Budgeting and Financial Planning for Snappy Drinks Plc

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BUSINESS FINANCE
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Table of Contents
INTRODUCTION...........................................................................................................................................3
PART 1.........................................................................................................................................................4
PURPOSES OF PREPARING A BUDGET......................................................................................................4
THE PROCESS THAT THE COMPANY NEED TO FOLLOW...........................................................................5
BUDGET PROCESS AND THE BUSINESS MODEL DEVELOPMENT..............................................................5
TRADITIONAL BUDGETING APPROACHES APPLICATION..........................................................................7
PART 2.........................................................................................................................................................9
ROLLING BUDGETS, ZERO BASED BUDGETS AND ACTIVITY-BASED BUDGETS.........................................9
POTENTIAL APPLICATION OF THESE METHODS WITH EXAMPLES.........................................................10
CONCLUSION.............................................................................................................................................12
REFERENCES..............................................................................................................................................13
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INTRODUCTION
This assignment is prepared to gain the insights for the role of the preparing budget which
include the follow up of the process of the company and way by which the process of the
budget can aid in the growth of the business model. This also provides the understanding of the
use of the methods for the traditional budget that can be uses in future considering the
managing cost of Snappy drinks. Further, the assignment also provides an understanding of the
traditional budgetary system that will best for all business in the form of the planned future.
The second part provides the insights of the substitute approaches of budgets and the method
of improving the traditional approach. Also, it also covers the application of these models will
be followed.
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PART 1
SnappyDrinks Plc is a manufacturer of the energy drinks that are operating at the global level.
Snappy Drinks also offers 60 million diverse products. CEO of SnappyDrinks plc is Donna who
owns a 15% share in the organization. This organization is located at Nottingham.
PURPOSES OF PREPARING A BUDGET
Objective of preparing budget:
The purpose of the budget is as follows that includes aspects:
 It is prepared to project expenditure and income
 Way to monitor the performance of the business
 A decision making tool
A projection of expenditure and income: It is also the vital part for planning the budget in the
organization. Business managers & owners need to have the ability to predict whether the
business will make a profit or not. Snappy drinks if prepare the budget then the organization
will be able to predict the profit-making of the Snappy Drinks. The objective of the budget is
only to provide the method and way of performing the business on certain events; strategies
and plans are carried out (Miller, 2018).
Figure 1: Forecasting of income and expenses
[Source: Miller, 2018]
Decision making tool: The objective to prepare the budget also includes providing the financial
framework for the process of the decision making as for example it is the proposed course of
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action that we have planned. For the management of the business in responsible manner
expenses must be controlled (Sokolov et al., 2018).
Figure 2: Tool for decision making
[Source: Sokolov et al., 2018]
A means to monitor the performance of the business: The other purpose of the budget is to
measure the actual performance of the business against the forecast business performance.
Thus the budgeting has the purpose of measuring the performance of the business up to mark.
THE PROCESS THAT THE COMPANY NEED TO FOLLOW
Snappy drinks can follow the following process for budgeting:
For the budgeting, Snappy drinks need to follow the stages that will initiate before 4-6 months,
the starting of the fiscal year while some of the organization takes the entire fiscal year for the
completion. Most of the organizations set the budgets and carries the variance analysis
monthly. Snappy drinks need to start with the initial stage of the planning and the company
goes through a series of the stages for the final implementation of the budget. The common
process involves communication within implementing the budget, the establishment of the
targets and objectives, development of the in depth budget, compiling of budget model,
evaluation for the budget and consent for the same (Nguyen et al., 2018).
BUDGET PROCESS AND THE BUSINESS MODEL DEVELOPMENT
The process can aid in the development of the business model for Snappy drinks. A business
model reflects the creation, delivery and capturing the value adopted by the organization. The
process of the budget is related to the development of model for business as it helps in
improving and developing with the help of funds and budget. For the business model, the
planning part is also related which includes funding of the model and concepts. A budget is also
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used as a plan that outlines the financial; and operations goals of the organization in the form
of the business model (Wildavsky, 2017). This also acts as an action plan. A budget helps in the
allocation of the resources of the business, performance evaluation and the plan formulation. A
business model involves the regular task of budgeting that normally occurs on an annual and
quarterly basis. The business model involves the process of budgeting as an essential and
important part. Without the use of the budget the business cannot be performed well. A
budget provides the accurate and real picture of the revenues and pictures and drives the
important decisions of the business such as increase the marketing, cutting expenses, hire staff,
purchasing equipment, improving efficiencies in another manner (Nguyen et al., 2018).
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TRADITIONAL BUDGETING APPROACHES APPLICATION
The traditional budgeting uses the incremental methods which start with previous year budget
and adjust down and up from that budget that reflects changing assumptions for the New Year.
As for example, the budget of the previous year budgeted expenses for the department were
$1.8 million the department may ask a 4% increase for maintaining the same service level for
the next year (Lorain et al., 2015).
Traditional budget can also be called as the incremental budget that is being formed with
consideration of budget of the existing period and real performance with the increase in
amounts that will be add for new budget period.
Traditional budgeting is used for planning and managing the cost in future in the business. The
old business uses the traditional budgeting where they plan for the future and manages the
cost. The business uses the traditional budget as the tool for the accounting that helps in
predicting and analyzing the expenses and earnings and makes good decision to minimize the
cost and maximize the profit in future. It helps in planning and changes in the business in the
future (Brusca and Labrador, 2016).
Traditional budgeting can be used for budgeting of products and services as for example an
organization can consider and prepare the budget for the sale of the products that will include
all expenses, rents, expenditure and other related items that will be incurred in future for the
development of that products. For this, the current period budget will be set as the benchmark
and will compare with the actual performance with the increase in amounts that will be
reflected in new budget period (Lorain et al., 2015).
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APPROPRIATENESS OF TRADITIONAL BUDGET SYSTEM
Traditional budgeting is the process to project the expenditures and profit for the future year
on the basis of the budget of preceding year. A budget is a tool of accounting that helps in
predicting and analyzing the earning and expenses of the industry. Below are the benefits and
drawbacks of the traditional budgeting system that reflects appropriateness for the same:
Advantages:
A traditional approach budget can help in decision making. A budget helps in easier for spotting
issues and the business can decide to make the changes in the business. If the budget expenses
are exceeded then the organization can cut back and reduce the expenses of the business that
has been deeming unnecessary. A traditional budget gives a game plan for the way for
operating the business (Brusca and Labrador, 2016). It is also important for obtaining financing.
Lenders and investors want to invest in the financial projections and plans before the
investment in the company and giving a loan. This budget provides the framework to control
that makes easy management of the stability and activities (Siddikee, 2018).
Disadvantages:
It can be inaccurate for the representation of the goals that must be attained. Owners can
make deception the projections so that outcomes can look more attractive. The creative
traditional budget also takes less time as compared to some of the methods but it still and
somehow time-consuming. There is a need to pour time for analyzing the budget of the
previous year with the actual outcomes. It also requires determining the changes that must be
made in the new budget. Most of the businesses also have the cycle that reflects annual budget
and this emphasis to make the budget outdated soon after its creation. It also fails in motivating
the employees for the company (O’Grady et al., 2017).
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PART 2
ROLLING BUDGETS, ZERO BASED BUDGETS AND ACTIVITY-BASED BUDGETS
Following are the understanding and explanation of the different budgets:
ROLLING BUDGET: Rolling budget system helps the management to adjust the operational
plans for countering the actual business performance. This is the continual updating for adding
the new budget period after the completion of the recent budget. Thus it involves the extension
in the form of increments of the current model for the business.
Advantages: This approach has advantage that business and individual can constant attempt
for preparation of budget model and it also helps to update the norms for the previous budget
of incremental nature (Berland et al., 2018).
Disadvantages: The drawback of this model as it will not result to provide the crucial budget
that can be more attainable than the previous budget.
ZERO-BASED BUDGET: This type of budget starts with the assumption that the budgets of all
departments are zero and must be rebuilt from scratch and initial. Managers must have the
ability to justify single expenses. It is good to uses when there is a need of cost containment in
urgency as for example in a situation where an organization is going through a restructuring in
finance or a market downturn or a major economic that need it to the reduce the budget.
Advantages: This approach is great to cut the cost as it provides control over cutting the cost.
Cutting inefficient costs also allow redirecting spending which can help in the advancement of
the organization (Elias and Etim, 2017).
Disadvantages: If the organization is very large then it may be too costly and it may also need
too much commitment for other departments also to be proved to be a realistic method.
ACTIVITY BASED BUDGET: This includes the activities which are related to the business
operations along with the cost. It provides the leaders with a better understanding of the cost
drivers and the activities that can be monitor by the managers to remain within budget. With
this type of budget, the leaders look for past expenses for getting the root cause of fluctuation
in the operating cost. Activity-based budgets also allow the management for calculation of the
profit that is being developed from the single activity (Bogsnes, 2016).
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Advantages: This budget evaluates the cost driver and it involves all phases that are considered
in the activity. The unnecessary activities are removed and only needed tasks are used. It also
saves the business cost.
Disadvantages: This approach needs gaining insights for the different practical area of the
business. This approach is also very complex (Elias and Etim, 2017).
POTENTIAL APPLICATION OF THESE METHODS WITH EXAMPLES
Snappy drinks must use the modern budgeting system that can be the alternative budgets
methods. Following are the examples of the use of the traditional budget system and which are
as follows:
Zero-based budgeting: This is the good method to manage and improve the budget of your
small business and it can help Snappy drink. Example: the marketing department of the Snappy
drinks has spent $1 million. The department can also take $ one ml repeatedly that will not
alter the marketing department of the previous year, the requirement to recruit more
employees for marketing for doing extra sales. The other method can includes providing all
team changes of 10% with increase and decrease by 10%. This will help to have the $ approx.
more than 1 million. The other method can be zero based approach where the business
department will initiate with no budget and it will also include expenditures and individual in
the budget for the future. This will leads of $1,024,314 which is greater than the previous year.
(Dudin et al., 2015)
Rolling budget: Snappy drinks have previously had static budgets in the organization. Rolling
budget is set for one time and lock for that year. Rolling budget leads to meet their budgets
very early and they doesn’t do anything for remaining year. The sales figures of each month are
assessed in relation with budget and this model is also altered. Rolling budget can be used by
the Snappy drinks as the alternative method of the budget as for another example; Snappy
drinks have prepared a budget for the year 2017 for full year. After passing the budget for
January that passes the original type of budgets those extends now up to for January 2018. The
budget is now prepared for next twelve months. It is similar to that one where the budge of
February 2017 has prepared and passed the rolling budget one up to Feb 2018. As per this and
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in accordance with this cycle the budgeted cycle will be for next two months (Dudin et al.,
2015).
Activity-based budgeting: Snappy drinks can project the business can purchase 1 lac materials
will needed cost of overhead expenses $ 2 lac for a whole year. It will also include remuneration
for purchasing, inspecting store items. For setting the equipment for a new product will need
$eight lacks and four hundred set ups. The organization will have 4000 inspections and $ 4lacks
overheads. Thus the overhead for the current year is $2,000,000 with the use of activity-based
costing.
ANALYSIS OF THESE METHODS REFLECTING APPROPRIATENESS TO THE COMPANY:
Snappy drinks must use the alternative method with respect to the traditional method. This will
best for snappy drinks. This utilises the methodology of the activity-based costing. It also
allocates the resources to all departments after the justification of the deriving of costs. In this
method, each function of the business also analyzed with keeping in opinion the goals and
functions of the business. It also allocated the resource after recording the relationship of the
functions of the business with the business objectives. It also helps in knowing the potential
profitability of the business (Zamfir, 2015).
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CONCLUSION
This assignment has provided the insights of the purpose to prepared the budget which will
include the procedures adopted by the company and Further, this has also demonstrated the
use of the approaches of the traditional budgeting for cost management. Section two of this
assignment provided the insights of the alternative ways of budgeting with the use in the
organization. It has also focused on the appropriateness of this method for the organization.
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