Business Finance Report: Budgeting Methods for Snappy Drinks

This report delves into the core concepts of business finance, specifically focusing on budgeting methods and their practical application. It begins by defining the purpose of budget preparation and explores the use of traditional and incremental budgeting approaches. The report analyzes the traditional budget system employed by Snappy Drinks Plc, an international energy drink manufacturer, highlighting its drawbacks and inefficiencies. It then introduces alternative budgeting methods and discusses their advantages. The analysis includes a detailed examination of how different budgeting approaches can be applied to Snappy Drinks Plc, considering the company's goals of business expansion and product diversification. The report concludes with recommendations on the most appropriate budgeting method for the company, providing a comprehensive overview of financial planning and decision-making in a business context.

BUSINESS FINANCE 2

Table of Contents
INTRODUCTION......................................................................................................................1
MAIN BODY.............................................................................................................................1
PART – A...................................................................................................................................3
1. Understanding the concept of preparing the budget and its purpose. ...............................3
2. Use of traditional and incremental budgeting approach. .................................................4
3. Making analysis of the use of traditional budget system in the company.........................5
PART – B...................................................................................................................................6
1.Defining the concept of alternative budget methods..........................................................6
2.Uses of alternative methods of budgeting..........................................................................7
3. Analysing the appropriate method of budgeting for the company....................................8
CONCLUSION………………………………………………………………………………11
REFERENCES.............................................................................................................................
12

INTRODUCTION
Business Finance basically means employment of funds, money and capital resources in
the business organisation. Finance is considered as life blood of every business organisation.
A company should make sound business policies as well as strategies related to the financial
aspects. Financial manager assists company in making sound decision related to the
investment to be made. Procurement of fund resources and its effective allocation and
utilisation can help company in making more profits. The present report is based on Snappy
Drinks Plc, which is an international energy drink manufacturer. The report will discuss
about Budget preparation purpose as well as its process. Further, report will streamline about
the meaning of traditional and incremental budgeting approach. Also, alternative budget
methods will be defined along with their drawbacks and applications. At last, the report will
shed light on making suggestion regarding which budgeting method is appropriate for
company.
MAIN BODY
PART – A
1. Understanding the concept of preparing the budget and its purpose.
Budget is defined as a financial plan which is designed or developed by the company for
making estimation of revenue and expenditure amount for a specified period of time.
Budgeting tools helps in forecasting of revenue and expenditure amount about all the
financial transaction. With the help of budget, a company is able to make use of limited
budgeted resource and amount available effectively and efficiently. Budgeting helps in
making business plans and evaluates performance. Company with proper budgets, can make
estimates of income to be earned from future sales and expenditure to be minimized for
specific business task.
The purposes of preparing budget are as follows:
1. Monitors and measures the performance of business – Budget helps the company
in making projections of sales, revenue and expenditure amount. With budget,
company can measure the performance by making comparison of actual outcome with
the expected one.

2. Allocation of resources – Effective and proper allocation of limited funds and other
business resources as per the budget designed helps company in attaining maximum
profit with minimum cost factor (Bogsnes, 2016).
3. Forecast income and expenditure – Budget helps the company in making forecast or
statements related to the amount of income and expenditure to be made in the near
future.
4. Predict cash flows – It helps in making prediction of cash flows for the definite time
period. Company is able to ascertain the amount of cash inflow and outflow made
with the help of budget.
5. Tool for decision making – Budget is considered as one of the most important tool
for making sound business decision. It helps in formulation of effective and accurate
strategies and plans related to allocation of fund resources, business operations or
method to be followed etc. which helps in successful accomplishment of business
goals and objectives.
This company needs to follow budgeting processes which can help them in predicting most
accurate future aspects. Process of preparing budget which should be followed by snappy
drinks is mentioned below:
1. Defining business goals and objectives – The first most important process in
preparing a budget is defining the goals and objectives which the business is willing
to achieve or for which it is working. Company should always have specific goal and
objective.
2. Collection of data – After the goal of business is defined, the next step is to gather or
collect all the relevant data, information or statistics. Proper interpretation should be
made of data gathered.
3. Framing expectations and reconciling of goals and data – Every company should
frame some expectations with the goal decided. This leads to motivation to work
towards attainment of these business goals.
4. Creating the budget – After the goals and objectives of business are framed, next
step is creation of budget plan. Budget is designed with in line of business goals and
to forecast the amount of income and expenditure (Gachoka and et.al., 2018).
5. Execution of budget designed – Budget created is then implemented for making
projections of sales revenue for a definite time period. It helps company in
determining the variances or loopholes in the budget designed by making comparison
between the actual one and the expected one.

6. Monitoring actual result & analysing the variances, if any – After successful
implementation of budget, actual results are monitor with the expected one so as to
ascertain the variance factor.
7. Redefining goals – Goals are redefined in case where actual result varies on large
basis with the desired outcomes. This is done with the objective of minimizing the
cost associated with department which is highly expensive and consuming more
resources then required.
With the help of budgeting practice, Snappy Drinks Plc can formulates its
budget for the year by considering the previous year budget and making required
changes as the business processes and operation. Also, it helps company in making
projection of sales and revenue, estimating cost of producing a new product.
2. Use of traditional and incremental budgeting approach.
Traditional Budgeting is a process of preparing budget for the current year by taking
into consideration the previous year budget as a base. The current year budget is prepared by
implementing necessary and required changes in the budget of previous year by taking into
consideration all the adjustments related to the expenses of business operations. The expenses
related to rate of inflation, customer taste and preferences, market demands and situation etc.
are considered for framing new year budget under the traditional budgeting approach.
The application of traditional budgeting is as follows:
1. It helps in decision making by spotting out the issues or errors and relevant
changes to them.
2. This budget method evaluates sales projections, predicts the revenue and profits as
well as estimation of expenses for the future.
In the Incremental Budgeting approach, the budget is prepared on the basis of
previous time period budget or the actual performance achieved (de Campos and Rodrigues,
2016). In this method, incremental addition is done in form of amounts for formulation of
new budget period. In management accounting it is considered as an important part, as by
making small changes in the existing budget, company can derive new budget.
The company here named Snappy Drinks Plc wants to expand its business operations by
launching new products for which appropriate budgeting method is required. The application
of Incremental Budgeting approach is as follows:
1. With the help of incremental budgeting approach, it provides continuity of fund
allocation or funding stability to all the departments of Snappy Drinks Plc without

making detailed analysis of requirement of funds (Brusca and Labrador, 2016). This
helps company in undertaking of business processes with the help of sound business
strategies in a cost effective manner.
2. The Incremental budgeting approach always ensures that no large deviations are
assessed year after year in the budget designed which leads to significant changes in
the budget requirement. This type of budgeting helps company by providing a stable
budget for year. This helps in minimizing the cost expenses in areas where
unnecessary cost are allocated by making of proper cost allocation.
3. This approach focuses on operational stability of Snappy Drinks Plc. It also
ensures that business operations of various departments are working in a
consistent and stable manner for long time.
For example if Snappy Drinks Plc wants to launch new drink product in
the market as the taste and preference of customer, then by with the help of
incremental budgeting company can proceed further. By considering the sales
projection, revenue and cost of producing such product, customer demand,
business strategies adopted by the rivalry firms and market trends changes in
existing budget can be made for formulation of new budget.
3. Making analysis of the use of traditional budget system in the company.
Snappy Drinks Plc, which is a manufacturing company of energy drinks, has been
making use of traditional budgeting approach for many years. Traditional budgeting system
functions on the basis of the previous year budget. Changes are made as per the requirement
or market trends in the previous year budget.
The traditional budgeting approach is not considered as appropriate method of
budgeting for Snappy Drinks Plc. As the company is having significant changes in its
business operations, this system of budgeting is not suitable in case when company is
thinking of making business expansion by launching a new range of health drinks with
variety of low fruit exotic fruit flavours. The company with this change will rollout 15 new
products in the market. But as traditional budgeting doesn’t consider significant changes
which can affect the company in the coming years.
The reason why traditional budgeting is not appropriate is as follows:
1. Inefficient business process – The main reason behind inappropriate form for
traditional budgeting is that it consumes too much of time as well as the management
resources. This is because traditional budgeting makes use of spread sheets. The use

of spread sheet is considered as the most common tool among companies but on the
flip side spread sheets has some drawbacks such as chances of errors during data
entry, control issues related to version or software, difficulty faced by company in
achieving accurate formulations.
2. Low response towards changing attitude – Many business organisation already
followed the annual budgeting cycle. This focus sometimes results into making the
budget obsolete immediately after it has been created (Berland, Curtis and Sponem,
2018). Employees are not interested in giving proper response towards such type of
budgeting. Also, company don’t conduct review session regularly so as to take change
into account.
3. Inaccurate prediction and forecasting – As it is makes use of previous year budget
as a basis for formulating current year new budget, it doesn’t take into account the
current market fluctuation or trends such as the rate of inflation, market and consumer
demand, market situation etc. for making of new budget.
4. Fail to motivate employee – The another reason traditional budgeting system is not
considered as appropriate is that it fails in motivating people or employees of the
company to perform in the interest of company. It leads to encouragement of
unprofessional behavioural attitudes among the budget cost centre managers of the
company (Popesko and et.al., 2015). It also results in strengthening of bureaucracy
and controlling factor which makes people feel undervalued. Also, it creates
departmental barriers instead of sharing of knowledge.
5. No alignment between spending and business strategy formulated – In traditional
budgeting approach, focus is not made on adoption of or following of business
strategy formulated. It results in non-alignment between the spending of budgeted
resources as per the strategies and plans developed by the company. This affects the
business goals and objectives which are to be achieved by company in the near future.
Hence, it can be said that traditional budgeting system is not appropriate for any part of
Snappy drinks.
PART – B
4.Defining the concept of alternative budget methods.
Budgeting is the process of detail financial planning of an organisation’s future
activities and settings goals to achieve profitability. It also helps to understand organisation’s

growth and performance throughout the year. Budgeting helps organisation to compare the
actual result against predications done, thus helping to make estimations more accurately.
1. Rolling Budgets - Rolling Budget also referred to as continuous budget, is constantly
updated to add new budget period to the existing one. It follows a dynamic approach,
where at the end of each month, the Snappy Drinks Plc’s progress towards the set
goals would be evaluated and based on that the goals and budget period for future is
modified.
Advantages Disadvantages
 Rolling budgets are flexible and
Snappy Drinks Plc could incorporate
the changes required based on the
result of last period.
 Rolling budgets are responsive to the
unexpected changes and modify the
plan accordingly in the upcoming
period.
 Profitability in the previous period
plays a key role in the improving the
forecast accuracy for the next period.
 Continuously updating the budget
requires a considerable amount of
time and effort.
 This is similar to creating a new
budget again and again (Liang and
Ordasi, 2015).
 Constantly changing budget could be
disturbing for the employees of
Snappy Drinks Plc and time spent in
revising the budget could lead to miss
of some other critical tasks.
2. Zero based budget - By using the Zero based budgeting, the Snappy Drinks Plc
could start at a zero base and analyze the needs and costs of each task in the
organisation. It could then build budget for the next period around the analysis done.
Advantages Disadvantages
 This method prevents unnecessary
spending as each spending is
accounted and justified whereas in
traditional approach, managers could
 This method would cost more time
and effort for Snappy Drinks Plc, as
the budget is always built from
scratch.

spend all the amount so they don’t
lose any.
 It could help Snappy Drinks Plc to
switch to more cost-effective ways of
doing things and reducing redundant
activities.
 It also encourages employees in
decision making and suggesting ideas
for reducing business expenses.
 It could be a disadvantage for
departments of company with long-
term investment. As this areas doesn’t
contribute to the revenue in the short
term, it could lead to shifting
resources to other areas.
 Managers can pull in more resources
than actually required.
3. Activity based budgeting - The Activity based budgeting does research and analyze
the activity thoroughly which brings cost to the business and then resources and cost
are allocated accordingly. Current budget planning in this method doesn’t require
referring to previous year’s budget.
Advantages Disadvantages
 It helps company to eradicate all the
unnecessary activities and save its
costs.
 Removing unnecessary activities help
would help Snappy Drinks Plc to
serve its customer with best price and
quality. This would further improve
the relationship between company
and customer (Brusca and Labrador,
2016).
 This method of analyzing activities
helps to view business as a unit and
not as separate departments. The
budgets are not made focusing on any
single department.
 This method requires much
understanding of the activities done,
otherwise it could lead to insufficient
resources allocated.
 This method is complex and time
consuming in nature. It would require
Snappy Drinks Plc to allocate its top
level expertise to do numerous
analysis.
 Activity based budgeting focuses on
short term goals of the organisation.
In the long run, this could bring
unseen challenges to the organisation.

5.Uses of alternative methods of budgeting.
The alternative method available for Snappy Drinks Plc includes Rolling budget, Zero
based budget and Activity based budgets by making use of one of this budgeting method
company can improve its performance level, increase its profitability and expand its business
operations with available budgeted amount and resources. The application of these alternative
budgeting methods is as follows:
1. Rolling Budget – The rolling budget helps company in incorporating the required
changes in the next period as compared to the previous period by increasing the
continuity of workflow (Bhimani, Sivabalan and Soonawalla, 2018). Rolling budgets
are more up-to-date and help in responding to the unexpected changes by making
adjustments in coming periods. Example: AB Company has followed a planning
horizon of 12-month with its budget starting from January to December.
2. Zero based Budget – It is a method of budgeting in which the budget is prepared by
the company by making budget from scratch or by starting the budget at zero based.
In this method, company has to specify about each business expense before making
addition of it to the main new budget. The objective behind zero-based budgeting is to
make reduction in the cost by ensuring where from it can be cut. It helps in efficient
as well as proper allocation of business and financial resources as per the
requirements. By this approach the managers of the company find ways of improving
business activities in a cost effective manner, by identifying & reducing wastage and
out dated business processes. Example – On hiring of new employee the budget is
increased by making add of new wages in payroll expenses.
3. Activity based Budget – The Activity based Budget helps Snappy Drinks Plc in
providing insights in form of better product quality, efficient business operations as
well as process, costing and decision making related to the business activity by
making better allocation of resource as per the business goals and priorities. This form
of budgeting allows company in making balance between the operational
requirements. It also emphasises on avoiding the unnecessarily infeasible plans by
calculating the financial effects of carrying on such business operations. Example- On
bending the fender for a car budget related to the overall costs of producing a product
is made.

6. Analysing the appropriate method of budgeting for the company.
For Snappy Drinks Plc, Activity based budgeting is considered as the most
appropriate method of budgeting as it helps in improving the relationship between the
company and its customers by rendering with the better quality services and products at best
price (Mahal and Hossain, 2015). This budgeting method helps company in eliminating all
the unnecessary business activities and cost associated with it. It also ensures that customer
expectations are met and brings satisfaction to them by providing them transparency in the
business operations.
CONCLUSION
From the above report it can be concluded that with a proper and accurate financial
policies and plans, company can achieve maximum returns from the investment. Business
having sound financial policy can help the management in good decision making process.
The report has discussed that how Snappy Drinks Plc is thinking of launching new product in
the market by changing its current budgeting method. The report has also shed light on the
uses of Incremental budgeting for the company. As company is having significant changes in
its business operations, the traditional budgeting method is not considered appropriate for the
company because it doesn’t provide proper alignment between strategies framed and
spending factors, fails to motivate employees towards change, supports inaccurate prediction
and forecasting, low change responsiveness etc. At last, the report has discussed that Activity
based budgeting is more appropriate form of budgeting for the company rather than Rolling
and zero based budgeting. It is because, the activity based budgeting system helps Snappy
Drinks Plc in eliminating or minimizing all unnecessary activities of the business and will
save cost.

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