Financial Planning and Budgeting Methods: Analysis of SnappyDrinks Plc

Desklib provides past papers and solved assignments. This report analyzes budgeting methods used by SnappyDrinks Plc.

EVENTS MANAGEMENT BUSINESS FINANCE
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Executive Summary
The assignment consist of the different types of budgetary system that are used by different
entities in calculating the “expenses and incomes” of the business. These are significant for the
business entities to work properly so that there is “maximisation of profit”. This helps the
business entities in cutting the “cost of production” wherever necessary. The assignment consists
of two methods of budgeting that are being presented here. This enables the business entities to
understand which system to use so that they get proper utilisation of the resources that is present
in the business.
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Table of Contents
Executive Summary.........................................................................................................................2
Part 1................................................................................................................................................4
Part 2................................................................................................................................................8
Conclusion.....................................................................................................................................11
Reference List................................................................................................................................12
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Part 1
An understanding of the purposes of preparing a budget; what processes the company
needs to follow; and how the budget process itself can help development of the business
model
Budgets are performed by the business entities in calculating the “expenses and incomes” that
will be incurred by them over a period of one year. This is necessary for the business entities to
perform this activity as this helps them to plan the whole process that will allow the management
to work properly. These help the business entities in enhancing the finance of the business. This
is significant for the entities in having proper utilisation of resources that are present in the
business. There are number of purposes that are fulfilled by the use of budgets. These are
discussed below:
“Forecasting the incomes and expenditures”
This is a very significant process of preparing a budget. This is necessary for the business entities
to “forecast the income and expenditure” of the business for a fixed period of one year, which is
generally the financial year. This helps the business entities in calculating how much risk they
can take in manufacturing the products that are to be sold by them in that period.
“Tool for decision making”
This is another significant process of preparing a budget. Budget helps the business entities in
taking important decisions on behalf of the business. There are certain important positions in the
business where there is a need to take urgent decisions like the “optimisation of price”. The tools
for budgeting are used to take those urgent decisions.
It is necessary for the business entities to prepare budgets for them. There are requirements for
the business entity SnappyDrinks Plc to understand different types of activities that are present in
the business. These budgets are prepared in such a way that help the business entity
SnappyDrinks Plc to utilise the resources in such a way where there is no wastage of those
resources. There are different purposes that are served by preparing budgets. These are discussed
below:
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1. Being a “manufacturing company”, it is necessary for the business entity SnappyDrinks Plc to
produce budgets for them as this will allow them to check the amount of expenses and income
that will be incurred by them over a fixed period of time.
2. The use of budgets will help them in shaping their finance so that they can solve any kind of
problems that are present in the business of the entity. This will allow them to work properly so
that there is strong financial governance that is present in the business.
Budgets are produced through a fixed process. The process that is used by SnappyDrinks Plc are
as explained below:
1. All the assumptions need to be updated to prepare budgets
2. The business firms need to review the bottlenecks that are present in the business
3. All the funding needs to be added in calculating the budgets
4. All the points needs to be added that represents costing
5. Budgeting package needs to be produced
6. Issues related to producing the budgets need to be incorporated
7. “Forecast of the revenue” needs to be obtained by the business
8. Models related to the budgets are to be updated by the business entities
9. Different departments need to produce separate budgets
10. All the budgets that are prepared in the business needs to be checked and issues by the
management.
The above process is used by the business entity SnappyDrinks Plc in calculating the budget for
the business. They use this process to prepare budget for the business. These are significant for
them to utilise the resources that are used by the business entities.
Demonstrate the application of traditional budgeting approaches (including incremental
budgeting) to plan future cost management for this specific business. Illustrate your
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answer with examples of how products and processes for this business would be budgeted
for in a traditional/incremental approach
The use of “traditional approach” is necessary for the business entities to perform. These allow
the business entities in checking the operations of the business to prepare the management cost
of the business. The “traditional budgeting approach” that can be taken by the business entity
SnappyDrinks Plc are as follows:
“Static Budgets”
These budgets are included in the “traditional budgeting approach” that helps the business entity
in preparing budgets for them. This allows the business entities to perform budgets in a way that
is static in nature. These are significant for those industries that have a fixed planning in
calculating the expenses. Once the budgets are performed, the planning should be done based on
these budgets and these cannot be changed for a period of one year. These are not to be used by
this business entity SnappyDrinks Plc as there are a number of items that are produced by them.
This will not allow them to make proper budget as they will not produce the same number of
units every year. These should be kept in mind by the management of the business entity.
“Fixed Budgets”
These are another important forms of budgeting that are used by the business entities. This helps
them to prepare budgets that are fixed in nature. Only one form of budgets are prepared by the
business entities to solve their issues related to budgeting. These are significant for them to work
properly by doing proper calculations. The business entity SnappyDrinks Plc should not use this
process as their planning tool. The reason is that they have sixty different products and those
needs to be budgeted separately so that they get the exact amount of expenses and incomes that
will be incurred by them. These are only applicable for those industries that have only one type
of products that are manufactured and sold by them.
“Incremental Budgets”
These are another form of budgets that falls under the “traditional budgetary system”. This is
calculated on the basis of increments in the activities that are present in the business to complete
the production and selling of the products. These are such type of budgets that are prepared by
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the business entities to calculate, where there are number of units to be produced. These allow
the management to calculate different units of products separately so as to check the exact
amount of “incomes and expenses” that will be incurred by the business entities.
Analysing whether a traditional budgetary system is appropriate to all or any parts of the
business in its planned future form
This significant area is necessary for the business entity SnappyDrinks Plc. It can be seen from
the above explanation that there is one type of budget that will suit the business entity. This is
“incremental budget”. The reason behind this is that this is the only form of budget that helps the
business entity to add the expenses on the basis of the activities that are added. These are
significant for the business entity to perform this budget, as there are sixty items that are being
produced by the business entity. Other budgets that are present cannot be used by the business
entity, as those budgets do not allow the business entities to change the aspects of the budgets for
that fixed period of time. This is the reason that reduces the use of these budgets in the business
entity SnappyDrinks Plc. Thus, it can be seen that there is only use of the “incremental budgets”
that are can be used by SnappyDrinks Plc in preparing budgets for the business. This will help
them to plan for any kind of activities that are needed by the business entity to work properly in
optimising the price of the products that are sold by them.
Thus, it can be commented that the business entity SnappyDrinks Plc can use the process of
“incremental budgets” in calculation of the budgets for the business. These will help the business
entity to take different kinds of decisions in relation to the “price optimisation”. These help them
to analyse the financial aspects of the operations of the business entity. These things are found
from the analysis of the aspects of finance of the business entity.
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Part 2
An understanding of the following alternative budget methods: rolling budgets, zero based
budgets and activity based budgets. Explain how each method attempts to improve on the
traditional approach and what their respective drawbacks might be
Drawbacks of traditional budgeting
Traditional budgeting is helpful for the company because it can be implemented in the
organisation easily. The simplicity is the main reason of the popularity of this budget but there
are several limitations of this budgeting method that have created a gap within the system of
budgeting. The main drawback of the traditional budgeting is the rigidity of the structure. The
structure of this budget is not at all flexible and no information can be updated in the budget once
the budget is made. It does not consider any bonus or incentives for the employees and the
morale of the employees become down. It is highly dependent on the previous data and the
budget is not much applicable in a situation where the information is getting updated regularly.
To mitigate the above limitations, alternative approaches of budgets have been invented. These
methods are more applicable for the companies and it helps the companies to apply the budget in
a more active way. Some of the alternative methods of budgeting have been discussed below:
“Rolling Budgets”
In this method of budgeting, the period of the budget is updated with the existing period. This is
a continuous method of budgeting. Flexibility of this budgeting method is high and it helps to
increase adaptability and the effectiveness of planning in the company. This method is highly
applicable in the situation where all the information is being changed often or regularly.
On the other hand, the method has some disadvantages such as the method is costly and it
includes more complex calculations than the traditional method. It is difficult to be applied in
small companies.
“Activity Based Costing”
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In this type of budgeting all the activities of the total production process is ascertained cost. This
method helps to reduce the costing of the company. It can group the same kind of activities in the
company and the method is highly flexible.
On contrary, this method is more time consuming and to imply this system in the company more
amount of human resources are needed.
“Zero based budgets”
This budgeting starts from the scratch at every stage and it does not rely on the previous data of
the companies. It takes all the updated data and the accuracy of this budget is very high. This
budget is highly applicable for the situation where the information and the circumstances are
constantly being changed.
On the other hand, this budget is very much time consuming with the highly complicated
calculation. It is not at all applicable for start up or the small companies.
The potential application of these methods to the company giving specific examples of how
all or some elements of budgeting could be performed more effectively using an alternative
method
Snappy Drink Plc is an old company that has already an established brand image. The company
already uses traditional method of budgeting and this budgeting method has helped the company
till date due to the static business environment of the company. Recently the company has
increased its product line. Due to this, the amount of revenue and the costing has been changed.
Other expenditures of the company are also being changed with time. In this situation of the
company, traditional method of budgeting is not being applicable properly. This gap can be
fulfilled by applying the rolling budget and the zero based budgeting method. These two
methods are most applicable for the changing environment.
Rolling budget
This environment can be taken care by applying this budget. This budget will help the company
to update al the information related to the change in the income and expenditure of the company.
Now the company has launched a new health drink and the costing of the company has been
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changed. This costing will run for sometimes and rolling budget will help the company in this
situation to update the period of the budget and the budget can be changed as per the period and
the period of the budget can be changed according to the pattern of the expenditure of the
company. In this situation, the planning is the most needed function in the company and rolling
budget is highly helpful in planning all the steps in the company. It will make the company more
adaptable towards the changing situation. At this situation, the organisation needs a flexible
schedule of the budget, the flexibility of the rolling budget is very high, and it will help the
company to manage the rate of attrition along with high responsiveness.
Zero based budget
Zero based budgeting starts calculating the expenditure and the performance of the company in
each period from the scratch. It does not depend on the previous data. Now the company has
increased its product line by launching new drink led by health. In this situation, no previous data
for the expenditure is available for the company. It is the high time for the company to apply
these types of budgeting and it will help the company to increase the effectiveness of
performance and to improve the spending habit. The company is and enough old company to
have enough human resource employed for the finance department. Thus, it can easily
implement zero based budgeting in its system.
Analysing whether one of these methods (or a combination) would be more appropriate to
the company
There are numbers of budgeting that are being used by the business entities to perform. This
helps them to analyse the operations of the business and helps the business entities in calculating
the “income and expenses” of the business. These are necessary for them to follow any kind of
budget that suits the business entities the most. The use of alternative methods of budgets helps
the business entities to perform budget that will help them in calculating the expenses
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Conclusion
This significant area is taken by the business entities that help them in calculating the budgets of
the business. These are significant for the business entities to work properly with the help of
preparing budgets of the business. These help the business to take important decisions that help
them in taking risks that are necessary for the business entities. The assignment consists of
explanations related to varieties of budgets that are performed by different business entities.
These are necessary for the business entities to perform budgets to help them in calculating the
“income and expense” of the business in the whole process of production to selling of the
products that are manufactured by them.
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Reference List
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