Business Finance: Budgeting Approaches for SnappyDrinks Company Report

This report provides a comprehensive analysis of budgeting methods within the context of business finance, specifically focusing on the fictional company, SnappyDrinks. The report begins by outlining the purposes of budgeting, including financial prediction, decision-making, and performance monitoring. It then explores traditional budgeting approaches, emphasizing their role in planning and cost management. The report examines the advantages and disadvantages of traditional budgeting and evaluates its appropriateness for SnappyDrinks' future planning, considering factors like time consumption and limited focus on value creation. Furthermore, the report delves into alternative budgeting methods, such as rolling budgets, zero-based budgets, and activity-based budgets, detailing their advantages and disadvantages and their potential application within SnappyDrinks. The report concludes by analyzing the most suitable budgeting methods for the company, considering factors like market competition and the launch of new products. Overall, the report offers a detailed overview of budgeting practices and their impact on financial planning and cost management within a business context.

BUSINESS FINANCE

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
PART A...........................................................................................................................................1
(i) purposes of preparing a budget..........................................................................................1
(ii) Explain how traditional budgeting approaches can help in planning future cost
management for business.......................................................................................................3
(iii) Examine whether traditional budgeting is appropriate or not for the business company in
its future planning...................................................................................................................4
PART 2............................................................................................................................................5
(4) Advantages and disadvantages of rolling budgets, Zero based budgets and activity based
budgets:...................................................................................................................................5
(5) Application of methods of budgeting)..............................................................................7
(6) Analysis of most appropriate course of method of budgeting..........................................9
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Finance is the basic requirement of any business, it is essential for organisation to
manage funds well and prepare a feasible budget. This study includes the purpose of preparing a
budget, a budget is the financial status of any business plan for a particular period often one year
which have various purpose such as prediction of income and expenditure and also helps to
monitor the performance of the company called SnappyDrinks. It also explains about the
budgeting processes and how their role can be beneficial for the development of the business
model. SnappyDrinks budgeting process includes controlling, communicating, coordinating and
operating within the enterprise. This study also includes the usefulness of traditional budgeting
including incremental budgeting which helps the SnappyDrinks to add the incremental amount
caused by inflation to the previous year budget to new budget period. It also explains about the
advantages and disadvantages of traditional budgeting and why it is not appropriate to use this
process anymore for future planning.
PART A
(i) purposes of preparing a budget
Purpose of Budgeting
In terms of business management, the purpose of preparing the budget are explained as
given below:
Prediction of income and expenditure
Business owners and manager plays an important role in a business planning process and
budgeting is the critical part for any business as it will provide the information related to
performance, financial status, strategies, planning. Preparing a budget will help the business
owners and managers of SnappyDrinks to predict whether the business will make a profit or not
(Foroohar, 2016). In developing a business plan, the manager is responsible to forecast the income
and expenditure and hence profitability.
Decision making on budgeting
The purpose of budgeting is to control the additional expenditure spend in the
SnappyDrinks with the help of decision making process. If the budget on advertising is already
exceeded then managing a business requires controlling the expenditure tightly.
Performance of business

The purpose of budgeting help in monitoring the performance of the SnappyDrinks by
giving the details of actual business performance to be differentiated with the forecast business
performance which will tell the business is living up to the expectations or not. Preparing of
budget helps in making and coordinating the future plans for the SnappyDrinks and it helps the
manager in motivating to achieve their goals (Burns, and Dewhurst, 2016). Preparing a budget can
help the enterprise in planning, controlling, coordinating and operating to be more effective.
Having a budget helps in organizing and prioritizing the activities through which they can
increase their profitability.
Budgeting process
The process of budgeting help the organization to achieve their goals and increase the
profitability in future by analysing the past expenditure (Gitman, Juchau, and Flanagan, 2015). This
process defines the objectives of budget such as accessing historical and actual data, developing
a base budget, preparing, reviewing and refining a budget, posting and reporting results and
monitoring progress and changing the budget.
Illustration 1: budget process
(Source: Planning and Budgeting Process, 2013)
Budget process role in development of business model
Budgeting can help in developing the business model in various ways:
Strategic Plan
The budgeting process helps in writing a strategic plan for the development of
organization. A good strategic plan can help the organization plan to achieve its mission.

Revenue Estimation
It can be estimated with the performance based on historical financial and projected
growth income, this growth income will help the organization to grow its business.
SnappyDrinks has been operating for 15 years and had revenues last year of 550 million pounds.
Profit Margin Targeting
Budgeting process will help the organization to set a profit margin target, that will return
to the business owner and will reinvest in the development of the organization (Haeger, 2017). The
founder and CEO, Donna owns 15% of the shares in SnappyDrinks.
Board Approval
Budgeting can help the business owner and managers to monitor budget performance by
reviewing the financial statement, have information of all expenditures and to prevent the
SnappyDrinks against employee fraud and exceeding of funds.
(ii) Explain how traditional budgeting approaches can help in planning future cost management
for business
A traditional budgeting is a quantitative statement and tool for strategic plan which focus
on goals like cash flows, revenues, assets, expenditure and liabilities for a particular time period.
It is prepared when addition of incremental amounts like inflation in sales prices and costs to
actual annual budget (Jordà, Schularick, and Taylor, 2016). It is a top-down budget process starts with
the senior management team passing down budgets and targets based on the organizational goals
and strategies. Incremental budget is prepared by using a previous year budget with adding
incremental amounts to the new budget period. SnappyDrinks can have benefits from this
budgeting method as it will help them to project business revenue and expenditure for the
upcoming year based on actual budget.
For e.g. The company is about to launch a new type of health-led drinks using a variety
of low-fruit exotic fruit flavours and this will add 15 new products, for this they need a large
amount of funds and will need to expand the sales team. Therefore, incremental budgeting can be
used to add the increment amount to the previous year budget and by analysing the previous year
revenue how much they can increase inflation on products so that they can increase their rates to
achieve high profitability in next year by setting up marketing campaigns to support the launch.
Traditional budgeting will maintain its significance as a planning, measurement of performance
and controlling the management. SnappyDrinks can improve their budgeting process by

combining traditional budgeting to the other budgeting such as incremental budgeting which will
improve their future cost management (Scholes, 2015). The directors of the company can manage,
control, communicate, coordinate better via traditional budgets. Before improving traditional
budgeting practices the company must understand its own requirements, conditions, cultures and
weaknesses.
(iii) Examine whether traditional budgeting is appropriate or not for the business company in its
future planning.
Traditional budgeting is still used in some companies when the combined with different
budgeting approaches but it is still considered as an indispensable process because of the
following reasons.
 It provides a framework which makes it easier within the organization to control and
manage the activities with stability.
 It is important to create values and to maintain the sustainability of companies. It
provides advantages such as controlling the company, forecasting and planning the
future, enhancing the motivation, coordination, communication and analysing the
performance.
Drawbacks of traditional budgeting
Illustration 2: Advantages of traditional budget
Source: Traditional Budgeting and Its Advantages, 2017 .

 Traditional Budgeting is time consuming, costly to put together and uses too many
management resources. As this budgeting process takes 20% time of the managers due to
the use of spreadsheets which can cause data entry errors, control issues and inaccurate
formulations and execution (Roberts, 2015). Research predicts that 80% of the companies
are not satisfied with this budgeting and planning procedures.
 Budget focuses on cost management for future and not on value creation which
discourage creative thinking. The business process of SnappyDrinks uses this type of
budget where updation are not frequently and departmental barriers are reinforced rather
than encourage knowledge sharing.
 The reviews on the budget takes longer time as they are not conducted regularly and the
responsiveness of change becomes low (Storey, 2016). The system of this budgeting fails to
motivate people to work towards organization goals as it make people feel undervalued.
SnappyDrinks should change their budgeting process as they can face difficulty in cost
management in future and they are about launch new products also which can affect their
profitability. As the Finance Director, Hayley, itself suggested that this approach might not be
the appropriate when such drawbacks of traditional budgeting can affect the company in the
upcoming years and they are planning to open their market in North America, Gulf and
especially China. So they need to change the process to sale more effectively and efficiently as
the market competition will be tough around these regions.
PART 2
(4) Advantages and disadvantages of rolling budgets, Zero based budgets and activity based
budgets:
Budgets can be defined as a plan for business for a short period of time, these budgets are
expressed in financial terms, hence budget is a plan and not a forecasting activity. There are
various alternative budget methods:
Rolling budget:
Rolling budget or continuous budget refers to a revised set of financial plan for next
accounting period which is used to replace the previous one in an ongoing budgeting system
with the updations, its a new updated budgets that takes place of the previous old version.
Rolling budget is prepared on the monthly, quarterly and annual basis by snappy drinks
(Babajide, Olokoyo and Taiwo, 2016).

The advantages of rolling budgeting to Snappy drinks:
 Flexibility: Rolling budgets provide flexibly to the company as it is more updated than
the static budget ,which doesn't consider the changes which takes place during
forecasting period, it does not extensive investment of money and time in order to do the
planning. Hence the traditional approach does not cover certain points which the modern
approach covers (Brooks, 2019).
 Responsiveness: It helps the company to response to the unexpected changes and allow
the Snippy drinks to make adjustments according to the circumstances. A company can
assess the performance against rationalized and realistic targets.
Disadvantages of adopting rolling budgeting methods:
 Time frame: Rolling budgeting are prepared for short term period and doesn't have a long
term perspective as this could be disadvantage for the Snippy drinks as the employees
does not have enough time to prove the performances (Jordà, Schularick and Taylor,
2016).
 Justification: When the circumstances are not changing constantly, it is not advisable to
prepare the rolling budget, it may waste the resources and time of employees to prepare
this budget in unvarying environment.
Zero based budgeting:
It refers to the budgeting method in which all the expenses should be justified for new
period. This is the budgeting method that helps manager of company to know every small detail
about spent amount (Brooks, 2019).
Advantage
 All the expenditures are justified and accordingly budget is being prepared. This helps in
allocating right resources to each activity and help in minimise issue of over budget.
 Zero based budgeting is beneficial in minimising wastage and identifying outsourcing
opportunities.
Disadvantage
 This is very time consuming process because manager of SnappyDrinks Plc will have to
give time to justify all expenditures and accordingly individual will have to take
decisions (Gitman, Juchau and Flanagan, 2015).

 As huge research is required to justify all costs or expenses thus, more manpower is
required.
Activity based budgeting (ABC)
This is far better approach as compare to traditional budgeting method because it helps in
creating feasible budget. Manager of firm can pay attention on causes of failure and accordingly
prepare the new budget.
Advantage
 Cost can be reduced because ABC method focuses on opportunities available to business
that may support in minimising cost.
 As cost calculations are done in significant manner hence it helps in improving
productivity and utilising resources effectively (Jordà, Schularick and Taylor, 2016).
Disadvantage
 ABC method cannot be used by small firms as it requires huge fund to prepare accurate
and feasible budget.
 Monthly profit statements are not being used to prepare final budget.
(5) Application of methods of budgeting)
Rolling Out Method - The rolling out method can be inculcated by Snappy Drinks in the
following steps :
 Firstly, identify the stakeholders of Snappy Drinks. It involves identifying how much and
who will be affected by the potential application of process. Analyse the impact of
process on stakeholders which will help to anticipate potential resistance and threats if
any (Kraemer-Eis and et.al., 2018).
 Create a detailed plan and schedule involving milestones for successful implementation
of roll out process which involve milestones increasing the efficiency of Snappy Drinks
 Keep a detailed record of the research phase, so that it can help as a trouble shooting
guide later for Snappy Drinks.
 Communicate the new process and policies to employees of Snappy Drinks, so that the
team can be trained and give respective feedback.
 Present the new system in a dynamic manner and discuss its marketing mix strategies
with the employees of Snappy Drinks (Babajide, Olokoyo and Taiwo, 2016).

 Ask promoters to adapt the method in resistant employees and hire new skilled expert's to
implement the process.
Zero Based Budgeting Method - Zero Based Budgeting Method can be inculcated by Snappy
Drinks in the following steps :
 Identify the decision units in proposed budgets to justify and frame their expenditure.
 Prepare separate decision package and link it with the corporate objectives of Snappy
Drinks (Brooks, 2019).
 Rank the above decision packages in analysis with cost structure of Snappy Drinks.
 Arrange, allot and utilize the funds in packages by way of pyramid ranking to ensure
higher returns to Snappy Drinks. For example if SnappyDrinks Plc has faced the issue of
over budget last year and it is unable to identify rout cause of over budget then in such
condition zero based budgeting would be suitable as in this firm can create budget by
looking at each costs without looking at prior year budget. This will help in focusing on
current year situations and preparing budget accordingly (Jordà, Schularick and Taylor,
2016).
ABC budgeting:
This is the type of budgeting method that that emphases on cause and effects and
accordingly to cost pools it allocates budget to each activity. This process is much more
effective.
 For example if SnappyDrinks Plc offers heterogeneous products then overhead cost
accounts may get high.
 Manager of SnappyDrinks Plc need to clarify the actual purpose of implementing this
budget and have to take support from other operational departments.
 Next step is to select cost drivers and allocate funds to each activity.
(6) Analysis of most appropriate course of method of budgeting
SnappyDrinks Plc should take support of ABC and zero based budgeting methods, as zero
based budgeting will help in eliminating wastage by looking at cost carefully. Furthermore, it
will help in resolving issue of inflation as well. Bu zero based tool is time consuming process

hence if ABC approach is also work in combination then it would support in making effective
control over budgeting process (Gitman, Juchau and Flanagan, 2015). By this way revenue and
expenses planning would be done at precise level that would help in projecting a good and
feasible budget.
CONCLUSION
From the above report it had been summarized that purpose of preparing the budget was
very crucial for any business plan as it would help the business owner and managers to forecast
the income and expenditure of SnappyDrinks. The report also highlighted the budgeting process
of SnappyDrinks in aspects of controlling, coordinating, communicating and operating the
business plan. This report also showed the role of budget process in the development of the
business model had helped SnappyDrinks to improve their strategic plans, revenue projection,
profit margins and approval of board. This report also highlighted the approach used by
SnappyDrinks which was traditional budgeting including incremental budgeting to improve the
future cost management. This had helped the company in value creation, control over the
organization, better forecast accuracy, better strategy formulation and execution. After analysing
the drawbacks of the approach the company's founder decided to change the budgeting process to
improve the process more effectively and efficiently.

REFERENCES
Books and Journal
Babajide, A. A., Olokoyo, F. O. and Taiwo, J. N., 2016. Evaluation of effects of banking
consolidation on small business finance in Nigeria. In Proceedings of the 23rd
International Business Information Management Association Conference (Vol. 1, pp.
2522-2540).
Bendell, J. and Doyle, I., 2017. Healing capitalism: five years in the life of business, finance
and corporate responsibility. Routledge.
Brooks, C., 2019. Introductory econometrics for finance. Cambridge university press.
Burns, P. and Dewhurst, J. eds., 2016. Small business and entrepreneurship. Macmillan
International Higher Education.
Foroohar, R., 2016. Makers and takers: The rise of finance and the fall of American business.
Crown Books.
Gitman, L. J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Haeger, J. D., 2017. John Jacob Astor: Business and Finance in the Early Republic. Wayne
State University Press.
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. and et.al., 2018. European Small Business Finance Outlook: June 2018 (No.
2018/50). EIF Working Paper.
Roberts, R., 2015. Finance for small and entrepreneurial business. Routledge.
Scholes, M. S., 2015. Taxes and business strategy. Prentice Hall.
Storey, D. J., 2016. Understanding the small business sector. Routledge.
Online

Planning and Budgeting Process. 2013. [online]. Available through
<https://docs.oracle.com/cd/E41507_01/epm91pbr3/eng/epm/pbpd/concept_Planningand
BudgetingProcess-d17e2d.html>
Traditional Budgeting and Its Advantages. 2017. .[online]. Available through
<http://www.turkishtaxnews.com/articles/the-usefulness-of-traditional-budgeting-in-today-s-
business-environment/>