Business Finance Report: Budgeting and Financial Analysis

This report provides a comprehensive analysis of business finance, focusing on budgeting and its role in developing a business model. It examines the purpose of budgeting, its process, and how it aids in decision-making, forecasting, and performance monitoring, using Snappy Drinks Plc as a case study. The report delves into traditional budgeting approaches, including incremental budgeting, and assesses their appropriateness for different organizational departments. Furthermore, it explores various budgeting methods like rolling budgets and analyzes their application, advantages, and suitability for the company. The report also covers the importance of strategic planning, revenue projections, and cost management, providing a detailed understanding of financial planning within a business context.

BUSINESS FINANCE

Table of Contents
..........................................................................................................................................................3
EXECUTIVE SUMMARY.............................................................................................................4
PART 1 ...........................................................................................................................................4
. Purpose of preparing budget, its process and how it helps in the development of business
model...........................................................................................................................................4
. Application of traditional budgeting approaches for planning future cost management..........7
. Analysing whether traditional budgetary system is appropriate to all or any part of
organisation's future plan ...........................................................................................................8
PART 2............................................................................................................................................9
.V Different types of budget methods.........................................................................................9
.V Application of these methods to the company through specific examples..........................10
.VI Analysing the methods which is best suited to the organisation........................................14
CONCLUSION..............................................................................................................................14
REFERENCES\.............................................................................................................................15

EXECUTIVE SUMMARY
Business finance can be defined as the money and credit which is employed in the
business. It basically involves acquisition of funds and utilising those funds in the most
productive way. The various activities are related with the business finance such as allocating the
resources, preparing forecasts and continuously reviewing the opportunities for debt and equity
financing. The present report is going to discuss about Snappy Drinks Plc, an energy drink
manufacturing company situated at Nottingham. It is listed on LSE. The report will highlight the
concept of budget, why it is prepared and its process. Further, different types of budgeting
methods will be analysed in the project report.
PART 1
Purpose of preparing budget, its process and how it helps in the development of business model
Budget in the simpler terms, means a short term plan that states out the expenditure that
will be incurred by the organisation. Preparing budgets is necessary for the Snappy Drinks
because of the following reasons:
It forecasts the income and expenditure of organisation: Budgeting is said to be one of
the crucial part of business planning process. Managers continuously put their efforts in
predicting whether the expenses that are incurred could be recovered by the income generated by
incurring them. This is done by the way of preparing budgets.
It helps in decision making: Another purpose of preparing budget is to render a financial
framework that leads to better decision making. For example, when budgets are prepared by
Snappy Drinks, it knows where its money is used and how productively it is used. Also,
preparing budget leads to tight control on the expenses of the company that again leads to
attainment of company's objective of being cost effective organisation.
Monitors and review business performance: The basic objective of budget is to find the
deviation between the actual performance and standard performance of Snappy Drinks by
comparing them against each other. This results in taking corrective actions that eventually leads
to better business performance of the company (Miller, 2018.).

Process of budgeting: The process of budgeting which Snappy Drinks could follow is
described below:
 Strategic planning process: The very step in the preparation of budget is writing down
the things Snappy Drinks wants. Every company comes into existence for a specific
purpose that it desires to fulfil. Thus, this is done by witting down the mission and vision
of the company that continuously guides them it has to achieve its objectives and goals
for which it has been formed.
The budgeting process involves strategic planning to ensure that organisation uses its
resources in the most optimum way for supporting the strategic goals of the company and paves
the way for its development. This means that budgeting moves towards vision. Goals of business: There are certain business goals which the Snappy Drinks wishes to
achieve for implementing its strategic plan. It is these goals which are funded by budget
or it can be said that the expenses are forecasted in the form of budget that helps in
fulfilling those goals. It is mainly the responsibility of management team of entity.
 Projections of revenue: The next step in budgeting process is to project or estimate the
income that will be generated by incurring the expenses for meeting the business goals,
For instance, for meeting the goal of increasing the sales of Snappy Drinks by 2%,
income that would be generated is projected for the year concerned (Dudin and et.al.,2015). Projection of fixed cost: Preparing budget involves estimating the expenses that will not
change due to any reason. Examples are employees' salary, interest expenses, rent, utility
expenses etc. Projection of variable cost: Budget also include variable cost that fluctuates with time or
other factor. These expenses should be controlled by management of Snappy Drinks by
the way of budgets. Annual goal expenses: Budgets should be prepared I such a way that helps in
accomplishing goals. Each initiative must have estimation of cost that is related to a
annual specific goal. Thus, it is place where annual goals or targets are integrated in
departmental budgets.

 Targeting profit margin: Every company wants to earn profit by undertaking business
activity. Profits are crucial because this shows the financial soundness of the company in
the market. Approval of board: Budgets have to approved by the board or any concerned authority
for putting the budget into effect. Reviewing budget: Prepared budgets shall be reviewed by the management monthly for
maintaining its effectiveness and to make sure that it does not deviate from its track.
 Handling the variations: When the actual performance deviates from the standard
performance, variation is said to have occurred. These variances should be reviewed by
the concerned manager and shall look into the reasons that created variances (Popesko
and et.al., 2015).
Budget process helps in the development of business model of Snappy Drinks in the
following manner:
A business model is a plan that lays out the operations of company will be carried out
along with identification of sources of revenues, target customer base and intense finance
detailing. Innovation and differentiation process of company: Snappy Drinks is intending to
launch healthy drinks with low sugar content in its product line. Preparing budgets will
help the managers in estimating the total expenditure that would be incurred for
launching new product. Marketing campaign planning: The business model involves detailed structure of how
company will generate its profits. In it, it also includes planning of marketing campaign
that rolls out the structure regarding how the new product is to be marketed in the target
market. Process of budgeting will help in determining the cost of marketing the products.
 Business expansion: Snappy Drinks is intending to expand its business in the Gulf
countries, Asian countries etc. This requires the management to draw a proper strategic
plan where the cost and benefits of the expansion plan will be evaluated and analysed.
Such a forecast will throw light on the viability of expansion proposal of the enterprise
(Argenti, 2018).

Application of traditional budgeting approaches for planning future cost management
A traditional budget is such a quantitative statement which is prepared by taking the
budget of last year as the base for the current year. Appropriate changes are done for adjusting
changing environment in which business exists such as rate of inflation, demand of consumers
etc. The traditional method is useful because of simplicity, accurate forecasting and it provides a
framework for controlling the expenses to the mangers of Snappy Drinks (Barr and McClellan,
2018).
One of the type of traditional budgeting is incremental budgeting. This is a kind of
budget where it is prepared by taking previous years’ costs or expenses as base and incremental
amount are added in the new year budget. This type of budgeting promotes the thinking of
spending up to the budget for ensuring optimum allocation of monetary resources to different
overheads. One of the major advantage of incremental budgeting is that it is steady and the
change is gradual which facilitates mangers in Snappy Drinks to operate their department with
utmost consistency. An illustration is given below by which incremental budgeting could be
easily understood:
INCREMENTAL BUDGET
Particulars initial investment 1st year 2nd year
product energy drinks energy drinks
no. of consumers (UK region ) 2500 3500
average selling price 200 200
revenue 500000 700000
product
no. of consumers (EU region ) 4500 5500
average selling price 160 160
revenue 720000 880000
Total revenue (cash inflows) 1220000 1580000
Operating expenses

repairs 200 300
Sales commission 500 550
Salaries 1000 1500
Advertisement 3000 3500
plant development 25000 2500 3000
Machinery purchased 4000 0 2000
Other equipment 2000 0 500
Total expenses( cash outflows) 31000 7200 11350
net cash flow -31000 1212800 1568650
Capital invested 800000000
bank loan 200000000
Opening balance of cash 1000000000 999969000 1001181800
cl. Balance of cash 999969000 1001181800 1002750450
From the above illustration, it can be seen that previous year budget has been taken as
base and accordingly incremental amount has been added in each of the expenses. Like number
of customers has been estimated to be increased in current year and accordingly the expenses
have also been increased taking previous year as base. The method is justifiable because of its
simplicity and it ability of facilitating the managers of organisation to handle their departments
with utmost consistency.
Analysing whether traditional budgetary system is appropriate to all or any part of organisation's
future plan
Traditional budgeting system holds great importance because of the following reasons:
 It is quickly prepared: The biggest advantage of traditional budgeting system is that
budgets cane be prepared very quickly under this approach.

 Simpler method: Its importance lies in the fact that it is simple in nature and rules out
the possibility of complications in drawing out a budget. This leads to better and more
accurate forecasting of the expenses and revenue.
 It facilitates a framework for control: It leads to better control of the business activities
as deviation is found out by comparing the actual expenses with estimated costs and the
reasons for such variance is found out by managers and are minutely analysed by them.
This lead to better control over the activities of an organisation (Rogulenko and et.al.,
2016).
Appropriateness of traditional system in Snappy Drinks company
Operations department: The traditional budgeting system could be effectively used by
Snappy Drinks. The managers can use previous year's data and can accordingly prepare their
current year budget with the incremental amount. This will help them in estimating the cost more
accurately by taking into factors such as inflation, market demand etc., into consideration.
Marketing department: The marketing department of Snappy Drinks Plc could use
traditional budgeting system as it can take the budget of last year and make new one by making
some adjustments. For example, cost of promotional activities, marketing campaigns etc., of the
current year could be determined by analysing the expenses incurred in the last year.
Finance department: It is one of the most useful technique which could be efficiently
used by finance department of company to prepare the finance budget that shows how assets are
managed, cash flow, income and expenditures takes place in the organisation. Finance manager
can use previous year budget for estimating the revenue and profits for the next year (Mahal and
Hossain, 2015).
PART 2
Different types of budget methods
There are different types of budget methods which are discussed below:
Rolling budget method: In this type of budgeting system, a budget is prepared in the
beginning of the accounting period and is continually monitored and amended for reflecting the
deviation that occurred because of different changing circumstances. Rolling budgets would
allow the Snappy Drinks to forecast the future with more reliability as the budget is based o
updated revenue and expense or actual results (Mahieu, Vroman and Calluy, 2015).

Improvement on traditional method: It is better method than traditional method because
it allows the budget to be prepared in realistic circumstances. It is more adaptable in nature
unlike traditional methods and provides more accuracy.
Drawback: The biggest drawback of this method is that, that it is time consuming.
Forecasts are just the predictability of future and not surety that this will happen in the future.
Thus, Snappy Drinks cannot ask its managers to put their valuable amount too much only on
preparation of budgets because it will prevent them in preforming their other core functions.
Zero based budgeting : It is the type of budgeting where the spending plan is created or
budget is prepared from the scratch. It is prepared from the zero, that is from the very beginning.
Improvement on traditional method: This method is more furnished method than the
traditional because it takes into account every factor from the very beginning unlike traditional
budgets which are based on previous budgets. Also, zero based budgeting is more driven towards
decision making rather than just determining the cost and revenue (Traditional Budgeting vs
Zero Based Budgeting Infographics, 2019).
Drawback: For preparing zero based budget, company requires more man power that
adds to the cost to the company. Moreover, the method takes immense time of the managers who
are performing the task of zero based budgeting.
Activity based budgeting: This method is based on the activity based framework in
which revenue generated from different activities are directly allocated to the unit which is
responsible for that particular activity.
Improvement on traditional method: The method is way better than the traditional
budgeting method because it increases traceability and transparency. It is also better in the sense
that activity based budgeting focuses more redesigning the products and improving the costing
process rather than just controlling the costs.
Drawback: The method is said to be one of the most complex and time consuming
method of budgeting which also requires high manpower along with the related expertise. This
restricts the wide applicability of this method in many organisations which are short in financial
resources.

Application of these methods to the company through specific examples
An illustration of rolling out budget:
An illustration of zero based and activity based budget:

Zero based budgeting
Illustration 1: Zero based budgeting
(Source: Example of zero based budgeting: A methodology for today's technology, 2019)

Analysing the methods which is best suited to the organisation
From the above discussions, it has been observed that modern budgeting techniques
provide more accurate and reliable results when compared to the traditional method of
budgeting. Snappy Drinks could use the mixture of the zero based and activity based budgeting
because of the following reason:
 Since zero based budgeting takes into consideration every factor from the very beginning,
it allows the managers to forecast the expenses and revenue with more reliability and
accuracy.
 Activity based budgeting provides that each activity shall be held responsible for the
income and expenditure generated in the Snappy Drinks Plc. This leads to proper
estimation of costs of operations of company and it also determines which company is
more profitable to which more resources could be allocated.
 Both the methods are good in the sense that each of them takes into account the different
factors that could change the budgets and cost of inputs drastically. This makes the
budgets of the company more adaptable and reliable as costs are determined based on
updated facts rather than just taking previous year's cost as base (Top 4 benefits of
Activity-based Budgeting, 2016).
CONCLUSION
From the above project, it can be summarised that budgets are the important tool for any
organisation to estimate their future income and expenditure. It is spending plan according to
which managers undertakes the business activity. The report focussed on the Snappy Drinks plc,
an international energy drink manufacturing company in which budgets plays a crucial role in
controlling its costs and using the monetary resources in the most efficient way. It was also
observed from the report modern budgeting techniques such as zero based and activity based
methods are more appropriate to the company because these methods considers every factor
from the scratch.

REFERENCES
Books and Journals
Argenti, J., 2018. Practical corporate planning. Routledge.
Barr, M. J. and McClellan, G. S., 2018. Budgets and financial management in higher education.
John Wiley & Sons.
Dudin, M and et.al.,2015. The innovative business model canvas in the system of effective
budgeting. Asian Social Science. 11(7). pp.290-296.
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.
Mahieu, K., Vroman, S. and Calluy, P., 2015. Asset-based Budgeting in Practice. Controlling &
Management Review. 59(5). pp.29-37.Popesko, B. and Šocová, V., 2016. Current trends in
budgeting and planning: Czech survey initial results. International Advances in Economic
Research. 22(1). pp.99-100.
Miller, G., 2018. Performance based budgeting. Routledge.
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.
Rogulenko, T and et.al., 2016. Budgeting-Based Organization of Internal Control. International
Journal of Environmental and Science Education. 11(11). pp.4104-4117.
Online
Example of zero based budgeting :A methodology for today's technology. 2019.[Online].
Available through <https://www.brighthub.com/office/finance/articles/122853.aspx>
Top 4 benefits of Activity-based Budgeting. 2016.[Online]. Available through
<<https://www.wallstreetmojo.com/traditional-budgeting-vs-zero-based-budgeting/>
Traditional Budgeting vs Zero Based Budgeting Infographics. 2019. [Online]. Available through
<https://www.wallstreetmojo.com/traditional-budgeting-vs-zero-based-budgeting/>