carrying on by making identification of the financial impact on the business
operations of Snappy Drinks Plc. Example – for producing one energy drink variable cost
is $5 and fixed cost is $50, then Snappy will make cost allocation as per the product
requirement.
6. Analyse the suitable method for the company
In case of Snappy Drinks Plc company, the most appropriate method of budgeting is
Activity based budgeting. It helps the company in making improvement between the relationship
of company and its customers by rendering the better quality services and products at best and
most affordable price. By this budgeting method Snappy Drinks Plc can eliminate all the
unnecessary cost expenditure associated with business activities and operations by identifying the
most unproductive functional department. It emphasizes is always on meeting customer
expectations and bringing them satisfaction level. The activity based budgeting method provides
transparency in the business operations.
CONCLUSION
From the above report it can be concluded that, financing of business organization is
considered as an important aspect which has to be done by adopting optimum capital structure.
Every company should focus on maximizing its value of firm and minimizing its overall cost of
capital. The report has discussed that by preparing a good and effective budget, Snappy Drinks
Plc can make projections of sales and income from future business operations. Also, it has
disclosed that by making budget Snappy can forecast about its future cost expenses. As the

company is thinking of expanding its business operations, activity based budgeting is considered
more suitable as it considers each business expense that whether it is creating worth to the
business operation or not. It also assists company in minimizing unnecessary cost expenses
associated with unproductive business department.

REFERENCES
Books and Journals
Bogsnes, B., 2016. Implementing beyond budgeting: Unlocking the performance potential. John
Wiley & Sons.
de Campos, C. M. P. and Rodrigues, L. L., 2016. Budgeting Techniques: Incremental Based,
Performance Based, Activity Based, Zero Based, and Priority Based. Global Encyclopedia of
Public Administration, Public Policy, and Governance. pp.1-10.
Ellegård, L. M. and Glenngård, A. H., 2019. Limited Consequences of a Transition From
Activity-Based Financing to Budgeting: Four Reasons Why According to Swedish Hospital
Managers. INQUIRY: The Journal of Health Care Organization, Provision, and Financing.
56. p.0046958019838367.
Gordon, V., Osgood Jr, J. L. and Boden, D., 2017. The role of citizen participation and the use of
social media platforms in the participatory budgeting process. International Journal of Public
Administration. 40(1). pp.65-76.
Kamau, J. K., Rotich, G. and Anyango, W., 2017. Effect of budgeting process on budget
performance of state corporations in Kenya: A case of Kenyatta National Hospital.
International Academic Journal of Human Resource and Business Administration. 2(3).
pp.255-281.
O'Shea, J. P., 2018. Viability of Zero-Based Budgeting Methods in the City of Albuquerque.
Popesko, B., and et.al., 2015. ARE THE TRADITIONAL BUDGETS STILL PREVALENT:
THE SURVEY OF THE CZECH FIRMS BUDGETING PRACTICES. Transformations in
Business & Economics. 14.
Saarinen, J., 2017. From budgeting to rolling forecasting: achieving goals for rolling forecasting
implementation: case study evidence from production and retail industry.
Sangiumvibool, P. and Chonglerttham, S., 2017. Performance-based budgeting for continuing and
lifelong education services: the Thai higher education perspective. Journal of Higher
Education Policy and Management. 39(1). pp.58-74.
Sridhar, M. S., 2017. Unit-11 Budgeting Techniques. IGNOU.
Van der Stede, W. A., 2015. Budgeting and management control. Wiley Encyclopedia of
Management. pp.1-7.

Online
Activity Based Budgeting. 2019. [Online]. Available through:
<https://www.myaccountingcourse.com/accounting-dictionary/activity-based-budgeting>.
Budgeting process. 2019. [Online]. Available through:
<https://saylordotorg.github.io/text_personal-finance/s09-01-the-budget-process.html>.