Business Finance Report: Budgeting Approaches for SnappyDrinks Plc

This report provides a comprehensive analysis of the business finance and budgeting practices of SnappyDrinks Plc, an international energy drink manufacturer. The report begins by defining business finance and the purpose of budgeting, emphasizing its role in operational planning, resource allocation, and performance monitoring. It then delves into traditional budgeting approaches, including incremental budgeting, and assesses their appropriateness for SnappyDrinks Plc, highlighting the limitations of such systems in a dynamic business environment, especially considering the company's plans for new product launches and international expansion. The report then explores alternative budgeting methods, such as rolling budgets and zero-based budgeting, evaluating their advantages and disadvantages and discussing their potential applicability to SnappyDrinks Plc. The analysis underscores the need for a more flexible and strategic approach to budgeting to support the company's growth and adapt to market changes effectively.

Business Finance

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
PART 1............................................................................................................................................1
1. Purpose and processes of preparing a budget & its support in development of the business 1
model...........................................................................................................................................1
2. Application of traditional budgeting approaches including incremental budgeting...............3
Application of Incremental budget are as follows:..........................................................................3
3. Making analysis of traditional budgetary system is appropriate for planned future form......3
PART 2............................................................................................................................................5
1. Alternative budget methods. ..................................................................................................5
2. Application of alternative methods of budgeting. ..................................................................7
3. Analysing method appropriate to the company......................................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
The term business finance refers to the process of procurement and utilization of funds, money
which is needed by the company in carrying on its business operations effectively and
efficiently. Business finance is thus defined as the amount of capital, money and credit employed
by the company in its business operational functions. Financing activity of business is concerned
with raising of funds from different sources and making investment in various alternative options
available with different purposes and returns. The report is about SnappyDrinks Plc, which is an
international manufacturer of energy drinks & produces 60 different products. The report will
provide a deep insight about Budget concept. It will explain purpose and process of preparing a
budget. The report will also shed light on traditional budgeting approaches and its application. At
last the report will explain alternative budget methods along with its drawbacks and benefits.
MAIN BODY
PART 1
1. Purpose and processes of preparing a budget & its support in development of the business
model.
The term budget is defined as the financial plans & strategies made for a define period of
time for meeting future expenses. Budgeting is thus a process of designing, formulating,
implementing and operating budgets (Wildavsky, 2017). It is considered as the management
process of planning, directing, organising, controlling and preparation budget and other budget
related procedures. The purpose of preparing budget for SnappyDrinks Plc is as follows:
1. Putting business strategy into operation - Budgeting aids in making and coordinating short
term plans. A company should makes business strategies and plans for making profits. Company
should formulate different business plans, policies and frameworks which aids in smooth
functioning of business operations and business activities effectively and efficiently.
2. Allocating resources – Procurement and utilization of resources related to business
organisation on time helps SnappyDrinks Plc in gaining competitive advantages. Company
should grab the opportunity as and when arises in making profits and also for acquiring market
share (Gachoka and et.al., 2018). Company should focus on proper and effective allocation of
resources in a cost effective manner which yields high production levels.
1

3. Assigning control – Company should focus on budget making process and assign controlling
and directing power to the management of the company. There are two types of control in every
business organisation viz. Centralised control and Decentralised control. Centralised control
emphasizes for budget making decisions at the level of institutional department where as in
Decentralised control the decisions related to budget are made at the department level.
4. Forecasting of income and expenditure – The process of budget helps in making prediction
for the future sales, production cost, manufacturing cost and other expenses related to business
operations so as to earn high amount of revenues & income thereby minimising the possibility of
occurring business losses.
5. Monitoring business performance – The main purpose of budgeting is to make comparison
of the actual business performance against the forecasted business performance (Van der Stede,
2015). It enables SnappyDrinks Plc in measuring the performance level of business and suggest
any modification required.
Processes of preparing a budget for SnappyDrinks Plc are as follows:
A budget process is defined as a process of directing and coordinating plans, strategies prepared
for operations and resources of a company expressed in the financial terms for some specified
period of time in the future. It involves following steps:
1. Defining goals and gathering data – The very first step of budget preparation involves
determination of goals and objectives to be achieved in near future (Gordon, Osgood Jr
and Boden, 2017). Data gathering is done after goal is defined.
2. Forming expectations and reconciling goals and data – After goals and objectives are
defined, the next step is to frame expectation and boundaries within which SnappyDrinks
Plc has to complete its business operations.
3. Creating the budget – After defining goals and objectives, the management of
SnappyDrinks Plc should focus on process of budget formulation.
4. Monitoring actual outcomes and analysing variances – With the help of budgeting
SnappyDrinks Plc can monitor and make comparison between the actual business
performance against the forecasted business performance.
2

5. Adjusting budget, expectations, or goals – After monitoring and comparing the actual
outcome with forecasted budget, changes and modifications are made as per the need and
requirement of business operations.
6. Redefining goals – Goals and objectives are redefined for smooth functioning of
SnappyDrinks Plc operations for successful attainment of business objectives effectively.
Budget is thus a way of motivating and encouraging the employees and managers of
SnappyDrinks Plc to achieve the goals and objectives by working with the available limited
budgeted resources which helps in development of business model.
2. Application of traditional budgeting approaches including incremental budgeting.
Traditional budgeting is considered as a method of preparing budget for current year by
taking last year's budget as the base. The budget of current year is prepared by marking changes
in the previous year budget by making adjustment related to the expenses which are based on the
inflation rate, consumer demand, market trends etc.
An incremental budget is a budget which is prepared by using a previous period's budget
as a basis with the incremental amounts added for the new budget period (Lorain, García
Domonte and Sastre Peláez, 2015). The resources allocation is made on the basis of allocations
of resources from the previous period.
Application of Incremental budget are as follows:
1. It is a type of budgeting process which is suitable for companies which don’t face
changes or variations in business operations.
2. Incremental budgeting is best to work when the business is having stable growth in
business operations.
3. This type of budget is considered as the easiest method to set and agree upon because it
doesn’t need much time to make modification in the existing budget which is requires for
developing, creating and agreeing upon new budget.
3. Making analysis of traditional budgetary system is appropriate for planned future form.
The company SnappyDrinks Plc is following traditional budgetary approach from many
years. Traditional budgeting approach is a method of budgeting which mainly depends on the
spending of preceding year with the purpose of doing budgeting for the current year. This
3

budgeting approach is not concerned to be the most appropriate method of budgeting in case
when the company is facing significant changes of dividing the business operational areas into
three parts: the existing products of SnappyDrinks Plc, the new products to be launched and the
planning of expanding of the international business in the coming years (Asogwa and Etim,
2017). Reason of traditional budgeting system is not appropriate is that:
1.No alignment between spending and business strategy formulated – Company for its
smooth functioning and meeting customer expectations makes business strategy and plans every
year. It is the desires of every business organization to grow and attain high market share. But
with the similar traditional budgeting system of spending scenario every year, it is impossible for
SnappyDrinks Plc to make strategies for a year to year profits and development.
2. Inaccurate predictions and forecasting – As the company is using preceding year’s data and
information as the base points it is very difficult to make the budget predictions for next year
with full accuracy. For SnappyDrinks Plc, it is good to first revisit the factors affecting profit and
sales level, monitors the business strategies & plans of the future formulated and then budgeting
of the next year spending should be done. Without proper and deep thinking, right approach it is
impossible for a company in ensuring accuracy.
3. Inefficiency - Traditional budgeting system is a time consuming process. This approach also
consumes too many business and management related resources (Popesko and et.al., 2015). One
of the most important reason traditional budgeting system takes too much of time is because of
spreadsheets use. As traditional budgeting approach uses spreadsheets function for making their
budget plans. But spreadsheets contain some disadvantages also which are as follows:
1. Prone to data entry and recording errors, mistakes, fraud.
2. Application is supported by version, which can face some control issues while working
on this.
3. Difficulties in monitoring, assessing and devising of accurate and correct formulations.
In present case, SnappyDrinks Plc is thinking of launching a new range of health-led
drinks of low-fruit exotic fruit flavours i.e. about 15 new products. This will require additional
plant and manufacturing capacity installation. For this company should focus on new budgeting
approach to expand their business operations effectively.
4

PART 2
1. Alternative budget methods.
A budget is considered as a mechanism of making plans and strategies for the smooth
functioning of operations and resources of SnappyDrinks Plc. With the help of a budget,
company can qualify the incomes or revenues which are to be realised from the selling of
company's products and services and the amount of expenses to be incurred on manufacturing
and production of goods or services which are utilised in revenue generating process (Kovaleva
and et.al., 2016). It helps in making plans regarding use of assets in conducting business
operations and sources of funds to finance assets both fixed and current assets. Alternative
budget methods used are:
1. Rolling budget – A rolling budget is a new budget which is the revised set of the
financial plans which is continually updated so as to add the new budget period as the
most recent budget period is completed. Thus, the rolling budget is a process which
involves the incremental extension of the existing budget model.
Advantages Disadvantages
 Rolling budget incorporates
modification or changes which are
required on the basis of the previous
period into the next, overlapping period
(Bhimani, Sivabalan and Soonawalla,
2018). Rolling budgets are therefore
considered up-to-dated budgeting
method.
 Rolling budget helps in becoming more
responsive for meeting the unexpected
changes and helps in making
adjustments for meeting those changes
in the coming future period.
 One of the disadvantage of a rolling
budget is that it is similar to preparing
of new budget on repetitive basis. This
type of budgeting requires to gather
facts on regular basis from the previous
period.
 Employee’s performance based on
rolling budgets when assessed limit the
opportunities for employee in achieving
targets before the budget is altered.
5

2. Zero based budget – It is a method of budgeting in which all the business related
expenses are need to be justified and approved for each new accounting period of time.
Zero-based budgeting thus starts with base as zero at the beginning of every budget time
period and thus analysing the needs, requirements and costs of each business operations
and allocating funds resources accordingly (Oraka, Sopekan and Udeh, 2016). This
allocation is made irrespective of the amount of money previously been budgeted for any
given item.
Advantages Disadvantages
 This type of budgeting helps
SnappyDrinks Plc in monitoring the
functioning of every department so as
to ensure company is getting correct
amount of money.
 It allows better coordination as well as
communication process within each
departments by making involvement of
employees in every decision-making
and budget prioritization process.
 This method works on the cost of time
and also requires extra training for the
managers of SnappyDrinks Plc. This
means that it requires extra time each
year for doing budget, making
adjustments. It is also concerned with
the process of receiving proper training
for knowing how to do Zero Based
Budgeting.
3. Activity based budget – It is the budgeting method in which budgets are prepared by
using Activity Based Costing technique after considering all the overhead costs. Activity-
based budgeting is considered as a system of planning in which costs are associated with
the business activities and thus budgeted expenditures are then compiled on the basis of
the expected activity level.
Advantages Disadvantages
 It helps in reducing the costs by
providing the accurate and meaningful
information related to the opportunities
available for reducing costs.
 The Activity Based Costing method
cannot be applied to companies
engaged in production of only one
product or few products (Mahal and
6

 The accurate and proper costs
allocation to the different products and
services of SnappyDrinks Plc. Helps in
proper pricing policy.
Hossain, 2015).
 Activity Based Costing method can't be
use for preparing monthly profit
statements by SnappyDrinks Plc.
2. Application of alternative methods of budgeting.
1. Rolling Budget – The rolling budget involves the process of incremental extension of the
existing budget model. Application of rolling budget are:
1. The rolling budgets do not require an extensive investment of time and amount of money for
planning of business operations.
2. Preparing rolling budgets is not advisable for the circumstances or conditions which are not
constantly changing (Ohemeng, 2016). It is considered as waste of time and resources in
preparing rolling budgets in the unvarying environments.
3. It helps in incorporating information from the past experience in renewing the budget plan for
the next period of time.
2. Zero based Budget – This budgeting tool is used by SnappyDrinks Plc. as one of the
managerial tool for controlling the costs expenses of the business (de Campos and
Rodrigues, 2016). Uses of zero based budget are:
1. The business and other resources are allocated by making planning on the basis of cost benefit
terms with the aim of better, accurate and effective utilization of resources.
2. It helps the finance manger of the company in giving the clear picture about extent of capital
and finance amount available and results of raising finance amount by SnappyDrinks Plc.
3. It emphasizes on the active participation of the management executives and personnel at all
levels of the company in formulation of budgeting process.
3. Activity based budget - It is a system which helps in recording, making researches and
analyses the activities which leads to the costs expenses for a business organisation.
Application of activity based budget are:
7

1. The expenditure statements of company are prepared on the activity-wise and then comparison
of costs of each activity with one another is done so as to find those activities which are required
to eliminate or improve for better performance (Dhubea, Salim and Al - Riami, 2017).
2. It helps the management of SnappyDrinks Plc. on laying focus on the forces of value adding
activities of the business and eliminates the non-value adding activities of the business
organisation.
3. Analysing method appropriate to the company.
For SnappyDrinks Plc. The budgeting method which is appropriate is Activity based
costing.
Activity based costing is defined as the costing method which identifies and monitors the
activities in the business organization of SnappyDrinks Plc. It helps in assigning the cost of each
activity to all the products and services manufactured or produced as per the actual consumption
made by each activity. This method assigns more indirect costs into direct costs. By using this
method company can improve the operational efficiency of business and performance level of
business. Following are the reasons of using Activity based costing:
1. Activity Based Budgeting is based on Activity Based costing which works only on the
activities of the business operations (Mahal and Hossain, 2015). This aids management in
taking the quality decision when they know the nature of each business activity.
2. The more the accurate and proper cost information helps the management of company in
adopting the productivity improvement approaches like Total Quality Management,
Business Process Re-engineering etc.
3. The effective and accurate allocation of costs expenses to various services and products
leads to proper pricing policy of the company.
8

CONCLUSION
From the above report it can be concluded that business finance is considered as a
process of planning for procurement and utilization of funds, money in a proper and effective
manner for smooth functioning of business operations. The report has discussed that how
SnappyDrinks Plc. Is thinking of expanding its business operations by launching new product
range in the market. The report has disclosed that traditional budgeting approach is not
appropriate for SnappyDrinks Plc. Every time as there is market fluctuation, changes and
variations which has to be inculcate by company for better growth. Further, report has defined
that Activity based budgeting is a better method of making budget for SnappyDrinks Plc.
Because company is thinking of launching new product along with increasing manufacturing and
production capacity.
9

REFERENCES
Books and Journals
Kraemer - Eis, H., Lang, F. and Gvetadze, S., 2015. European small business finance outlook.
EIF Research & Market Analysis.
Demirgüç - Kunt, A. and Cihak, M., 2015. Revisiting the state’s role in finance and
development. In The Oxford Handbook of Banking, Second Edition.
Kraemer - Eis, H., and et.al., 2018. European Small Business Finance Outlook: December 2018
(No. 2018/53). EIF working paper.
Wildavsky, A., 2017. Budgeting and governing. Routledge.
Miller, G., 2018. Performance based budgeting. Routledge.
Van der Stede, W. A., 2015. Budgeting and management control. Wiley Encyclopedia of
Management. pp.1-7.
Gachoka, N., and et.al., 2018. The Moderating Effect of Organizational Characteristics on the
Relationship Between Budgeting Process and Performance of Churches in Kenya. Journal
of Finance and Investment Analysis.7(2). pp.1-5.
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.
Kovaleva, T. M., and et.al., 2016. The Budgeting Mechanism in Development Companies.
International Journal of Environmental and Science Education. 11(15). pp.7726-7744.
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.
Lorain, M. A., García Domonte, A. and Sastre Peláez, F., 2015. Traditional budgeting during
financial crisis.
10

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.
Oraka, A. O., Sopekan, S. A. and Udeh, F. N., 2016. Zero-based budgeting: Pathway to
sustainable budget implementation in Nigeria.
Bhimani, A., Sivabalan, P. and Soonawalla, K., 2018. A study of the linkages between rolling
budget forms, uncertainty and strategy. The British Accounting Review. 50(3). pp.306-323.
Asogwa, I. E. and Etim, O. E., 2017. Traditional Budgeting in Today's Business Environment.
Journal of Applied Finance and Banking. 7(3). p.111.
Ohemeng, F. L. K., 2016. Reforming the Ghanaian Budget System from Activity-based
Budgeting to Performance-based Budgeting: Eureka, or another Reform Illusion?. In Public
Budgeting in African Nations (pp. 130-154). Routledge.
Dhubea, B., Salim, H. M. and Al - Riami, S. A., 2017. THE APPLICATION OF ACTIVITY-
BASED COSTING AND ACTIVITY-BASED PLANNING INFLUENCES DECISION
MAKING. Asia-Pacific Management Accounting Journal. 12(1).
Mahal, I. and Hossain, A., 2015. Activity-Based Costing (ABC)–An Effective Tool for Better
Management. Research Journal of Finance and Accounting. 6(4). pp.66-74.
Online
Aydin, E., 2017. The Usefulness of Traditional Budgeting. [Online]. Available through:
<http://www.turkishtaxnews.com/articles/the-usefulness-of-traditional-budgeting-in-today-
s-business-environment/>.
Different Budget methods. 2018. [Online]. Available through:
<https://www.mylsb.com/blog/general/different-budget-methods-which-works-best-for-
you.aspx>.
Small Business Finances. 2019. [Online]. Available through:
<https://www.companybug.com/category/finance/>.
11