Business Finance: Cash Flow, Working Capital, and Budgeting

This assignment discusses the concepts of cash flow, working capital, and budgeting in business finance. It explains the differences between cash flow and profit, the meaning of working capital, and how changes in working capital impact cash flow. The assignment also provides recommendations for improving cash flow and working capital through budgeting methods. The second part of the assignment focuses on the purpose and types of budgeting, including traditional and alternative methods. It discusses the strengths and weaknesses of incremental budgeting, zero-based budgeting, and activity-based budgeting. The assignment concludes with an explanation of rolling budgets and their benefits.

Business Finance

TABLE OF CONTENTS
PART 1.......................................................................................................................................3
Executive summary................................................................................................................3
1..............................................................................................................................................3
Stating the meaning of cash flow and profit along with differences......................................3
Presenting the meaning of working capital, receivables, inventory and payables.................3
Stating how changes in working capital impacts cash flow...................................................4
2. Applying the concepts of working capital to the company for showing how it affects
company’s results...................................................................................................................4
3. Recommending steps to the firm that need to be taken for improving cash flow and
thereby working capital..........................................................................................................4
PART 2.......................................................................................................................................5
Executive summary................................................................................................................5
1. Stating purpose and types of budgeting.............................................................................6
2. Demonstrating the application of traditional and alternative budgeting methods.............9
3. Analyzing budgeting system which is appropriate for business from future perspective..9
REFERENCES.........................................................................................................................11

PART 1
Executive summary
In the current times, it is highly required for the business units to make optimum
utilization of funds that contributes in the attainment of goals. This part of the assignment is
based on MDL which owns 30 delicatessens in South of England. It can be summarized from
the evaluation that manager of MDL is required to make modifications in the existing
strategic and policy framework. By this, company would become able to improve both
working capital, cash-flows and thereby profitability as well.
1.
Stating the meaning of cash flow and profit along with differences
Cash flow: It implies for the inflow and outflow that associated with business
operations pertaining to specific time frame. Cash flow presents money that business entity
has at any given time for business activities. This element of financial management presents
the extent to which liquid assets of the firm are increased.
Profit: This means return that company has generated through selling products or
services. Profitability may be served as an indicator which reflects surplus after subtracting
all the expenditure from the revenue generated.
Difference between cash flow and profit is enumerated below:
Basis of difference Cash flow Profit
Meaning It implies for the money that
flows in and out with regards
to specific time period.
Profitability accounts for the
money or amount that
remains after deducting all
the expenditure.
Measurement Under cash flow, valuation is
being done by taking into
account inventory,
receivables and payment
It is measured or calculated
by deducting al the
expenditures from revenue.

period.
Time period Cash flow provides
information about company’s
success or failure in long run
(The Critical Differences
between Cash Flow and
Profit, 2020).
Unlike cash flows, in the
case of profit success can be
identified and evaluated
within short time frame.
Nature Cash flows can be increased
or bought through the means
of long term borrowings.
However, in this, profit can
be generated through the
means of only sound
strategic framework, policies
and effectual cash
management.
Sales Here, revenue is recognized
when debtors clear their
dues.
It recognized through the
means of invoices.
Taxation In this, tax is paid in terms of
installments.
Tax is calculated by taking
into account profit generated
during the period.
Fixed assets Recorded in statement at the
time of purchase which in
turn results into decrease in
cash flow.
In this, with regards to fixed
assets, profitability decreases
due to the inclusion of
depreciation charged on the
basis of it.
Presenting the meaning of working capital, receivables, inventory and payables
Working capital: It may be served as a measure which entails the current to which
company’s liquidity position is good. In other words, working capital serves information
about company’s ability in relation to managing daily operations. In order to avoid

undesirable conditions business unit must maintain enough cash flows for meeting short-term
cost and debt obligations (Obradovich, 2019).
Inventory: Stock may be served as a main asset of an organization that need to
converted into sales or cash for ensuring enough working capital. Period within which
company sells and replenishes its stock assists in identifying its success level.
Receivables: This includes money that customers owe due to previous credit sales. In
the case of receivables business unit needs to make focus on collecting money timely so that
it can be used for other productive activities (Gupta and Gupta, 2019).
Payables: It is one of the main component or elements of working capital which
includes money that must pay to suppliers over short term. Thus, firm should focus on
maintaining enough receivables in line with short term obligations.
Stating how changes in working capital impacts cash flow
From research, it has assessed that changes that take place in working capital has
significant impact on company’s cash flow. Moreover, high working capital shows that
management team is focusing on investing money for short term (Sultan and Murtaza, 2019).
This means company is relying on draining cash flow available from operating, financing and
investing activities. On the other side, working capital of the firm decreases when
management takes resort of short-term borrowings for financing operations. In this case, cash
flow of the firm increases and vice versa.
2. Applying the concepts of working capital to the company for showing how it affects
company’s results
By evaluating case scenario it has identified that MDL is facing difficulty pertaining
to two aspects mainly. This includes default made by debtors and lower stock conversion
rate. Given case scenario entails that firm is reluctant in relation to pushing its customers fall
under the category of doing less frequent payment. Now, due to dispute firm is facing issue in
getting stock on time. In this, firm will take more time for converting stock into cash within
appropriate time frame. This will place direct impact on company’s cash flow and overall
results. Moreover, insufficient stock level may result into loss of customer base and thereby
sales as well as profitability. Along with this, Company is facing issues in getting funds from
debtors on time. Due to this, MDL failed to maintain enough current assets in against to the
obligations. This in turn creates obstacles in performing daily activities or funding day to day

operation which closely impacts organizational cash flows. Hence, for improving results
business unit is required to take suitable measures regarding working capital and cash flow
management.
3. Recommending steps to the firm that need to be taken for improving cash flow and thereby
working capital
Budgeting refers to the process that helps in creating plan for spending money and
balancing income level. Cited case situation presents that MDL is facing issues in receiving
amount from debtors. There are several customers who are making default in paying funds
that owed to them. This situation is placing direct impact on company’s working capital and
cash flow position. For business management, in the context of MDL, working capital is
considered as the most essential aspect that needed to carry out daily operations prominently.
In this regard, manager of MDL is required to take significant measure for enhancing both
working capital and thereby cash flow as well.
 For reducing debt level and improving receivable period manager of MDL should
make focus on evaluating credit rating of debtors. By doing this, company can
identify customers who do not make payment on time. In this way, such measure
helps in improving receivable period and thereby cash flow as well.
 Along with this, by replacing short term obligation with long-term business
organization can manage and improves its working capital. Moreover, working capital
is mainly used for meeting short-term obligations from current assets (Le and et.al.,
2018).
 In addition to this, MDL should focus on undertaking promotional tools and
techniques. By this, company would become able to convert stock into cash more
frequently. Thus, inventory turnover ratio or period can be improved by MDL through
employing inventory management and promotional strategies.
 Furthermore, company’s working capital and cash flow increases when supplier
payment period is higher. Accordingly, focus needs to be placed on contacting
supplier which offers credit for longer duration.

It has assessed from the evaluation that MDL facing issues in relation to recovering
amount from debtor. Thus, for improving cash flow manager is required to tighten or strict
credit policies. By doing this, firm would become able to receive payment on time and
thereby can meet day to day activities prominently. Further, for managing cash flows
company should offer credit to the debtors for short span over longer duration. Hence, by
practicing all such strategies MDL would become able to get desired level of outcome or
success.
PART 2
Executive summary
This report is based on the case scenario of Second Sight Plc which offers sunglasses
to the customers. According to the case, company is currently applying traditional budgeting
system for the purpose of cost assessment. It can be inferred from the evaluation that
company should undertake activity based budgeting method for developing financial plan.
Further, it has been articulated that using alternative methods of budgeting Second Sight Plc
would become able to present appropriate view of cost and profitability aspect.
1. Stating purpose and types of budgeting
Budget may be served as a plan that associated with specific time frame, which
contains information about both income and expenses. Thus, for getting or assessing
information about cash inflows and outflows Second Sight Plc prepares budget using
traditional method or system.
With regards to business management, Second Sight Plc emphasizes on preparing
budget. In the context of business organization, purpose of budgeting is enumerated below:
 Budget helps in making forecast about income and expenditure associated with future
activities. By preparing budgets, manager can do prediction that business unit will
generate profit or loss in the upcoming time period.
 It offers a financial framework which aid in decision making aspects. Moreover, it
provides manager with framework which helps in doing comparison of current
performance in against to the standards. By this, Second Sight Plc can assess
deficiency and take corrective action for future (Budget: Definition, Purpose,

Elements and Steps, 2020). In this way, budget can be served as a tool which helps in
monitoring or evaluating business performance.
 Helps in determining accountability of managers and planning about incentives for
concerned departments.
There are several traditional and alternative budgeting methods available which can be
undertaken by Second Sight Plc such as follows:
Traditional budgeting methods
Incremental budget is recognized as traditional method in which past year’s budget is
used for arriving at new one. In this, business unit makes marginal changes in the previous
year’s plan or framework. Moreover, managers assume that all the concerned departments
will continue with the recent activities, income and expenses (Incremental Budgeting –
Meaning, Advantages and Disadvantages, 2020).
Strengths Weaknesses
 Easy to implement as it does not
involve complex calculation.
 Such budgeting method assists in
ensuring continuing funding of
departments.
 Facilitates both operational and
funding stability.
 This budget ignores changing
circumstances which in turn limits its
significance to a great extent.
 It leads extra spending and creates the
situation of budgetary slack.
 Incremental budgets may result into
wastage of resources which in turn
hampers potential growth.
Alternative budgeting methods
Zero based budgeting
It involves budget preparation which starts from scratch or zero base for developing
the new one. ZBB includes re-evaluation of every item of cash flow statement and focuses of
justifying the same. In this, all the expenses are calculated on the basis of activities that need
to be performed in current period.

Strengths Weaknesses
 Highly appropriate for non-profit and
service organizations.
 Ensures optimum utilization of
financial resources by eliminating
bottlenecks or undesirable activities
from operations.
 Assists in promoting operational
efficiency as it is not based on
incremental approach or method.
 ZBB is time consuming process
because it involves more paper work.
 Requires high manpower because
each item of every department is
evaluated for budget preparation
(Zero Based Budgeting – Meaning,
Advantages and Disadvantages,
2020).
 Imposes high cost because for budget
preparation company needs to make
focus on conducting training &
development session.
Activity based budgeting
According to this method, budgets are prepared through considering all the overhead
cost or expenditure. In this, activities that incur cost are analyzed and researched deeply for
the purpose of cost ascertainment as well as allocation.
Strengths Weaknesses
 Focuses on making evaluation or
assessment of each cost driver.
 Helps in gaining competitive edge as
it ensures production cost saving and
thereby assists in setting appropriate
pricing framework.
 ABB assists in eliminating
bottlenecks and improving
relationship with both business units
and customers.
 In ABB, firm requires competent
workforce having understanding
about cost drivers and aspects
pertaining to resource allocation.
 For preparing budget according to
ABB company needs lot of resources.
Moreover, business unit has to
include team of higher management
for doing numerous analyses.
 Further, under ABB, firm needs team

of trained personnel which in turn
imposes high cost (Activity based
budgeting, 2020).
Rolling budgets
This budgeting tool focuses on including highly updated information as it follows
dynamic approach, Accordingly, budget is prepared and reviewed on quarterly basis rather
than preparation for 12 months.
Strengths Weaknesses
 Facilitates effectual planning and
control
 Ensures change appreciation
 Contributes in wisely spending
 Time intensive exercise
 Demotivate personnel due to the lack
of having updated information
2. Demonstrating the application of traditional and alternative budgeting methods
By doing assessment, it has found that incremental budget helps in making competent
or effectual plan about future cost management. The below depicted cash budget clearly
exhibits that additions are done in sales as well as expenditures. Considering such budget
manager of Second Sight Plc can compare existing performance and take measures for
performance improvement.
Traditional method: Incremental budget
Particulars
Janua
ry
Februa
ry
Marc
h April May June
Opening cash balance 10000 16500
23292
.5
30387
.5
37795
.2
45526
.3
Sales 15000 15450 15914 16391 16883 17389
Other income 2000 2000 2000 2000 2000 2000
Total cash inflows 27000 33950 41206 48778 56677 64915

.4 .8 .5
Material 3000 3060 3121 3184 3247 3312
Labour 2250 2250 2250 2250 2250 2250
Other expenses 2250 2318 2387 2459 2532 2608
Administration, selling &
distribution expenses 3000 3030
3060.
3
3090.
9
3121.
81
3153.
03
Total cash outflows 10500
10657.
5
10818
.5
10983
.2
11151
.5
11323
.6
Cash surplus/ closing cash balance 16500 23293 30387 37795 45526 53592
Application of activity based budgeting
The above mentioned budget shows that referring relevant cost drivers cost is
ascertained. This tool is highly effectual which facilitates appropriate allocation of overhead
expenditure.
3. Analyzing budgeting system which is appropriate for business from future perspective
On the basis of cited case situation, Second Sight Plc is planning to explore business
operations with the motive to enhance both productivity and profitability. It is planning to
introduce new facility in Netherland and doing a joint venture with an Indian firm. Currently,
business unit is using traditional budgeting system for cost management and assessment. In
this regard, manager of Second Sight Plc is advised to undertake alternative or modern
budgeting method over traditional. Moreover, incremental budgets do not lay emphasis on
evaluating alternatives. Budget is prepared only on the basis of estimation by doing some
additions in the previous financial plan which in turn not realistic in the current business
arena.

Referring all such aspect it is recommended to Second Sight Plc to adopt activity
based budgeting method. It is suggested because Second Sight Plc is involved in producing
prescribed sunglasses and other ones for leading international brands. Thus, activity based
method will prove to be more beneficial for the firm in the context of cost assessment and
budget formulation. In the dynamic business arena, activity based budgeting is highly
suitable because in this overhead cost allotted to the related activity as per the driver
identified. ABB focuses on analyzing activities deeply that incurs cost for the purpose of
resource allocation (Activity based budgeting, 2020). By undertaking this method, firm can
bring efficiency in the activities by justifying the cost drivers.
There are several benefits which company will attain by undertaking ABB method for
cost ascertainment and resource allocation. The rationale behind this, it eliminates
unnecessary activities from the operations and contributes in profit maximization. By taking
into account all the above depicted aspects it can be presented that ABB will be suitable for
all parts of the business with regards to Second Sight Plc. Hence, in the near future, through
undertaking modern budgeting method namely ABB Second Sight Plc can prepare
appropriate and realistic budgeting framework. Referring this, business unit can do
monitoring of current performance effectually and thereby finds deficiencies. In this way,
ABB helps in taking corrective measure for future and setting appropriate financial plan for
future.

REFERENCES
Books and Journals
Gupta, R. K. and Gupta, H., 2019. Working Capital Management & Finance: A HAND
BOOK FOR BANKERS AND FINANCE MANAGERS. Notion Press.
Le, H.L. and et.al., 2018. Impact of working capital management on financial performance:
The case of Vietnam. International Journal of Applied Economics, Finance and
Accounting. 3(1). pp.15-20.
Obradovich, J., 2019. The impact of working capital management on the decision of
production firms about the amount of dividends. pdf. Int. J. Business and
Globalisation. 22(3).
Sultan, K. and Murtaza, M. M., 2019. IMPACT OF AGGRESSIVENESS OF WORKING
CAPITAL MANAGEMENT ON FIRM'S PROFIT. Humanities & Social Sciences
Reviews. 7(3). pp.612-618.
Online
Activity based budgeting. 2020. Online. Available through: <
https://efinancemanagement.com/budgeting/activity-based-budgeting>.
Budget: Definition, Purpose, Elements and Steps. 2020. Online. Available through: <
http://www.accountingnotes.net/cost-accounting/budget/budget-definition-purpose-
elements-and-steps/4795>.
Incremental Budgeting – Meaning, Advantages and Disadvantages. 2020. Online. Available
through: < https://efinancemanagement.com/budgeting/incremental-budgeting>.
The Critical Differences between Cash Flow and Profit. 2020. Online. Available through: <
https://www.inc.com/entrepreneurs-organization/critical-differences-between-cash-flow-
profit.html >.
Zero Based Budgeting – Meaning, Advantages and Disadvantages. 2020. Online. Available
through: < https://accountlearning.com/zero-based-budgeting-stages-advantages-
disadvantages/>.