Zero Base Budgeting Analysis and Comparison

The provided report presents a detailed examination of zero base budgeting and its advantages over traditional budgeting methods. It delves into the specifics of rolling budgets, zero base budgets, and activity-based budgets, providing insights into the benefits of using these approaches in business finance. The report also mentions the use of structured finance techniques, accounting conservatism, and the role of small business finance outlooks in executive compensation contracts.

BUSINESS FINANCE

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
PART 1............................................................................................................................................1
1) The purposes of preparing a budget and what processes the company needs to follow. .......1
2) The application of traditional budgeting approaches to plan future cost management..........3
3) Analysis whether the traditional budgetary system is appropriate in the business or not......4
PART 2........................................................................................................................................5
4) Alternative budget methods and each method attempts to improve on the traditional
approach......................................................................................................................................5
5) Potential application of these methods to the company..........................................................5
6) The Zero base budgeting method is more appropriate for the Company...............................6
CONCLUSION................................................................................................................................8
REFERENCES ...............................................................................................................................9

INTRODUCTION
Business finance refers to money and funds that is needed to run a business. The firm
needs finance to carry out its Business operations effectively and efficiently. Business finance
also involves arrangement of funds through taking credit and loans. Business finance refers to
the smooth utilization of funds. The project report is based on Snappy Drinks plc. The Project
report will outline the purposes of preparing a budget and will suggest what processes the
Snappy drinks plc needs to follow. The project report will explain how the Budget process helps
in development of business model. The project report will showcase the application of traditional
budgeting approaches in order to plan future cost management. The project report will illustrate
the examples how products and processes for this business will be budgeted for in a traditional
and incremental approach. The report will analysis whether traditional budgetary system is
appropriate to all parts of the business or not. The project report will explain the alternative
budget methods like rolling budgets, zero based budgets and activity based budgets. The project
report will explain how each method attempts to improve on Traditional approach and will also
reflect its respective drawbacks. The project report will explain potential application of these
methods. Lastly the report will analysis which method would be best for the Company.
MAIN BODY
Snappy Drinks plc
Snappy drink plc is an international manufacturer of energy drinks. The Company is established
about 15 years ago. Snappy drink is located in Nottingham. The founder of the Company is
Donna. The Snappy drink is listed on London Stock Exchange.
PART 1
1) The purposes of preparing a budget and what processes the company needs to follow.
Purposes of preparing a budget
 The budget helps to put business strategy into operations. The budget describes
Company's Mission, Vision and values.
 The Budget helps in allocation of Business resources. The Budget also facilitates the
reallocation of the business resources.
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 The Budget assigns control in the business. The Budget centralised the control for
making business decisions at the institutional level.
 The Budget describes institutional plans. The Budget helps in forecasting. The budget is
helpful in minimising the business losses.
 The Budget decide the composition of capitalization in order to insure availability of the
funds at reasonable cost (Iwasaki and et.al, 2018).
 The Budget helps in accelerating the efficiency of Business operations. It facilitates the
coordination with various business departments.
 The budget is helpful in predicting the Company's future sales, production cost and other
expenses.
 The Budget is helpful in inventory management. It ensures effective control over it.
Processes the company needs to follow
 The Snappy drinks plc firstly need to update budget assumptions. The Company should
review to assumptions about its business environment. As the company is planning to
change their budgeting system.
 The Snappy drinks plc needs to determine the capacity level of primary bottleneck that
constrain the Snappy plc from the future revenue growth and sales.
 The Snappy drinks plc should determine the amount of funding that will be available
during the budget period.
 The Snappy drinks plc should determine the step costing points and should defines the
amount of these costs that will be incurring.
 The Snappy drinks plc should issue budget package. The company needs to obtain the
revenue forecast from the sales manager and need to formalize with the company's CEO
Donna. The Company also needs to obtain the department budgets (Ylhäinen, 2017).
 The snappy drinks plc should update the budget model with the master budget model.
Lastly the Snappy drinks plc needs to review the budget plan they have made whether it
is implementing in the company properly or not and if not they need to maker further
improvements in it.
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Budget process can help development of the business model
The Budget process helps in the allocation of the resources and it evaluates the measures
that need to be taken by the Snappy drinks plc. The Budget facilitates in sourcing and
arrangement of the funds from different financial institution which is helpful in implementation
of the budget model. For conducting business activities there is need of finance. Budget includes
capital expenditures that will be included in the business model. The Snappy drink plc follows
the Operating Budget. Operating Budget includes Income and expenses which drives to develop
the business model. It drives total cost of projected Business Model (Loughran and McDonald,
B, 2016). The budget process helps the Snappy drinks plc to account for factors such as sales,
production, labour costs, manufacturing cost and administrative expenses which defines the
Company's business model. The Budget process will evaluate the Manufacturing cost which
facilitates to calculate the total projected expenditure of the Business model which the Snappy
drinks plc is planning at any of the location like Gulf, North America and China to establish new
manufacturing units.
2) The application of traditional budgeting approaches to plan future cost management.
Traditional Budgeting - The Traditional Budgeting method is helpful in preparation of next
year budget by taking last year budget as the base. The traditional budgeting depends on
preceding years spending and facilitates to do budgeting for the current year. The traditional
budgeting can save the time because it is based on past year data and figures from the financial
statements. Traditional budgeting does not require lots of efforts to be put in by the company.
The traditional budgeting offers solid framework because it is based on data points of the
previous year. The financial activities can easily be managed by Traditional budgeting (Sassen,
2017). The Traditional budgeting can encourages decentralisation in the organisation because
every one decide upon the budget for the next year. The idea becomes decentralized.
Incremental Budgeting – The incremental budgeting is also called Traditional method it is
prepared by taking benchmark. The incremental amount is added on the next budgeted period. In
incremental budgeting expenditure the income starts with the previous year actual numbers.
For an example, the Salary paid to employees is $400,000. When budget will be prepared for
next year the management thinks that there is need of 5 more employees and they will be paid
$20,000 each and also increment of 10% to existing employees.
($400,000 +10% Existing Employees) + ($20,000 *5 new employees)
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Thus, incremented budget for salary is 540,000
Cost Management – The cost management refers to the planning and controlling of the
projected budget in the business. Cost Management refers to cut off the unexpected expenses by
predicting it by making a budget plan. Cost management helps in increasing efficiency the
efficiency of the Business operations.
For planning the future cost management plan of Snappy drinks plc the incremental budget is
useful for preparation of next year budget plan. The cost can be mange by taking last year
budgeted cost into consideration. The last year figures is helpful for determining the total
expenses that could be arise in the current year. The Snappy drinks plc manage or try to cut off
the cost by analysing alternatives and can save company from occurring losses (Scholes, 2015).
The cost can be minimised by help of Traditional budgeting. The Traditional budgeting can
adjust the expense and cost of Snappy drinks plc based on rate, consumer demand and market
situation.
3) Analysis whether the traditional budgetary system is appropriate in the business or not.
The Snappy drink plc is using Traditional budgetary method from the past years as it is based on
past year data and figures it requires fewer efforts it saves time and reduce the cost of budget.
Usually budget arises huge costs as it requires deep market research and study. Budget generally
made by experts so they charge high fees but Traditional budgetary method doesn't require that
much knowledge and expert-ism in comparison to other methods.
The Traditional budget is appropriate to some extent but not fully as it has own
disadvantages. The Snappy drinks plc is arising error due to Traditional budgetary system is all
about looking at spreadsheets. As a result the manager of snappy drinks plc requires lot of time
to correct those errors. The previous year spending is not reliable on newly designed projects
and tasks by Snappy drinks plc (Roberts, 2015). The traditional budgetary method doesn't
encourage the expected behaviour in the organisation from the employees. The employees in
other departments of Snappy drinks plc like research and development they tend to think
innovative and brings new idea and methodology in the organisation but Traditional budgetary
system don't promote them to do so. There is no alignment can be seen between spending and
strategy in Traditional budgetary system, the Snappy drinks plc doesn't have their own thought
process they are just based on previous year strategies. Sometimes the predictions are inaccurate
because they are based on past year data. The Snappy drinks plc cannot relay upon them.
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PART 2
4) Alternative budget methods and each method attempts to improve on the traditional approach.
Zero Base Budgeting – The zero base budgeting have the number of reset to zero. The zero base
budgeting provide data and figures by its own. The zero base budgeting provides data and figures
by doing deep research and study of the company. It gives the fresh thought over all the items.
The new numbers of every items justifies the thought process. Proper reasoning is being given to
make the data more relevant. This kind of budgeting helps in facilitating the management to
avoid the traditional expenditures (Caselli and Gatti, 2017.). Zero base budgeting also have some
drawbacks like manipulation by the department, resource intensive as they require the
manpower, requires the knowledge, it might become the time consuming. By considering all
these factors company decides to switch the approach as it has more drawbacks as compared to
zero base budgeting.
Activity based Budgeting – The Activity based budgeting is prepared after considering the
activity base. The Activity base consider the overhead costs. The Activity based budgeting is the
exercise that finds cost of each activity in the Snappy drinks plc. Activity based budgeting is a
long exercise that includes alternative procedure in order to perform the activity. The Activity
based budgeting reduced cost from the current level. The resources are allocated to an activity in
activity based budgeting. By implementing the Activity based budgeting in Snappy drinks plc the
business operation will complete on time and in efficient manner.
5) Potential application of these methods to the company.
Zero based budgeting is considering one of the most effective approach that helps the
business in preparing an effective financial plan. In this type of budgeting method firm has to
justify all its expenditures. In this entity only has to explain amount require for necessary
operations. In this planner has to look upon the excess amount which is required as compare to
previous budget. For example, last year company has allotted 1 million budget to marketing
department but this year it requires more people and needed to spend more in advertisement thus,
enterprise can add percentage require more this year (Haeger, 2017). It might enhance 10%
budget and can allot 1.1 million budget to marketing department. Hence, zero based budgeting
emphases on expenses of last year and add amount or inflation rate into it in order to prepare a
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proper budget. The major element of zero based budgeting is that it re-allocate all resources and
justify all the expenses according to priority of tasks.
6) The Zero base budgeting method is more appropriate for the Company.
Zero base budgeting is the method of budgeting in which all expenses should be justify
for each new year. The process of Zero base budgeting starts from the new year and take the base
as Zero and then analysed by the each department of an organisation that what will be the needs
for the year and evaluate the cost. Then budgets were prepared for the upcoming period, without
considering the budget is higher or lower than the previous one.
Snappy Drinks Plc. Earlier using the approach of traditional budgeting in this the budget will
prepared by taking the base of last year budget and adjust the expenses by considering the
inflation rate, consumer demand, market fluctuation etc. now the company has decided to use the
Zero base budgeting approach helps the company to look over the each department and it will
make sure that they will get the accurate amount of money. It helps the company to increase the
efficiency and eliminates the unnecessary expenditures (Zero base budgeting, 2019). Zero base
budgeting helps the Snappy Drinks Plc to have a better coordination and communication with the
each department and its employees, this approach also helps the company while launching their
products in the different countries.
As traditional approach do the incremental increases from the past year budgets such as
inflation rate, market fluctuation etc. and they did not consider any old and new expenses which
a company can do it makes the difficulty to Snappy Drinks Plc because it does not do the
accurate prediction and analyses only new expenditures while zero base budgeting helps the
Snappy Drinks to starts from zero and even they consider the justification of old one. Company
has faced many drawbacks in traditional budgeting as it required too much time to prepare the
budget and still it will have high probability of mistakes because in this lot of spreadsheets has to
be looked due to this the chances of clerical mistakes increase. It is very time consuming
approach it takes lot of time as they compared the spreadsheets from previous year spending.
Benefits of Zero base Budgeting over Traditional budgeting (Cumming and Vismara, 2017.). It
is more accurate as compared to the traditional budgeting because it focused more on needs and
benefits. This approach finds the inflated budget but traditional approach don't.
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It is useful for the Snappy Drinks Plc because in these criteria are not always easy to find. This
approach eliminates wastage and identify the operation while in traditional approach wastage of
resources and time both were happened. Zero base budgeting is having more accurate prediction
as compared to traditional budgeting.
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CONCLUSION
From the above report it has been summarised that the preparation of budget and its uses to the
company and also contains how business model helps the Snappy Drinks Plc in the process of
preparation of budget. This report elaborates the different types of budgeting approaches and
what approach the company is using earlier and what are their drawbacks. This report also
explains the rolling budget, zero base budgets, activity base budget. This report contains the Zero
Base Budgeting also explains the benefits over the traditional approach and how it is useful to
the company.
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REFERENCES
Books and Journals
Caselli, S. and Gatti, S. eds., 2017. Structured finance: Techniques, products and market.
Springer.
Connolly, E. and Jackman, B., 2017. The Availability of Business Finance. RBA Bulletin, pp.55-
66.
Cumming, D.J. and Vismara, S., 2017. De-segmenting research in entrepreneurial finance.
Venture Capital.19(1-2).pp.17-27.
Haeger, J.D., 2017. John Jacob Astor: Business and Finance in the Early Republic. Wayne State
University Press.
Iwasaki, T. and et.al., 2018. The role of accounting conservatism in executive compensation
contracts (Forthcoming in Journal of Business Finance and Accounting) (No. CARF-F-
370). Center for Advanced Research in Finance, Faculty of Economics, The University of
Tokyo.
Jordà, Ò., Schularick, M. and Taylor, A.M., 2016. The great mortgaging: housing finance, crises
and business cycles. Economic Policy.31(85). pp.107-152.
Kraemer-Eis, H., Lang, F. and Gvetadze, S., 2015. European small business finance outlook. EIF
Research & Market Analysis.
Loughran, T. and McDonald, B., 2016. Textual analysis in accounting and finance: A survey.
Journal of Accounting Research. 54(4).pp.1187-1230.
Roberts, R., 2015. Finance for small and entrepreneurial business. Routledge.
Sassen, S., 2017. Finance and business services in New York City: international linkages and
domestic effects. In Deindustrialization and Regional Economic Transformation (pp.
132-290). Routledge.
Scholes, M.S., 2015. Taxes and business strategy. Prentice Hall.
Ylhäinen, I., 2017. Life-cycle effects in small business finance. Journal of Banking & Finance,
77. pp.176-196.
Online
Zero base budgeting, 2019 [Online] Available through:
<https://www.investopedia.com/terms/z/zbb.asp >
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