Budgeting Methods for SnappyDrinks: A Comparative Analysis

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BUSINESS FINANCE
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Table of Contents
LIST OF FIGURES.............................................................................................................................3
EXECUTIVE SUMMARY...................................................................................................................4
PART 1............................................................................................................................................5
i. DEMONSTRATING THE UNDERSTANDING FOR THE PURPOSE OF PREPARING THE
BUDGETS, ITS PROCESS AND HOW IT CAN HELP IN DEVELOPING THE BUSINESS MODEL.........5
ii. DEMONSTRATING THE APPLICATION OF TRADITIONAL BUDGETING APPROACH AND
INCREMENTAL BUDGETING APPROACH IN THE PRODUCTS OF SNAPPYDRINKS'.......................7
iii. TO ANALYZE THE EFFECTIVENESS OF TRADITIONAL BUDGETING APPROACH IN THE
SNAPPYDRINKS’ COMPANY IN FUTURE.....................................................................................8
PART 2..........................................................................................................................................10
iv. DEMONSTRATING THE UNDERSTANDING ON THE DIFFERENT TYPES OF BUDGET AND
THEIR DRAWBACKS..................................................................................................................10
v. APPLICATION OF THE BUDGETING METHODS IN THE SNAPPYDRINKS’ WITH EXAMPLES.12
vi. TO ANALYZE THE APPROPRIATE METHOD FOR THE SNAPPYDRINKS’...............................13
REFERENCES.................................................................................................................................14
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LIST OF FIGURES
Figure 1 Process of Budgeting........................................................................................................4
Figure 2 Process of Traditional Budgeting..................................................................................... 8
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EXECUTIVE SUMMARY
In this paper, the emphasis will be led on the clarifying the budgeting methods. It will include
the theoretical aspects of the budgeting methods i.e. traditional, zero-based, rolling budgeting
and activity-based budgeting in the context with SnappyDrinks' Company. This Company is the
international manufacturer of energy drinks which produces more than 60 products. The
company’s CEO Donna wants to introduce the new energy drinks with different flavours of
fruits and expand the business operations apart from the UK. Thus the finance manager of the
company wants to plan a budget for the company and which method will be more appropriate
for the company will be evaluated.
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PART 1
i. DEMONSTRATING THE UNDERSTANDING FOR THE PURPOSE OF PREPARING THE
BUDGETS, ITS PROCESS AND HOW IT CAN HELP IN DEVELOPING THE BUSINESS
MODEL
The process of estimating future income and expenses in order to restructure the expenditure
plans is known as budgeting. Budgeting helps in tracking the records. Budgeting is also done to
manage the business finances so that future plans can be structured such as in the
SnappyDrinks', Donna the CEO is planning to expand the business and also to introduce the new
drinks and for this, she has to plan the estimated budget. The budgeting activity also includes
the process of forecasting, controlling, managing and analyzing the financial objectives
(Wildavsky, 2017).
Budget is the most important part of every business entity. It works as a tool of the guide which
enables the companies to assume the incomes and identifies the expenses. There are various
approaches in which budgeting can be done (Wildavsky, 2017). But the two most important
approaches that the SnappyDrinks’ can follow are:
Figure 1 Process of Budgeting
(Source: Miller, 2018)
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Top-Down Budget:
In this type of approach, the main input is done by the top authorities of the company i.e. the
CEO and the concerned employees of SnappyDrinks’. The top management executives provide
the framework for the future objectives of the business. Every guideline whether it is related to
sales budget or to provide the compensation, it is given by the top executives of the
organization. The bottom level management of SnappyDrinks’ is not given enough priority to
involve in the budgeting decisions of the company. They are just required to follow the
instructions properly (Van der Stede, 2015).
Bottom-Up Budget:
A bottom-up budget is a comprehensive approach to the process of budgeting. The top level
management which also includes the finance manager of SnappyDrinks’ Hayley provides the
overall instructions that are simulated with budget and bottom level management along with
the employees execute the budgets. Every department of SnappyDrinks’ prepares its individual
budget as per the given instructions. Finally, the budget of every department is merged and it
forms the budget of the overall company. As it is comprehensive in nature, the employees find
themselves more committed towards the work which is to be done under the budgeted criteria.
It is because the employees’ involvement is taken into consideration and this makes them more
focused towards the business objectives (Van der Stede, 2015).
The following are the steps that are to be taken by the SnappyDrinks to prepare the budget for
the upcoming plans.
 There are various factors that are to be considered by the company while preparing the
budget. As SnappyDrinks wants to introduce the new product and also wants to expand
its operation in the Gulf, Far East, North America and specifically in China, it is necessary
for the finance manager of the company to go through the cost and sales trends and
other environmental conditions which might affect the business plans (Van der Stede,
2015).
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 There should be adequate funds available to plan the business project. As SnappyDrinks
is the well-known international brand and has sufficient funds to plan the future
expansion, so, at the time of preparing the budget, the financial resources should be
allocated properly according to the requirement (Van der Stede, 2015).
 There are various factors that change on a regular basis and this might also affect the
business operations of SnappyDrinks'. Therefore, the costs related to the changes
should be considered while preparing the budget (Van der Stede, 2015).
 The revenues that are to be generated from the projects that the SnappyDrinks’ is
planning should be forecasted. The department budgets should be merged to form the
master budget so that the expenditures can be estimated.
 The budget should also include the bonus plan which is the part of the job appraisal for
the employees of the company. The most important factor that is to be considered by
the SnappyDrinks’ is the capital expenditure as it helps the company to plan the
expansion (Van der Stede, 2015).
 After all this, the budget should be reviewed and approved by the top management and
then the formulation of the budget should be done (Van der Stede, 2015).
Thus with the help of sales budget the proper business model of SnappyDrinks’ can be
developed which can lead to the business project to be successful as it plans according to the
defined objectives related to the expansion of the business operations in the targeted areas
and also to introduce the new drinks in the market.
ii. DEMONSTRATING THE APPLICATION OF TRADITIONAL BUDGETING APPROACH
AND INCREMENTAL BUDGETING APPROACH IN THE PRODUCTS OF
SNAPPYDRINKS'
In the traditional budgeting approach, the manager of SnappyDrinks' used to prepare the
budget on the basis of the previous year's budget. The new budget for the current year is
prepared by changing the last year budget and applies the inflation rate, demand for the drinks
in the market, an increase in competition, etc. the revenues that are generated in the last year
are the most important part of the financial year’s budget (Asogwa and Etim, 2017).
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The traditional approaches are somewhat similar to the incremental budgeting but different
from the zero base budgeting. In the incremental budget prepared by the SnappyDrinks', the
finance manager used to change the previous budget and estimate the current budget and the
current year’s budget becomes the benchmark for the next year budget (Asogwa and Etim,
2017).
As in the given situation, it is seen that the company is planning to introduce the new products
in the market which will include 15 products of different fruit flavours and for that there will be
a requirement of additional workers at the manufacturing site. So the salaries are required to
be paid. Finance manager paid the salary to the 30 staff which cost to around £3,80,000. The
budget that will be prepared for the next year will also include the salary of the newly hired
employees i.e. £22,000 each and will also give the increment to the existing employees of 10%.
Therefore the incremental budgeting of SnappyDrinks of this year, the budget of salary head
will include (£3,80,000+10% increase in the salary of existing employees)+( £22,000*10 newly
employed)
iii. TO ANALYZE THE EFFECTIVENESS OF TRADITIONAL BUDGETING APPROACH IN
THE SNAPPYDRINKS’ COMPANY IN FUTURE
In a traditional budget, the plans of the company SnappyDrinks' are based on the quantitative
terms of the last year budget. Generally, it involves the last year's assets, revenue and
expenditure cash flows statement, liabilities, etc. in the traditional budget prepared for the
current year the incremental amounts related to inflation rates, changes in business plans
which increases the cost and sales of the company are added. It is usually applied in the top-
down approach of the budgeting. The traditional budgeting increases the value of the business
of SnappyDrinks’ and its sustainability in the future. The estimation is taken on the basis of the
past records which properly controls the activities of the company by planning and forecasting,
coordinating, communicating, and evaluating the job performance at the manufacturing site.
The main advantage of the traditional budget in SnappyDrinks’ is that it generates the value to
the shareholders in the future also (Lorain et al., 2015).
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Figure 2 Process of Traditional Budgeting
(Source: SILVA, 2015)
Thus traditional budgeting is important for planning, measuring the performance and acts as
the tool of controlling in the management of SnappyDrinks'. As there is a rapid change in the
environment, SnappyDrinks’ is able to improve the budgeting approaches by continuing the
traditional budgeting approach along with other approaches rather than deserting this type of
approach (Lorain et al., 2015).
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PART 2
iv. DEMONSTRATING THE UNDERSTANDING ON THE DIFFERENT TYPES OF BUDGET
AND THEIR DRAWBACKS
In this segment, the application of the different types of budget apart of the traditional budget
is being discussed and how it impacts the financial budgeting of the companies:
Rolling Budgets:
In the rolling budget, the new budget is prepared after the completion of the old budget. As the
name defines that rolling means the continuous process, it is the budget that is continued for
the further years of the existing budget by taking into consideration the incremental changes.
Instead of being static for the 12 months, rolling budgets are prepared for the quarter or six
months. If compared with the traditional budget, they are prepared for the one year, while
rolling budgets are prepared on a yearly basis by are monthly, periodically updated. As in the
traditional budget, it is prepared in the last quarter of the year, while the rolling budget is the
continuous flow. There is also the difference in alteration; the traditional budget can never be
changed in the middle of the year while rolling budgets can be changed based on the ongoing
trends (Henttu-Aho, 2016).
Disadvantage of implementing the rolling budget in the company:
Rolling budget tends to take more time and efforts. It is just a tool that helps to take a
decision but does not operate the business. Continuously changing the budget can also
demotivate the employees. The rolling budgets are updated only for the incremental
duration and not updated for the entire year (Henttu-Aho, T., 2016).
Zero-based Budgets:
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In the zero base budgeting, there is the fresh budget prepared not taking into
consideration the old budget. There is again the proper planning made for every business
activities. The traditional expenditures are ignored. The whole new budget is prepared in
which the new estimation of incomes and expenses is done ( de Campos and Rodrigues,
2016).
The disadvantage that the zero-based budgeting carries is that it consumes higher time as
the whole new budget is to be prepared without considering the previous budget. There is
a requirement for a huge number of employees in every department. There is a need for
expert managers to formulate the zero-based budgeting (de Campos and Rodrigues, 2016).
Activity Based Budgets:
In the activity-based budgeting, the budget is prepared to identify the business operations
in order to analyze the cost and to reduce the identified cost from the actual level ( de
Campos and Rodrigues, 2016).
With the help of activity-based budgeting, the cost of every department is identified and
the evaluation of value generation can be done.
The main drawback of activity-based budgeting is that there is the requirement of in-depth
knowledge of the functions by the manager or else it would lead to an inaccurate budget.
The research and analysis are to be done for estimating the demand for the product in the
market so that the necessary budget can be formulated for the respective departments.
This type of budgeting deals with the short term plans and thus it proves to be the serious
issue for the companies planning for long term (de Campos and Rodrigues, 2016).
Thus all the three above mentioned budgeting approaches are different from the
traditional budgeting and thus require the large manpower and also consumes the costs
and time (Rogulenko et al., 2016).
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v. APPLICATION OF THE BUDGETING METHODS IN THE SNAPPYDRINKS’ WITH
EXAMPLES
As SnappyDrinks' CEO is planning to launch the drinks with various flavours of fruits and this will
result into 15 products and is also planning to expand the business specifically in China, the
finance manager of the company strategizes the budget on the basis of rolling budgeting, zero-
based budgeting and activity-based budgeting.
Rolling Budgeting:
As rolling budget is the continuous process in which SnappyDrinks’ financial manager has
previously made the budget for the financial year i.e. from 1st April to 31st March. But if the
manager considers the changes that are affecting the business strategies, he can again revise
the plan and can continue the budget for the upcoming months (Barr and McClellan, 2018).
Now the budget will be extended up to the May which has been revised from June.
Zero Based Budgeting:
SnappyDrinks’ is the energy drinks producer and wants to plan the budget for the launching of
new products. For example, if the company was purchasing the raw material until the last year
from another company at £30,000. Planning according to the zero-based budgeting, while
listing the expenses, it is analyzed that the company is able to manufacture the raw materials
and will save the cost of purchase and will result in £22,000. So in the zero-based budget, the
expenses will be marked as only £8,000. In the zero-based budgeting, it will be much useful for
the departments, as the funds will be allocated to every department according to their budget
that they prepare every year by considering the future expenses. The previous expenses are not
considered in the zero-based budget reports (Barr and McClellan, 2018).
Activity-Based Budgeting:
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