Budgeting Process and Methods: SnappyDrinks Plc Case Study

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Business Finance
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Executive Summary
Managing finances is a tough job for every enterprise in the world and budgets are one of the key
factors that play an important role in the financial management of an enterprise. In this report,
budgets, their processes, their purposes, and their various types have been discussed in detailed
through the example of SnappyDrinks Plc, an international producer of energy drinks. It has
discussed on various budget methods, their pros and cons and provided examples of how they
can be applied. It has also provided examples of which of these budgets would be the most suited
one for SnappyDrinks Plc.
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Table of Contents
Part 1................................................................................................................................................4
Part 2..............................................................................................................................................10
Bibliography..................................................................................................................................17
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Part 1
i. 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
A budget can be described in a number of ways. In the words of Weetman (2010), an enterprise’s
financial plan within which plans are set out for the enterprise for comprehending not only its
expenses but also its income for a forthcoming budgetary period, which is usually a year is
known as a budget. In the figure below, the five most significant aspects or factors in a budget
have been presented -
Figure 1: Five significant aspects of budgets
(Source: Created by the learner)
However, purposes of budget preparation are considerable in number. These purposes differ
from one enterprise to another (Atrill, 2015). The general purposes of budgets have been
presented in the diagram below -
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PreparingaplanCheckingandmonitoringPlanning,makingdecisionsaswellascontrollingPerformancemeasurementandevaluationMotivatingemployeesandpeoplewithanorganisation

Figure 2: Four significant purposes of budget preparation in enterprises
(Source: Created by the learner)
Other than these purposes, budgets are also used in enterprises for other purposes, such as that of
anticipation of the amount of funds it requires for the forthcoming period or the financial
stability that it is going to have at the end of that period. It is also used in order to ensure that it
can be having a desired level of income along with decreasing its chances of earning loss.
Budgeting purposes also include bringing about enhancements in the departments of an
enterprise, the cost centres that it has along with its diverse departments and segments.
The processes that enterprises require following and abiding by for the development of its
budgets include the following -
Sales budget - Prepared for having a rough estimate of an enterprise’s volume of sales, the
expenses regarding sales and the units needed to be sold.
Production budget - Prepared for having a rough estimate of an enterprise’s volume of
production, the expenses regarding production, the units needed to be produced and such other
details.
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Toplanandcoordinateanorganisation’sactivitiesandoperationsTomotivateemployeesofanorganisationTocontrolandmanagetheactivitiesandoperationsofanorganisationToactasthebasisfortheevaluationoftheperformanceoforganisations

Communication of the frameworks or guidelines of the budget - Detailed discussion and
presentation of the frameworks along with those guidelines with which it is being developed and
the ones that are to be followed for integrating it.
Submission of the budgets of the departments - The anticipated resources and expenses to be
spent in the various departments of an enterprise are to be included in the budget and submitted.
Approval of the budgets - The management of the enterprise, in the second last step, approves
the budgets that its departments have submitted.
Agreement of budget and their implementation - The budget is finally agreed upon in this step
by all the members of the budget committee and the management followed by its implementation
within the enterprise.
However, one of the fundamental purposes, which have been missed out from the discussions
made above is that a budget plays a significant role in the development of an enterprise’s
business model. This is because with the help of budgets, an enterprise’s strategic decisions can
be prudent in nature while managerial decisions can also be effective. Similarly, with budgets,
enterprises have the capacity of assigning and utilising all their human resources, physical
resources and financial resources so that its strategic goals can be accomplished along with its
ensuring its sales forecast. Each of these processes functions at the same time and assist
enterprises in the development of their respective business models.
ii. Demonstrate the application of traditional budgeting approaches (including incremental
budgeting) to plan future cost management for this specific business.
Traditionally, budgets have been developed and implemented within enterprises using diverse
techniques, the most within them being the approach of incremental budgeting. In the words of
Drury (2016), an incremental budget or the approach of incremental budgeting is a way of
budget preparation as well as forecast in which budgets for a new period are developed by
summing up the previous budget with increments, be it in percentage form or amount form. The
SnappyDrinks Plc is one of the enterprises in which incremental budgeting is the budgetary
approach used. In the following section, a detailed evaluation has been made on the way in
which the enterprise uses this budget approach -
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Budget for the period of 2018-19 prepared for SnappyDrinks Plc (prepared through
incremental budgeting approach)
Earnings Amount Spending Amount
Revenue from sales £ 47,500.00 Material inputs £ 7,000.00
Expenses spent on maintenance £ 500.00
Electric expenses £ 1,200.00
Rent for factory £ 1,500.00
New equipments purchased £ 6,000.00
Telephone related expenses £ 900.00
Marketing and advertisements £ 2,500.00
Insurance expense £ 1,500.00
Wages:
Management £ 2,200.00
Subordinate workers £ 5,600.00
Total earnings £ 47,500.00 Total spending £ 28,900.00
Table 1: SnappyDrink Plc’s budget for 2018-19
(Source: Created by the learner)
Budget for the period of 2018-19 prepared for SnappyDrinks Plc (prepared through
incremental budgeting approach)
Earnings Amount Spending Amount
Revenue from sales £ 57,000.00 Material inputs £ 8,400.00
Expenses spent on maintenance £ 600.00
Electric expenses £ 1,440.00
Rent for factory £ 1,800.00
New equipments purchased £ 7,200.00
Telephone related expenses £ 1,080.00
Marketing and advertisements £ 3,000.00
Insurance expense £ 1,800.00
Wages:
Management £ 2,640.00
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Subordinate workers £ 6,720.00
Total earnings £ 57,000.00 Total spending £ 34,680.00
Table 2: SnappyDrink Plc’s budget for 2019-20
(Source: Created by the learner)
In the table above, the budget that has been developed for SnappyDrinks Plc for the period 2018-
19 can be identified. This budget has been prepared through its budget for 2017-18 by addition
of an increment to all budgeted expenses and income by 20%. Thus, this demonstrates how
budgets at the SnappyDrinks Plc are developed by using incremental budgeting.
iii. Analysing whether a traditional budgetary system is appropriate to all or any parts of
the business in its planned future form
The examples above indicate that SnappyDrinks Plc is one of the enterprises in which
incremental budgeting is the budgetary approach used. This budgeting approach is utilised in the
enterprise since computation of expenses and estimating costs are easier in case of this approach
while the time span for developing and implementing it is comparatively lower. Weetman (2010)
opined that incremental budgets are most suited in the cases where funds are fixed by nature and
the deviation of expenses is almost insignificant. However, this factor of SnappyDrinks Plc is a
hint that this enterprise is quite huge in size and employs quite a large number of individuals
including both the factory, and other functions such as administrating, HR, finance, sales as well
as management. This budget would have been proven an ideal one for SnappyDrinks Plc as well
provided the enterprise’s operations, activities and product range remained limited to its current
ones.
However, in the present situation, a diversification is being planned within SnappyDrinks Plc in
which 15 new drinks are going to be rolled out. This shows that deviations are going to be
considerable in the enterprise and the incremental budgeting will not be suitable. Similarly,
adding increments might also be causing increases in its cost structure by adding up increments
while revenues will be depleting due to fixed sales prices. Budgetary slacks can also be created
when incremental budgeting is used within the enterprise, thereby enlarging management
expenditure. Another limitation or unsuitability of incremental budgeting that Weetman (2010)
had put forward in an organisational context is that this budget does not make any consideration
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of an enterprise’s external business environment. Due to all these factors, it can be stated that
incremental budgeting will not be suitable for SnappyDrinks Plc any longer.
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Part 2
iv. 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
For replacing the limitations of traditional budgets, various alternative budget methods are now
being used. The three most significant among them include the following -
 Zero based budgets - According to Atrill (2015), the budget method that develops an
enterprise’s budget through newly justifying its expenses exactly from the scratch is
known as zero based budgets. They are advantageous in place of traditional budget
methods since it helps enterprises in discontinuing with their ineffective activities
followed by upgrading its employee involvement and being responsive to external
environment. However, the method is limited since it has the need of managers
possessing effective skills, focuses on benefits for a short-term and becomes rigid in most
instances.
 Rolling budgets - Atrill (2015) defined rolling budgets as a budgeting approach within
which another period is automatically added to the budget for the previous period when
the current or existent budget period expires. It is advantageous since it re-examines
existing budgets almost on a daily basis through consideration of its external factors and
business environment followed by decreasing its budgeting uncertainties through short-
term focus. However, it is limited due to its time consumption and labour intensiveness
along with employee demoralisation (Drury, 2016).
 Activity based budgets - A budget method in which costs and expenses of an enterprise
are measured and allocates the enterprise’ costs to its various activities such as issue of
stock, production, stock counting and such other aspects is the activity based budget
(Drury, 2016). They are advantageous in place of traditional budget method since it
compiles an enterprise’s budgeted costs based on its activity levels. However, its
limitations include time consumption, labour intensiveness, cost intensiveness and
increase of managerial stress (Atrill, 2015).
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v. 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
In the following discussion, the potential application of all the three alternative methods for
budgeting discussed have been shown in detail -
Budget for the period of 2018-19 prepared for SnappyDrinks Plc (prepared through zero based
budgeting approach)
Earnings Amount Spending Amount
Revenue from sale of existing
drinks
£ 32,500.00 Materials for manufacturing
existing drinks
£ 8,000.00
Revenue from sale of new drinks
rolled out
Materials for manufacturing new
drinks
Drink no. 1 £ 5,400.00 Drink no. 1 £ 2,200.00
Drink no. 2 £ 4,800.00 Drink no. 2 £ 2,200.00
Drink no. 3 £ 4,400.00 Drink no. 3 £ 2,200.00
Drink no. 4 £ 3,300.00 Drink no. 4 £ 1,300.00
Drink no. 5 £ 4,200.00 Drink no. 5 £ 3,300.00
Drink no. 6 £ 3,800.00 Drink no. 6 £ 2,800.00
Drink no. 7 £ 5,500.00 Drink no. 7 £ 3,100.00
Drink no. 8 £ 2,800.00 Drink no. 8 £ 2,100.00
Drink no. 9 £ 3,700.00 Drink no. 9 £ 1,900.00
Drink no. 10 £ 3,800.00 Drink no. 10 £ 2,200.00
Drink no. 11 £ 5,300.00 Drink no. 11 £ 3,100.00
Drink no. 12 £ 2,900.00 Drink no. 12 £ 1,600.00
Drink no. 13 £ 2,800.00 Drink no. 13 £ 1,400.00
Drink no. 14 £ 3,200.00 Drink no. 14 £ 2,700.00
Drink no. 15 £ 2,600.00 Drink no. 15 £ 1,300.00
Overall expenses:
Expenses spent on maintenance £ 1,200.00
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Electric expenses £ 3,500.00
Rent for factory £ 3,000.00
New equipments purchased £ 9,000.00
Telephone related expenses £ 1,800.00
Marketing and advertisements £ 4,000.00
Insurance expense £ 3,100.00
Wages:
Management £ 3,400.00
Subordinate workers £ 6,600.00
Total earnings £ 91,000.00 Total spending £ 77,000.00
Table 3: SnappyDrink Plc’s budget for 2019-20 using zero-based budgeting
(Source: Created by the learner)
Budget for the period of 2018-19 prepared for SnappyDrinks Plc (prepared through activity
based budgeting approach)
Activities Receivin
g
delivery
Issue
from the
store
Stock
order
Stock
count
Records Superv
ision
and
manag
ement
Total
Materials for
manufacturing
existing drinks
£
1,000.00
£
1,500.00
£
2,000.0
0
£
1,600.0
0
£
1,000.00
£
900.00
£
8,000.0
0
Materials for
manufacturing new
drinks
Drink no. 1 £
500.00
£
400.00
£
300.00
£
300.00
£
300.00
£
400.00
£
2,200.0
0
Drink no. 2 £ £ £ £ £ £ £
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