Financial Analysis of SnappyDrinks Plc: A Comparative Budgeting Study

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BUSINESS FINANCE
SnappyDrinks Plc
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Table of Contents
EXECUTIVE SUMMARY........................................................................................................................................... 3
PART 1............................................................................................................................................................................ 4
1.1................................................................................................................................................................................ 4
1.2................................................................................................................................................................................ 6
1.3................................................................................................................................................................................ 8
PART 2......................................................................................................................................................................... 10
2.1.............................................................................................................................................................................. 10
2.2.............................................................................................................................................................................. 13
2.3.............................................................................................................................................................................. 14
CONCLUSION............................................................................................................................................................. 15
REFERENCES............................................................................................................................................................ 16
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EXECUTIVE SUMMARY
The assignment is focused on the traditional budgeting system and alternative budgeting
method that can be adopted by SnappyDrinks Plc. The first task of the assignment provides
full knowledge of Traditional budgeting system its advantages and disadvantages as well as
how SnappyDrinks Plc can use this effectively within the organization. the second task
throws light on alternative budgeting method which can be useful for the business
organization.
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PART 1
1.1
For a business, an organization budget serves as an effective tool to operate and manage
business financial activities. The purpose of creating a budget in an organization is for
forecast expenditure and income, budget considered as a tool for decision-making as well
as it helps to monitor the performance of the business (Prümmer et al., 2011). Budgeting is
the course of saving money for the business organization by creating a plan for a particular
business activity. Creating a budget helps the business organization to take careful
measures with respect to the investment of financial resources as well as shows business
does business have enough money to spend to avoid moment troubles.
The budget helps SnappyDrinks Plc in the following activities:
Forecast of income and expenditure – Budget helps SnappyDrinks Plc to foresaw the
expenditures that were meant to occur for business for which business can plan effectively
as well as the business also get to know various sources of income from which business can
earn the profit (Shim et al., 2011).
Decision-Making – Budget helps SnappyDrinks Plc in decision-making activities for long-
term perspectives. The budget helps to create a plan for future financial activities,
considering that activities business can take effective actions for the growth and success of
the business organization (Singh et al., 2012).
Monitor Performance – Budget significantly helps SnappyDrinks Plc to understand the
financial situation of the business organization as well as helps to monitor financial
activities (Singh et al., 2012). Comparing budget with actual expenditure and income
present the effective report for business as where they spend more or less as well
understand the change in the market.
The SnappyDrinks Plc needs to follow the budget process in which all the departments
estimate their future business activities and report to the upper manager and budget
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should be prepared by the responsible and experienced person within the business
organization (Rogulenko et al., 2016). For example, the HRM department calculates its
financial activities and submits its budget to upper management and so on. The activities
should be according to the nature and needs of the business. For example, as the company
plans to expand their business into more countries they need little bit complex budget such
as the zero-based budget. As for the current situation for the business Incremental budget
is suitable in which the budget process is based on last year's data.
Budgeting itself significantly develop the business process as by having an effective
financial plan can help business to effectively manage their business activity as budget
forecast expenditure and incomes which improve the efficiency of the business
organization (Miller, 2018). The proper financial plan for the business helps business saves
a lot of money which results in profit maximization as well as make the business process
clear to all reduce complexity which ultimately helps in business development.
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1.2
Traditional Budgeting
Traditional budgeting approach is the method in which budget is prepared based on the
last year' budget of the business organization. With respect to last year’s budget new or
current budget is prepared with some corrections and modification according to current
business goals and requirements of the business (Miller, 2018). Traditional budgeting also
refers as Incremental budgeting in which the same process is applied for budgeting.
SnappyDrinks Plc has been using traditional budgeting approach for about 15 years for
creating their various budgets for business activity. The current budget is based on
previous years' budget as a company last year revenue was £550 million the current budget
plan aims to increase the revenue for business compared to last year.
SnappyDrinks Plc plans to expand its business in other countries and plan to introduce 15
new products into the market for which budget needs to consider these facts as well
(Aspara et al., 2011). As these expansions and launching new products in the market
significantly change the fixed budget which is effective for the business for a long time.
Market fluctuation – Market keeps changing for that business budget needs to consider all
the facts and compare it with last years’ budget to avoid consequences.
New Market Area - SnappyDrinks Plc needs to consider the fact that business aims to
expand in other countries for that budget needs to consider all these things (Aspara et al.,
2011). For example budget of SnappyDrinks Plc should add the cost of the establishment as
business is expanding; the cost of new labor should also be added in the budget, cost of
various taxes also added in the cost management of the SnappyDrinks Plc.
New Products – The incremental budget of SnappyDrinks Plc is based on last year's budget
but in current year business aims to add 15 new products for that the additional
manufacturing cost should be added to the current budget and other expenses which is
going to incur for the new products also consider in the current budget (Bonini and Gorner,
2011).
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For example, The last year's budget of SnappyDrinks Plc is £ 300million but the current
budget of the company should include the additional cost which incurs for manufacturing
the new product, marketing expenses, etc. as well as the cost of expansion in the new area.
The hypothetical budget for SnappyDrinks Plc:
Business tasks Cost (in
millions)
Last year budget £300
Change in cost of labor (Additional Cost) £50
Market research cost for expansion in other countries as well establishment
cost
£100
Cost of Manufacturing of new product + change in business expenses +
advertisement for new products
£100
Total £550
The new and current budget for SnappyDrinks Plc should be around £550 million and
should aim to get better revenue to compare to last year for consideration to be successful.
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1.3
Traditional budgeting is an effective type of budget which is commonly used in the
business enterprise in where expenses through the years are the same or very less
fluctuated. Following are the Advantages and Disadvantages of this budget:
Advantages and Disadvantages of Traditional Budgetary System
Advantages
Implementation - Traditional budget is simple and easy to understand as well as it is very
easy to implement in a business organization (Bonini and Gorner, 2011). The traditional
budget can be created very quickly as only a few modifications required with respected to
last year's budget. SnappyDrinks Plc effectively adopted this method for almost 10 years.
Stability – This process is very old and adopted in various organizations. Traditional
budgeting provides stability as it is simple to understand and everyone knows their tasks
as well as every year it’s the same with few modifications (Piercy, 2014). As SnappyDrinks
Plc uses this budget for almost 10 years the organization pretty knows all about their tasks.
Decentralization – Traditional budget is very suitable in Decentralization as more often
than not branches refer as an independent working structure in which branch can prepare
their own budget.
Disadvantages
Fixed and Rigid – Traditional budget is Fixed as it is the same all the years as well as
inflexible. Budget not affected by the various market factors such as a change in the market,
new competitors, policy change, etc. (Piercy, 2014).
Excessive Reliance – As Traditional budget prepared with respect to data of last year's
budget for that it is over-reliant on past years' budget. As if the past budget goes wrong for
the company it is possible that the current budget also generates a loss.
Demotivation – Traditional budget is created by the upper management as they evaluated
past year's data and make few changes to create a new budget which leads to the
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bureaucracy that demotivates other employees as they feel ignored or unimportant for the
business organization.
SnappyDrinks Plc has been using the incremental budgetary system for almost 10 years
effectively and business gains a lot of success through this type of budget (Bonini and
Gorner, 2011). But one of the major drawbacks of the traditional budgeting system is that
they are inflexible and fixed.
Inflexibility and fixed pattern is a huge disadvantage of this budget as budget should be
flexible according to the situation as this budget can work in some cases for SnappyDrinks
Plc such as their regular business activity in particular region but as they aim to expand its
business into other countries as well as introducing new products into the market for that
Traditional budget is not suitable (Bonini and Gorner, 2011). Traditional budget is not
appropriate for changing conditions as it may harm the business activity very critically.
The finance director, Harley who joined 3 years ago got it right for the SnappyDrinks Plc as
a business organization needs to change their budgeting system as they are only
appropriate in repetitive business activity of business but not appropriate for all the
business activities.
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PART 2
2.1
Rolling Budget
The rolling budget can be referred as continuous budget and same as a traditional budget
that is created for a year but the only difference between both is that in the rolling budget
manager can make changes monthly or quarterly basis (Jones and Lüder, 2011). Rolling
budget is flexible according to the situation and can be fixed by the condition of the
business.
Rolling budget is a good option for the SnappyDrinks Plc as a permanent budget as it is the
same as the traditional budget with the quality of flexibility which is healthy for the
business organization.
Advantage – Rolling budget is very effective in changing conditions as it has the quality of
adapting to the changes.
Drawback – As the continuous nature of this budget that keeps updated monthly or
quarterly according to business needs makes it complex as employees generally feel
demotivated because of so many changes and not having the same budget (Rogulenko et al.,
2016). Also, a rolling budget can be effective in a Short period of time.
Zero-Based Budget
Zero-based budgeting is the most commonly used budget method at present for the
organization. This budget is very effective in new startups or expands the existing business
into a new place. This budget assumes that all the budgets are nil and must be created from
scratch. This budget is considered as practical budget in which year by year budget treated
as nil and created as per the market conditions (Rogulenko et al., 2016).
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Addition to the zero-based budget helps SnappyDrinks Plc to create a budget for the new
business activity which is not done in the last year to gain the data from (Shim et al., 2011).
As the zero-based budget create the budget from scratch is helpful in unfamiliar situations.
Advantages – Zero-based budgeting provides accuracy and efficiency for the business
activity of SnappyDrinks Plc also it is effective in communication and coordination.
Drawback – Zero-based budget aims to create a budget by assuming current budget zero
and from the starting point in which there is a risk of expending more money on
expenditure than the required amount.
Activity Based Budget
It is a top-down budgeting method that created for the target set or goals of the company
which needs to gain or achieve. The activity-based budget takes the input of amount which
is required to provide the required output (Prümmer et al., 2011). For example,
SnappyDrinks Plc aims to expand their business into other countries the budget created for
successfully establish its business body and generates a considerable amount of revenue is
referred to as Activity-based budget as it is created to for particular activity.
Figure 1: Activity-Based Budget Diagram
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Source: Prümmer et al., 2011
Activity bases budget is suitable for SnappyDrinks Plc as they plan a certain activity such as
expand their business in foreign location as well as a plan to manufacture 15 health-related
product and introduce them into the market for these activities SnappyDrinks Plc can
consider this budgetary system (Miller, 2018).
Drawback - It is useful in short term business activity or for particular activity it can't be
considered as a permanent budgetary system for SnappyDrinks Plc.
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