Assignment 2: Continental Hotel Budget Planner

BMIH5007 – Financial Management for the Hotel Industry

[DATE]

UNIVERSITY OF WALES TRINITY SAINT DAVID

[Company address]

Executive Summary

In this study, we looked at how zero-based budgeting works in practise. As a result of this research, an organisation will have a better understanding of how to use zero-based budgeting in financial accounting. In comparison to traditional budgeting, ZBB is more efficient and effective, and it also overcomes some of the limitations of traditional budgeting. ZBB, as opposed to conventional budgeting, considers all of an organization’s costs, not only new ones. Despite its flaws, Continental Hotel will benefit from using ZBB in their budgeting process.

Table of Contents

1. Introduction

Zero-based budgeting and its application in an organisation were the subject of the research. ZBB (Zero-based Budgeting) has been defined in the paper, together with its historical context and technological aspects. The phases of zero-based budgeting have been explained in this section. Thus, the ZBB has been compared to Traditional Budgeting in terms of its advantages in the financial accounting process of an organisation. On the general and Continental Hotel level, ZBB installation has been explored.

2. Zero-based Budgeting

While working at Texas Instruments as an account manager in the early 1960s, Peter Pyhrr came up with the concept of zero-based budgeting (Ibrahim, 2019). ZBB (zero-based budgeting) differs from standard budgeting by starting at zero and justifying every single expenditure. Zero-based budgeting, as opposed to incremental budgeting increases, starts from beginning and examines the particular needs of the organisation. This enables a more deliberate, top-down approach to project performance analysis (Petersen et al., 2022).

2.1 Zero-based budgeting

Each fiscal year begins with all expenses accounted for in zero-based budgeting. Zero-based budgeting is a procedure in which every aspect of an organisation is analysed for its needs and costs. In the end, it does not matter if the budgets are larger or smaller than they were in the past; they are based on what is required for the following term. It is possible to integrate high-level strategic objectives into the budgeting process by tying them to specific business units where expenditures may be pooled and then compared to previous results and current expectations (Beredugo, Azubike and Okon, 2019). This is made possible via ZBB.

Over an extended period, managers or group leaders can carry out zero-based budgeting by examining only a few functional areas at a time. Zero-based budgeting might save money by avoiding substantial increases or decreases in the budget from the previous month. It is quicker to use traditional cost-based budgeting than this strategy, but it requires more time. Since customer service and R&D are more difficult to track, companies choose to focus on areas like direct income or production (Adah, 2016). In addition to corporations, individuals and families may benefit from zero-based budgeting.

Zero-based budgeting may be used by an equipment maker, in which production expenses are analysed more thoroughly. Coyte, Messner and Zhou (2020) have seen that there is a 5% annual increase in the cost of things that are outsourced to another manufacturer. The company’s employees may produce these components on-site. Having weighed the pros and cons of in-house production, the firm has come to the conclusion that it can create the parts for a cheaper price than the external source.

There are more options beyond merely raising spending. One is to figure out when and where the firm can produce or acquire a component for its final goods. Departmental cost factors could be difficult to identify using standard budgeting. The purpose of zero-based budgeting is to discover and justify spending on a more granular level (Rasugu, 2019). On the other side, zero-based budgeting involves a lot of work, so the potential savings need to be weighed against the time and resources necessary to execute it.

Businesses may begin implementing ZBB in one of several ways, with the following five steps serving as a good place to start.

Start:	A new company should be started from scratch. The actuals from the previous year should not be used to create a new yearly budget by organisations (Chinniah, 2013).
Evaluate:	Every facet of a company’s budget should be scrutinised. They should cut back on or remove non-essential activities or services (Broughel, 2020).
Justify:	Each and every one of the budget’s components has to be taken into consideration. Organizations need to discover ways to save money while still accomplishing their goals and objectives (Heinrich, Garton and Martin, 2016).
Streamline:	What has to be done and how it needs to be done is the responsibility of the organisation. Automating and standardising processes is a win-win situation for everyone involved (Al-ddin and Ayedh, 2019).
Execute:	Planning and execution should be approached from a holistic perspective by organisations. Each person’s duties and how they integrate into the larger picture must be made clear (Ekanem, 2014).

2.2 Advantages of Zero-based budgeting over Traditional-Based Budgeting

Companies use budgets to keep track of spending and identify ways to reduce costs and enhance revenues. Past year’s expenditure plans are sometimes used as a basis for budgeting. Whereas with traditional budgeting, new goals are incrementally achieved by adjusting the preceding year’s budget by a certain percentage point. One percent to ten percent are the most common percentages here. Budgets can go out of control or show enormous increases or drops in costs depending on the overall market prediction and other external events (de Campos, Rodrigues and Jorge, 2017). It is not a good idea to look at the company’s prior year’s budget because of the significant changes that have taken place. When it comes to a fresh budget, a zero-based budget is necessary. All of the company’s costs and components are analysed one by one in a zero-based budget. It is known as the “zero base” start. However, traditional budgeting only accounts for new expenses (Rassadina, 2017).

When it comes to budgeting, zero-based budgeting is one of the most effective methods for streamlining operations while cutting costs and enhancing budget flexibility. It is when managers consider the financial impact of every dollar that the most profitable businesses come to the forefront of their thoughts. As opposed to a budget that grows incrementally, resources are not misallocated when budgeting on a zero-based basis (AHMODU, 2018).

Unlike zero-based budgeting, conventional budgeting argues for gradual climbs over previous budgets, such as an 8% increase. Because of this, typical budgeting only considers current expenditures, but zero-based budgeting demands an explanation of all prior purchases, including recurring ones. The primary objective of zero-based budgeting is to put the onus on managers to justify their expenditures and to create value for a company by optimising costs rather than just revenue (Dali, 2021).

2.3 How the Organisation Might introduce Zero-based Budgeting

While zero-based budgeting has numerous advantages, it also has certain drawbacks that should be taken into account. The whole corporate strategy and aims of a corporation must be taken into consideration when selecting whether or not to employ zero-based budgets. The value of a firm and the culture it creates may be drastically altered by implementing a zero-based budget (Ibrahim, 2019; Lorenz, 2015).

Changes in corporate culture can be brought about by a company’s strong desire to maintain a dynamic work environment that is open to everyone while also cutting all the expenses connected with it as part of the zero-based budgeting process, for example. Increased customer turnover and a changed perception of the brand are both possible outcomes of this change. In these instances, typical budgeting is inadequate since just half of organisations can retain cost reductions for longer than a year or two (Al-attara, Mashkourb and Hassanc, 2020).

It is important to weigh the pros and cons of zero-based budgeting before deciding whether or not to utilise it.

Implementation of Zero-based Budgeting:

Consolidate financial reporting and analysis with ZBB

ZBB should not be seen as an alternative to existing budgeting and planning processes, but rather as a mechanism to refocus investment on important goals every few years as an auxiliary procedure (Kanungo, 2017).

Prioritise ZBB’s efforts to maximise its return on investment

ZBB initiatives frequently target difficult-to-quantify indirect costs, such as SG&A and other types of overhead. As a result of this strategy, Continental Hotel may concentrate their efforts on certain sections of the company while minimising disturbance to customer-facing services. Continental Hotel can utilise ZBB just for new business initiatives and requests for additional money, and can keep using conventional budgeting techniques for current activities (Beredugo, Azubike and Okon, 2019).

An operational and financial system should be consolidated

ZBB’s success depends on a thorough understanding of the operational factors that influence the company’s expenditures. An individual worker, a business trip, or a marketing campaign must have a degree of detail in terms of expenditures that can be linked back to them (Haxholli, 2015).

The modelling process should be as straightforward as possible

There must be a direct correlation between activity levels and the resulting need for resources and personnel (Vaughan, 2018). The managers of the Continental Hotel must make cost-effective judgments when activity levels and service levels change.

Improvements in FP&A (financial reporting and analysis) can be made by employing ZBB models

The ZBB model might be the first enterprise-wide model of causal relationships between the activities of different business sectors if Continental Hotel adopts an incremental budget planning approach based on the previous year’s actuals. In order to support the annual budgeting process and rolling predictions, FP&A teams need change the model. By repurposing models in this way, ZBB is no longer regarded as a stand-alone activity; rather, it is regarded as the initial stage in the change of corporate planning and budgeting, which might eventually lead to completely unified business planning (Coyte, Messner and Zhou, 2020).

3. Conclusion

In a nutshell, the paper covered a variety of components of zero-based budgeting, all of which are essential for an organisation to understand in order to successfully implement and use ZBB in its financial accounting. There is little doubt that ZBB is more efficient and user-friendly than traditional budgeting, and it also addresses a number of the restrictions that traditional budgeting imposes. The standard budgeting procedure just takes into account new spending, but ZBB takes into account all of an organization’s budget’s expenditures. In spite of ZBB’s flaws, Continental Hotel will gain by incorporating it into their budgeting process.

4. Budget Calculations

Continental Hotel Budget Planner
(in £)	January	February	March	April	May	June	July	August	September	October	November	December	Total
Receipts:
Payment on business Accounts	6,000												6,000
Cash sales	91,800	72,800	91,800	46,800	48,800	55,800	63,300	73,700	80,800	55,800	57,700	57,600	7,96,700
Interest Received		2,549	4,417	6,918	8,034	9,136	10,679	12,514	14,687	17,091	18,873	20,778	1,25,675
Total Receipts	97,800	75,349	96,217	53,718	56,834	64,936	73,979	86,214	95,487	72,891	76,573	78,378	9,28,375
Payments:
Freehold
Fixtures and fittings
Property expenses					7,000				2,500				9,500
Laundry
Energy costs	700	700	700	700	700	700	700	700	700	700	700	700	8,400
Payments to suppliers	4,900	5,150	4,900	8,600	5,150	5,600	4,900	5,850	4,900	5,600	5,150	5,600	66,300
Wages	6,000	6,000	6,000	6,000	6,000	6,000	6,000	6,000	6,000	6,000	6,000	6,000	72,000
Salaries
Vehicles	450	415	450	415	450	415	415	415	450	415	415	4,415	9,120
Van
Petrol and Diesel	500	500	500	500	500	500	500	500	500	500	500	500	6,000
Rates	300	300	300	300	300	300	300	300	300	300	300	300	3,600
Marketing
Overdraft Interest
Total Payments	12,850	13,065	12,850	16,515	20,100	13,515	12,815	13,765	15,350	13,515	13,065	17,515	1,74,920
Balance b/f	0	84,950	1,47,234	2,30,601	2,67,804	3,04,538	3,55,959	4,17,123	4,89,571	5,69,708	6,29,085	6,92,592	41,89,163
Net cashflow in month	84,950	62,284	83,367	37,203	36,734	51,421	61,164	72,449	80,137	59,376	63,508	60,863	7,53,455
Balance c/f	84,950	1,47,234	2,30,601	2,67,804	3,04,538	3,55,959	4,17,123	4,89,571	5,69,708	6,29,085	6,92,592	7,53,455	49,42,618

5. References

Adah, A., 2016. Zero-based Budgeting System: Is Budgeting System the Determinant of Budget Implementation in Nigeria?. International Journal of Economics and Financial Research, 2(11), pp.192-198.

AHMODU, L.O., 2018. ASSESSMENT OF BUDGETING SYSTEMS IMPLEMENTATION STRATEGIES IN SELECTED GOVERNMENT TECHNICAL COLLEGES IN SOUTHWEST GEO-POLITICAL ZONE, NIGERIA.

Al-attara, H.A., Mashkourb, S.C. and Hassanc, M.G., 2020. Zero-based budget system and its active role in choosing the best alternative to rationalise government spending. International Journal of Innovation, Creativity and Change, 13(9), pp.244-265.

Al-ddin, A.E.S.A. and Ayedh, A., 2019. Factors Influencing the Adoption of Zero-Based Budgeting Integrated with Cloud Based Platform (Paas) in Yemeni Public Sector: Moderating Role of Government Intervention Policies.

Beredugo, S.B., Azubike, J.U. and Okon, E.E., 2019. Comparative analysis of zero-based budgeting and incremental budgeting techniques of government performance in Nigeria. International Journal of Research and Innovation in Social Science, 3(6), pp.238-243.

Broughel, J., 2020. Zero-Based Regulation.

Chinniah, A., 2013. An Assessment of Zero-Based Budgeting to Protect the Leakage of Finance in Government and an Organizational Development. CLEAR International Journal of Research in Commerce & Management, 3(5).

Coyte, R., Messner, M. and Zhou, S., 2020. The revival of zero‐based budgeting: drivers and consequences of firm‐level adoptions. Accounting & Finance.

Dali, N.R.S.B.M., 2021. Conceptual Framework for Determinants of Cloud Zero-Based Budgeting Adoption: The Moderating Role of Government Intervention Policies.

de Campos, C.M.P., Rodrigues, L.L. and Jorge, S.M.F., 2017. The Role of Management Accounting Systems in Public Hospitals and the Construction of Budgets: A Literature Review. Public Health and Welfare: Concepts, Methodologies, Tools, and Applications, pp.289-312.

Ekanem, E.E., 2014. Zero-based budgeting as a management tool for effective university budget implementation in University of Calabar, Nigeria. European Journal of Business and Social Sciences, 2(11), pp.11-19.

Haxholli, B.N., 2015. Zero Based Budgeting in KCS Implementing Zero Based Budgeting Method in Kosovo Correctional Service.

Heinrich, J., Garton, E. and Martin, B., 2016. Betting on Zero-Based Budgeting’s Trifecta. Bain & Company. Pobrano z: http://www. bain. com/publications/articles/betting-on-zero-based-budgetings-trifecta. aspx (8.03. 2017).

Ibrahim, M.M., 2019. Designing zero-based budgeting for public organizations. Problems and Perspectives in Management, 17(2).

Kanungo, S., 2017. Government Budgeting: A study on Zero Base Budgeting. ODISHA REVIEW, p.81.

Lorenz, A., 2015. Contemporary management accounting in the UK service sector (Doctoral dissertation, University of Gloucestershire).

Petersen, F.C., Ramos Junior, A.C., Marques, M., Da Silva, H.A., Dalvi Dos Santos, P.R., Rodrigues, L.T., Rodrigues dos Anjos, J.L., Russo, R.M.D. and Ferreira Filho, V.M., 2022, April. Zero Base Budgeting Applied to Oilwell Construction. In Offshore Technology Conference. OnePetro.

Rassadina, A., 2017. ZERO-BASED BUDGETING: HISTORY AND MODERN EXPERIENCE. ШЕВЧЕНКІВСЬКА ВЕСНА» Секція «Актуальні проблеми міжнародних фінансів, p.12.

Rasugu, E.N., 2019. Factors Affecting Implementation of Zero-Based Budgeting In Chemical Organizations: A Case of Diversey Eastern and Central Africa Limited (Doctoral dissertation, United States International University-Africa).

Vaughan, T.S., 2018. CHARACTERIZATION OF OPTIMAL FACULTY ALLOCATION SUBJECT TO A BUDGET CONSTRAINT. AMERICAN ASSOCIATION OF UNIVERSITY ADMINISTRATORS, 33(1), pp.82-93.

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