Cash Budgets and Zero Based Budgeting

This document provides an introduction to financial management and the importance of cash budgets for businesses. It also explains the concept of zero based budgeting and its advantages over traditional budgeting. The document includes a cash budget for a hotel for the year 2020 and discusses the process of zero based budgeting. It is relevant for students studying financial management or budgeting techniques.

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Cash Budgets for the year from January to December for the year 2020 of Hotel Haversons ...1
TASK 2............................................................................................................................................5
a) Zero Based Budgeting and its process.....................................................................................5
b) Assess advantages zero based budgeting is having over traditional budgeting......................6
C) Organisations introducing zero based budgeting technique in practical terms.......................8
CONCLUSION ...............................................................................................................................8
REFERENCES..............................................................................................................................10

INTRODUCTION
Financial management refers to organising, planning, directing & controlling financial
activities like procuring and utilising the funds of enterprise. It refers to application of general
principles of management to financial resources of enterprise. Financial management is
undertaken ensuring regular & adequate supply of the funds . For ensuring that adequate returns
are available to the shareholders that depends on earning capacity, share's market prices and their
expectations (Financial Management, 2019). They enable the company to effectively utilise the
funds of company. Financial management involves various activities that are undertaken by the
management for effectively managing different operations of the business. Mostly companies
have separate department for managing the financial affairs of company (Mitchell and Calabrese,
2018). For financial management, financial managers are appointed by companies. It involves
various budgeting techniques like traditional budgeting, cash budgeting, zero based budgeting
and many more. The present report is about the Haverson Ltd that manages chain of hotels in
Europe and United Kingdom. One of its hotel of the group is situated in United Kingdom
Llantwit have identical 80 double rooms and 50 two bed rooms for which standard rate of 100
pound is charged per night. Report will give monthly cash budget for the hotel and understanding
about the zero based budgeting and its importance over traditional budgeting.
TASK 1
Cash Budgets
Cash budget could be defined as an estimation of cash flows for business over specific
time periods. The budget is generally used for assessing that company is having sufficient cash
for for its operations. Organisations uses sales & production forecasts for creating cash budgets,
with the assumptions associated with necessary spendings and the accounts receivable. If
company do not have required liquidity for its operations it should raise capital using through
issue of stocks or debts (Bratton,2018). Cash budget computes cash inflow and cash outflow for
given period. Budget allows company to forecast about the cash requirements for the year (Cash
Budgets, 2019).
Cash Budgets for the year from January to December for the year 2020 of Hotel Haversons
Particulars January February March April May June
1

Receipts :
Sales 382414 298218 291005 285111 325600 380450
Cash sales 229448.4 178930.8 174603 171066.6 195360 228270
Collection from the
credit sales 75565.0064
130821.70
88 113567.572
111046.873
6
117939.42
8
136389.7
2
Receipts from sale of
the long term assets
Receipts from loans
Other receipts
Total receipts 687427.4064
607970.50
88 579175.572
567224.473
6
638899.42
8
745109.7
2
Payments:
Payment made on
cash and the credit
purchases
bed purchase 2560
Kettle tray sets
Furniture 50000 50000 50000
Furniture and fittings
Buildings cost
Payment for the
expenses:
Printing and
stationary cost 5800 4000 4000 4000 5800 4000
laundry services 18750 18750
salaries 26666 26666 26666 26666 26666 26666
wages 40000 40000 40000 40000 40000 40000
Light and heat 30000 30000
Marketing cost 25000
petrol cost 1100 1100 1100 1100 1100 1100
Decorating cost
Maintenance cost 6000 6000 6000 6000 6000 6000
Cleaning cost
Cash drawings
Purchase of the long
term assets:
motor vehicle 30000
land 28000 52000
Repayment of
debentures or the
loans
Other payments :
Complimentary
toiletries 8166.67 8166.67 8166.67 8166.67 8166.67 8166.67
2

Business rates 75000.00 75000.00 75000.00
corporation tax 779000.00
Total payments 165732.67 154682.67 190932.67 115932.67 158482.67
115932.6
7
Net receipts 521694.74 453287.84 388242.91 451291.81 480416.76
629177.0
5
Bank balance at
beginning 318000.00 203694.74 249593.10 138649.80 312642.00
167774.7
6
Bank balance at
period end 203694.74 249593.10 138649.80 312642.00 167774.76
461402.3
0
Working note:
Credit sale 152965.60 119287.20 116402.00 114044.40 130240.00
152180.0
0
52.00% 79542.11 62029.34 60529.04 59303.09 67724.80 79133.60
5.00% 3977.11 3101.47 3026.45 2965.15 3386.24 3956.68
Collection after
discount 75565.01 58927.88 57502.59 56337.93 64338.56 75176.92
47.00% 71893.83 56064.98 54708.94 53600.87 61212.80
Total collection 75565.01 130821.71 113567.57 111046.87 117939.43
136389.7
2
Particulars July August September October November
Decembe
r
Receipts :
Sales 400600 480750 520180 400800 375080 340900
Cash sales 240360 288450 208072 240480 225048 204540
Collection from the
credit sales 150683.16 170309 244562.352 225888.84 149466.208 137876.88
Receipts from sale of
the long term assets
Receipts from loans
Other receipts
Total receipts 791643.16 939509 972814.352 867168.84 749594.208 683316.88
Payments:
Payment made on
cash and the credit
purchases
bed purchase 2560
Kettle tray sets 7150
3

Furniture
Furniture and fittings 37500 37500 37500 37500
Buildings cost 109200 109200 109200 109200 109200
Payment for the
expenses:
Printing and
stationary cost 4000 5800 4000 4000 5800 4000
laundry services 18750 18750
salaries 26666 26666 26666 26666 26666 26666
wages 40000 40000 40000 40000 40000 40000
Light and heat 30000 30000
Marketing cost 25000 25000
petrol cost 1100 1100 1100 1100 1100 1100
Decorating cost 18000
Maintenance cost 6000 6000 6000 6000 6000 6000
Cleaning cost 10000
Cash drawings
Purchase of the
long term assets:
motor vehicle
land
Repayment of
debentures or the
loans
Other payments :
Complimentary
toiletries 8166.67 8166.67 8166.67 8166.67 8166.67 8166.67
Business rates 75000.00 75000.00 75000.00 75000.00 75000.00 75000.00
corporation tax
Total payments 110932.67 215682.67 262632.67 250632.67 288182.67 262632.67
Net receipts 680710.49 723826.33 710181.69 616536.17 461411.54 420684.21
Bank balance at
beginning 461402.30 219308.20 504518.14 205663.55 410872.62 50538.92
Bank balance at
period end 219308.20 504518.14 205663.55 410872.62 50538.92 370145.30
Working Note
Credit sale 160240.00 192300.00 312108.00 160320.00 150032.00 136360.00
52.00% 83324.80 99996.00 162296.16 83366.40 78016.64 70907.20
5.00% 4166.24 4999.80 8114.81 4168.32 3900.83 3545.36
Collection after
discount 79158.56 94996.20 154181.35 79198.08 74115.81 67361.84
47.00% 71524.60 75312.80 90381.00 146690.76 75350.40 70515.04
Total collection 150683.16 170309.00 244562.35 225888.84 149466.21 137876.88
4

TASK 2
a) Zero Based Budgeting and its process.
For staying on top of business expenses, companies are are required to plan and update
constantly the business budgets. When companies are using traditional budgeting method they
use previous budgets that might not be effective way of preparing a budget.
Zero Based Budgeting
Zero Based Budgeting is defined as the method that is used for preparing budget of
company for specific time periods under the consideration where the budgets of company are set
from the scratch after all activities of company are re-evaluated from starting.
ZBB allows companies to begin with zero as base for every item that is include in there
budgeting list. This eliminated the chances of all the errors by taking all the right factors into
consideration (Zero Based Budgeting, 2019).
This budgeting is beneficial as company is not required to depend over any reference
points for making estimations over budget of particular item. This process requires justification
for every dollar spend over the expense that is occurring on constant basis over the years.
Example – If company each year is spending around 10000 pounds for rent for the warehouse
building. , under process of zero based budgeting it is presumed as no rent was paid previously.
This causes that every activity of the warehouse should be justified, reviewed and needs to be
documented before it is given space in the budget. ZBB in comparison with other popular
budgeting techniques that focuses over incremental changes from current budget and current
expense (Menifield, 2017). In other terms, under typical processes of budgeting rent expense of
10000 pounds is accepted and focus is whether the rent for upcoming budgets are required to
have adjustment for inflation of around 300 pounds or related amounts.
While the ZBB would be much more time taking rather than focusing over incremental
changes related to the next budgets, it results in cost savings significantly. For example ;
Documentation and analysis of warehouse activities that are required by ZBB can lead effective
utilisation of the warehouse space, inventory management etc. If they are managed efficiently
than warehousing budgets may be dragged down to 6000.
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Employees of the company could also be involved for creating ZBB. Employees can
provide for the expenses that will be incurred and where company could expenses of the
business.
It was mainly discussed in 1970's for governments and businesses. Today it is used by various
large organisations for significantly reducing their unneeded expenses.
Zero Based Budgeting Process
Before preparing Zero Based budgets few steps are to be kept in mind. The process follows some
basic steps
 Identifying the business goals
 Developing and analysing new ways of achieving goals
 Discovering new ways for funding the business process
 Prioritizing funds
Through these steps of zero based budgeting, company can determine about the expenses that
will go towards achievement of business goals which directly benefits the company. This helps
company in finding new ways for spending.
b) Assess advantages zero based budgeting is having over traditional budgeting.
Advantages of Zero Based Budgeting over traditional budgeting
Profit Centre - The budgeting technique gives priority to profits above the expenses. Therefore
the units or departments that are generating profits whether directly or indirectly are given more
preferences. As result funds are available to the business for generating profits and revenues.
Detailed - Details can help in saving the business. The approach reduces errors and helps
business in looking deeply in the business processes. Due to this inefficiencies are properly
handled and this helps in making the business very effective.
Strategic - As the aim of every business is of growing, to get more customers, and to serve more
clients. The budgeting techniques helps business to become strategic in its approach & only
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those amounts are spent which are required for growth of business. This will give direction to the
spending of the business and this would become means for achieving something worthwhile.
Situational - ZBB does not encourage practitioners in following the rules and regulations. They
are done with mind of achieving and maximising the wealth of the organisation (Advantages of
ZBB, 2019).
Why Zero based Budgeting over traditional budgeting
Zero based budgets do not consider the budget made in the prior years unlike traditional
budgeting. Traditional budgets reviews budget prepared in previous year and adjust the budgets
of current year based on information given in previous budgets. Zero based budgeting is time
consuming process as compared with traditional budgeting as in this everything is to be started
from the beginning and to frame strategies which are essential for cutting the expenses. This
monitors the expense of every dollar. ZBB is useful in making departmental budgets. Funds
could be allocated to the managers of different department. ZBB cuts down every unnecessary
spending of the company.
Mandatory Systematic Analysis
Before identifying the unit or department that will be getting funds, the budgeting
techniques encourage analysing carefully requirements for funding. The manager should be able
to give appropriate reasons for getting the approvals for funding. Funds will not be given to
particular department that comes down over other reason to choose ZBB over the traditional
budgets.
Ensuring Cost Effectiveness
Major reason behind which the zero based budgets are used because it helps in saving
lots of upfront cost. For instance ; it is observed by manager that one department is not
performing well. Staff of accounting department is not performing well and work is not adding
value in generating profits for the company (Epper and Fehr-Duda, 2015). Two things could be
done in this scenario ; employees could be shifted to other job role that helps them in
appreciating their abilities and talent or the accounting work could be outsourced from the next
year.
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Based over routine decisions
In zero based budgets decisions triumphs over the routine where the traditional budgets
almost activities are of routine. In ZBB every thing is questioned, analysis is done of the
approaches and things may also be redone. Because of this there is no space left for wasting
money, time and efforts. Management are also in control as the decisions matter more than the
routine (Han, Zhang and Luo, 2016).
C) Organisations introducing zero based budgeting technique in practical terms.
ZBB is an approach facilitating particular process that evaluated the programs of
company. It allows reductions in the budgets and and also permits re-allocation of resources that
range from low to high priority procedures & programs. It is used as cost analysis tool that helps
company in decision-making.
Companies could modify or develop their own separate approaches for ZBB and these
five will provide baseline for the implementation.
Start – Begin from the ground zero. Creating new annual budgets from the scratch without the
use of previous year's budgets as baseline
Evaluate – Evaluating every area of cost. Reducing and eliminating all the unnecessary services
or activities.
Justify – All components of budget should be accounted. To identify the areas which are
relevant, cost effective and help in driving cost savings.
Streamline – Determining which activities are required to be performed & how they are to be
performed. Standardizing and automating the processes where it is possible.
Execute – Rolling out execution process and comprehensive planning. Communicating the plans
clearly, and also the roles & responsibilities (Zero Based Budgeting, 2019).
CONCLUSION
Carrying out the above study it could be conclude that financial management play an important
role in the business. Financial management helps the organisation in making the strategies for
the business that will help in achievement of the financial goals. All the activities of business
requires funds to carry out its activities and financial management effectively allocates the fund
to different departments. There are various budgeting techniques that are used by organisation to
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save their costs and eliminate the unnecessary spendings over unproductive activities. Cash
budget is essential as it helps company to track the outflow and inflow of cash. It can than
monitor and control the cash spendings over different activities. Zero based budgets are prepared
by organisations for allocating the resources efficiently to the activities and departments. They
are more preferred over the traditional budgeting as they are not made on e previous estimates
that may have error.
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REFERENCES
Books and Journals
Mitchell, G.E. and Calabrese, T.D., 2018. Proverbs of nonprofit financial management. The
American Review of Public Administration. p.0275074018770458.
Bratton, A., 2018. Cash oriented budget accounting (Doctoral dissertation, Тернопіль: ТНЕУ).
Menifield, C.E., 2017. The basics of public budgeting and financial management: A handbook
for academics and practitioners. Rowman & Littlefield.
Epper, T. and Fehr-Duda, H., 2015. Risk preferences are not time preferences: balancing on a
budget line: comment. American Economic Review. 105(7). pp.2261-71.
Han, K., Zhang, C. and Luo, J., 2016. Taming the uncertainty: Budget limited robust
crowdsensing through online learning. IEEE/ACM Transactions on Networking
(TON). 24(3). pp.1462-1475.
Online
Cash Budgets. 2019. [Online]. Available through : <https://debitoor.com/dictionary/cash-
budget>.
Financial Management. 2019. [Online]. Available through :
<https://www.managementstudyguide.com/financial-management.htm>.
Zero Based Budgeting. 2019. [Online]. Available through :
<https://www.wallstreetmojo.com/zero-based-budgeting/>.
Advantages of ZBB. 2019. [Online]. Available through : <https://www.anaplan.com/blog/zbb-
zero-based-budgeting-guide/>.
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