Which ones better? Traditional or alternative budgeting systems

Leeworthy Ices is undergoing significant changes due to Brexit, aiming for growth through new consumer markets and possible expansion in manufacturing capacities. Traditional budgeting approaches are insufficient, as they would not accurately capture the changing business scenarios and capitalize on new opportunities. Alternative budgeting systems, such as Activity-Based Budgeting (ABB) and Zero-Based Budgeting (ZBB), can better equip the company to adapt to these changes. To be effective, a robust mechanism is needed to periodically review the reflection of business operations and economic environment under the new legislative framework.

EXECUTIVE SUMMARY
Planning, control and performance management is crucial for any business operations and is often
facilitated through budgets. This report analyses the various traditional and alternative budgeting
techniques and their effectiveness within the given set of conditions. Part 1 provides understanding
of the traditional budgeting techniques and its applications on Leeworthy Ices. It further discusses
the disadvantages of such technique for Leeworthy Ices owing to changes in the business structure
and regulations. Part 2 evaluates the new alternative budgeting techniques and its application to the
business of Leeworthy Ices. It further analyses the appropriateness of one budgeting technique over
the other. Past 3 Concludes.
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Contents
Introduction...........................................................................................................................................3
Part 1 Analysis.......................................................................................................................................4
Benefits of Traditional Budgets (Incremental budgets).....................................................................4
Application of traditional budgeting approach to business like Leeworthy Ices................................4
Relevance of traditional approach.....................................................................................................5
Part 2 Analysis.......................................................................................................................................7
Alternative budgeting systems..........................................................................................................7
Potential Applications of alternative budgeting systems and problems............................................8
Which ones better? Traditional or alternative budgeting systems....................................................9
Part 3 Conclusion.................................................................................................................................10
References:..........................................................................................................................................11
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Introduction
Business operations require continuous monitoring and adequate planning. This is crucial to ensure
that the right people are rewarded for their contribution to the overall profitability of the business.
Budget is the basic and prominent tool for planning, control and performance management. The
business operations and underlying analysis has underwent changes in the nineteenth century and
so has been the budgeting approach. The traditional approach to budgeting like incremental budgets
were once effective with stable business conditions. However, these too are being replaced with
alternative budgeting techniques that facilitate changes in business strategies and economic
environment to be factored within the budget itself. Even though traditional budgeting techniques
are still prevalent in the business today, modern corporations have gradually adopted the new
alternative budgeting techniques in the form of rolling budgets, ABB and ZBB.
Leeworthy Ices with its headquarters in UK will face the economic unknown impact of Brexit.
Further, it is strategizing on building on new opportunities through expansion of manufacturing
facilities or joint ventures with business partners in new markets. This calls for a shift from
traditional budgeting tool towards dynamic alternative budgeting techniques.
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Part 1 Analysis
Benefits of Traditional Budgets (Incremental budgets)
Traditional budgeting system like incremental budgets is a planning and control tool for the business
operations. Business operations typically involves use of resources in the form of raw materials,
manpower and other utilities. These resources are not freely available and hence requires adequate
planning from the business end to ensure smooth and economical procurement. Thus viability of the
operations are maintained. The ice-cream manufacture business operations requires inputs of raw
material like milk and milk products which have a very short shelf life and required to consumed
fresh to ensure quality output.
The incremental budget outlines the range and scale of activities for the upcoming current year on
the basis of the actual performance and expected demand for the company’s product. Thus the
business managers have the required funding and the level of operations to be achieved for the
upcoming year. This helps the business managers to plan out the activities and manage scalability of
their operations. The incremental budgets assumes similarity of business conditions in the upcoming
year as well and hence is an useful planning and control tool under stable economic and business
conditions.
The incremental budget provides a benchmark for comparison of the actual performance. It serves
as a measure point to adjudge the actual performance of the business and its managers. The overall
variance in the actual profit in comparison with the budgeted profit may be due to efficiency or
inefficiencies of a particular department. Incremental budgets will facilitate to determine the
contributors to the overall profitability vis-à-vis the budgeted profits. This control mechanism
ensures that the efficiencies are suitably rewarded and any inefficiencies could be addressed in the
future. (Cardos, 2014)
This dual role of planning and control tool of the incremental budgets helps in the overall
development of the business. With a plan in place in the form of budgets, the managers can arrange
for resources in a timely manner at a reasonable price. In absence of the business plan for the year,
the managers would have to shell out premium for sourcing raw materials and labor, if it were to
suddenly scale up operations. Moreover, it may lose out on servicing the consumer demand and lose
the market share. Thus incremental budgets helps the business to bank on the expected (budgeted)
surge in demand and avoid paying unnecessary premium for it resources.
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Application of traditional budgeting approach to business like
Leeworthy Ices
The business of organic dairy ice-cream manufacture relies on the sourcing of quality organic raw
materials and processing them as fresh as possible. This helps it to maintain the quality of the
finished output. The logistics of the business is another crucial area as the finished products has a
very short shelf life and is required to be stored in a controlled temperature. Delays in the shipment
to the supermarkets and distribution centers will affect the quality of the product. Failure to provide
adequate cooled storage to the finished output will spoil the output and render it unfit for sales.
Traditional budgeting approach like incremental budgets will chart out the level of operations for
the current year. This will enable the procurement manager to ensure smooth availability of fresh
organic dairy at reasonable prices throughout the year. The production manager can manage the
production of the desired output and ensure sufficient storage space for the finished output. The
logistics team has a plan to adhere through which the timely movement of the packaged output
could be arranged to the market and distribution centers spread across various countries.
The incremental budgets is more crucial to the Leeworthy Ices since the manufacturing base is
located within one country and the consumer market is spread across a region comprising of many
nations. Efficient planning on the basis of the budget will ensure scalability of production and
distribution activities without compromising the quality of the finished product. Business like
Leeworthy Ices deal in product that has a very small range of shelf life right from the inputs in the
form of milk and milk products to the output in the form of ice creams which required temperature
controlled storage and needs to be consumed within a small time frame ranging from few days to
few weeks.
The overall approach to planning and control using traditional budget approach is the estimation of
consumer demand. This crucial area of the business will affect the overall performance of the
business as the entire procurement, production and distribution cycles rests on the estimation of the
sales for the year. Any error in the sales budget will adversely affect the quality of the finished
product as the unsold output would be unfit for further sales owing to lower shelf life. Thus the
traditional budget process needs to focus on the areas of demand of the business which it usually
estimates to a steady percentage rise from the actual demand of the past year.
Relevance of traditional approach
The traditional budgeting approach is on the premise of stable business conditions from one period
to another. Leeworthy Ices will witness a significant change in business conditions. The current
business is based out in UK with all the manufacturing facilities and entire marketing team based out
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in UK. The business currently caters to consumers in UK and across Europe. The sales offices spread
across Europe manages the sales in their respective zones.
The future business environment of the business is riddled with uncertainty largely due to
impending Brexit in the current year. The economic impact of the Brexit is unknown on the business.
The possible restrictions of free flow of goods and services could hamper the existing business
structure where the manufacturing and marketing base is centralized in one country and the sales
office is scattered across the consumer market in other countries. There are many variables in the
economic environment of the current financial year that a traditional budgeting approach would fail
to capture. The business is expected to adopt a change in strategy by focusing on growth through
installation of new manufacturing facilities or entering into business agreement or joint ventures in
the new consumer markets. These crucial aspects would not be effectively captured under the
traditional budgeting approach. This is because of the following limitations of the traditional
budgets:
1. It assumes similar business conditions of the earlier years.
2. It prevents any changes in the operations to reflect the true forces of the market.
3. The focus is on cost reduction rather than business growth and value creation.
4. The traditional budgets promotes departmental working without effective communication
and knowledge sharing between the departments. People tend to work under silos as the
budget is the sole compass for business operations.
5. The traditional budget is often based on estimation of expected demand and is just a
mathematical increase in the actual performance of the past year.
6. They reinforce top-down authoritarian approach to business management.
7. The traditional budgeting approach is a pure mathematical interpretation of the past
performance. The behavioral aspects of the human resources and the changes in the
business environment are not addressed under this approach. Thus it often tends to be aloof
from the economic reality. Despite of this inherent weakness, the managers may end up to
be rewarded for their performance in line with the budgets even though the budgets may
have caused loss of opportunity of possible wealth creation.
8.
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Part 2 Analysis
Alternative budgeting systems
Modern business scenarios have witnessed a sharp change to the budgeting process with business
houses ditching traditional budgeting approaches to make way for alternative and more business
friendly alternative budgeting systems. Zero Based Budgeting, Activity Based Budgeting and rolling
budgets are some of the alternative approaches to budgeting that have been developed and being
used by modern businesses. These alternative approaches are a step towards reducing the
limitations that are faced by the traditional budgeting approaches.
ZBB is an approach that ignores the past performance and budgets. It involves building up the
budget for the year right from zero. The entire gamut of business operations and business activities
are identified. These are evaluated in terms of usefulness to the business objectives in light of the
impending changes in plans and strategy over the current financial year and long term in general.
Thus ZBB entails an in-depth analysis and understanding of the current business operations and
business strategy for the future operations. (Cheong, 2012). It serves the objective of cost savings as
the redundant and futile business activities are identified and killed. The resources that were earlier
tied up in these redundant activities are freed for contribution to the other more crucial business
activities. This internal reallocation of existing resources is the major advantage of ZBB.
ABB is an approach that involves allocation of required resources to the activities of the business by
identifying relevant cost drivers. The overall business operations and process is analyzed to identify
the business activities and cost drivers which is then used to identify the budget for that specific
activity. (Steven, 2007)
Rolling budgets is a continuous budgeting approach where in a particular period of time of added to
the current budget on passage of such period. This period is usually a month. Thus the budget is
updated with the figures for additional month on completion of every month. The rolling budget will
therefore reflect the budget for the period of say 12 months. (Lynn and Madison, 2004). The actual
performance is analyzed to tweak the new period added to the current budget so that the overall
budget reflects the current business environment.
Leeworthy Ices is expected to witness a significant change in its business environment with the
impending Brexit during the current year. These alternative budgeting approach would enable the
business to budget for the realistic performance and changes in business strategy. The changes in
business activities owing to Brexit, expansion into new consumer markets through joint ventures and
possible set up of new manufacturing base will not be captured under the traditional budgeting
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approach and the only viable option of effective budgeting exercise would be resort to any of these
alternative budgeting approaches.
Potential Applications of alternative budgeting systems and
problems
The alternative budgeting systems can have the following applications in case of business of
Leeworthy Ices:
1. The business environment of the company is volatile due to the unknown impact of the
Brexit. The new set of rules and regulations that will govern the business dealings and
movement of resources between UK and the EU will have a significant impact on the
business of Leeworthy Ices. It is difficult to determine the exact impact on the business
operations due to absence of the new set of formal rules and regulations. Hence the current
budgeting practices would not be able to capture these changing scenarios. The alternative
budgeting system in the form of rolling budgets would find useful application in this
scenarios. Since the rolling budgets are updated over every period, which is usually a month,
the budget for the company could be adjusted as and when the new rules and regulations
are in place. This will ensure that the planning, control and performance objectives of the
budget is not compromised due to errors in the budget.
2. The company is evaluating the need to establish new manufacturing base in another
location. This will involve setting up a new base right from zero. A detailed analytical budget
in the lines of ZBB or ABB would be ideal in this scenario. The budget could be applied onto
the existing business process in place in UK. This would form base for budgeting for the new
manufacturing base. The impact of the currency fluctuation would be an unknown in such a
case. However, the same can be incorporated in the budget on a rolling basis. Similar
approach would be viable for the joint venture option as well.
The possible problem areas for Leeworthy Ices would be as under:
1. The Joint Venture plan is at a very informal stage. Budgeting for a joint venture would
require equal level of inputs from the business partner with whom venture would be set. At
this stage the same might not be available since there is no formal arrangement. This would
make budgeting and planning for joint venture activities difficult.
2. At present the UK Pound has witnessed a significant depreciation against global currencies
since the announcement of Brexit. (Ward and Mnyanda, 2016). The probable impact of the
same once the Brexit is in place would be difficult to factor in the budget.
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3. The impact of the new regulation on the budget would entail detailed analysis and could be
prone to error of judgement as there is not historic data to correlate the events with.
4. The new budgeting techniques required decentralized decision making environment. The
current centralized management set up will have to undergo a change with more decision
making authority being given to local managers.
5. New business ventures with US counterparts would make Leeworthy liable to comply with
US food industry norms which are lenient than the present EU norms. (Lau, 2015). The
budgeting for compliance with new rules would be difficult.
Which ones better? Traditional or alternative budgeting systems
Each of the approach to budgeting, be it traditional or alternative, has its advantages and
disadvantages. Their applicability and usability depends on the business scenario which is being
budgeting for. A robust business environment with expected volatility and changes in addition to
shift in business strategy calls for application of alternative budgeting systems. A stable business
conditions and without any major plans for restructuring or expansion may find application of
traditional approach to budgeting more suitable. Any of the budgeting approaches discussed above
would be effective if used in response to the underlying business conditions and strategy.
Leeworthy Ices is at a tangent of radical changes to its business operations because of Brexit. It will
be governed by a new set of rules and regulations in the food industry. Further, the business is
aiming for growth through business ventures in new consumer markets and a possible expansion in
manufacturing capacities to cater to such increased demand. These factors render the traditional
budgeting approach futile since the objectives of efficient planning, control and performance
management, which is expected of any budgeting process, would not be accurate. (Hanninen, 2013)
Alternative budgeting systems would be better equipped to capture the changing business scenarios
and capitalizing on new business opportunities. However, this would require a behavioral change in
the management. The fundamental changes to business culture is imperative to consider a direct
shift from traditional budgeting approach to alternative budgeting systems within the time frame of
less than 1 year. This will call for a change in management model of the company and empowering
the business managers to make decentralized decisions. (Reka et al, n.d.). This drastic shift in
budgeting approach will have to be incorporated in the management function as well.
The application of alternative budgeting system will work only if a robust mechanism is in place to
periodically review its reflection of the business operations and economic environment under new
legislative framework.
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Part 3 Conclusion
The business environment of Leeworthy Ices is expected to change with the Brexit. Further, the
business activities would also change with expected expansion plans through set up of
manufacturing units or entering into joint venture with new business partners. Evaluation of the
different budgeting techniques with the expected changes to the business structure and business
environment, the company is better place with the adoption of a healthy mix of traditional and
alternative budgeting techniques.
ABB and ZBB will help the business to fade out redundant activities and the traditional budget could
be used to scale up and compare the budgets derived from ABB and ZBB for its accuracy. This mix of
the budgeting techniques is possible with a change in overall business understanding and
management practices prevalent at present. This will require strong commitment to new budgeting
technique from the top management. Empowering local managers with decision making and making
them accountable for the profits of their business areas will ensure a smooth transition to the new
budgeting technique that will help Leeworthy Ices to propel its business operations and performance
in the future.
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