Business Finance: Elements of Financial Statements, Implementation of Concepts, Enhancing Cash Flows

This document provides an overview of business finance, including the elements of financial statements, implementation of concepts in managing a company, and recommended steps to enhance cash flows. It covers topics such as profit and loss account, cash flow, working capital, inventory, receivables, payables, and different budgeting approaches. The case study of BoatWorld Plc is used to illustrate the application of these concepts. Suitable for students studying business finance.

BUSINESS FINANCE

Contents
PART A...........................................................................................................................................1
Executive summary................................................................................................................1
i.) Elements of financial statements........................................................................................1
ii) The implementation of concepts to company to show the way the company is being
managed..................................................................................................................................2
iii) Recommended steps to be taken to enhance company’s cash flows of company............3
PART B............................................................................................................................................4
Executive summary................................................................................................................4
i) Understating of budget formation.......................................................................................4
ii) Implanting of methods and cost management...................................................................5
iii) Evaluation of traditional or alternative budgetary system................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

PART A
Executive summary
Business finance is essential to construct the organisational structure and run the business
activities to generate profitability. This part states the profit and loss account nature and cash
flow with bifurcating the characteristics. Application of the concepts in order and after
implementing impact is analysed subject to working capital management.
i.) Elements of financial statements
a) Meaning and distinguish of profit and cash flow
Profit and loss account states the profitability of organisation, the excess receipts over
payments is recognised as a profit and the excess of payments over receipts is considered as loss.
The profit and loss account has a nominal nature and it is prepared on accrual concept (McLean
and Zhao, 2014).
Cash flow presents the position of available cash in the entity. This statement is prepared
during the end of each year. the real accounts are considered in this statement (Apăvăloaie,
2014). As how much cash is generated and spent through operation, investing and finance
activities are recognised at the end of the year.
Individuals perspectives state that positive cash flows are recognised beneficial for
companies but it’s not true because there is a big difference found among profit and loss and
cash flow statements it can be understand as follows:
Basis Profit and loss Cash flow
Nature It is a nominal nature of
account. That is based upon
accrual concept.
It is a real account and
prepared on the basis of
receipts and payment
accounts.
Recognition of transactions All the outstanding and
prepaid expenses are included
in profit and loss account.
Transaction of current year
which are happed in cash are
only recognised in cash flow
statement.
b) Meaning of working capital, inventory, receivable and payables
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Working capital is that source of organisation which supplies flow of liquid assets to
carried out daily operation of business entity like, payment of stationary expenses, postage
charges, delivery or logistic charges and petty cash expenses (Liguori, Sicilia and Steccolini,
2014). Main objective of the working capital in business is to complete the short term business
requirement of organisation. In calculative form, excess of currents over current liabilities is
recognised as working capital. Main elements of working capital is defined as follows:
Inventory: It is called as goods or stock used to make finished products for entity. There
is three type of inventories available in a business as raw inventory, work in progress and
finished goods.
Receivables: this refers to the amount to be recovered from customers. Consistent buyers
are given a credit on sales like, credit of one or two months. This is one of the essential element
of working capital.
Payables: The amount to be paid to suppliers after a significant span of time is
considered as payables (Brown, 2015).
c) Change in working capital affect cash flow
The variation in working capital impact upon cash flow in both the forms as a positive
working capital has positive impact (Ziemba and Vickson, 2014). It shows increase in cash
inflow due to increment in current assets like cash in hand, inventories and receivables.
Alongside, negative working capital shows decrease in cash flows which means current
liabilities of entity increased for the year. the negative working capital balance remain temporally
due to lag in period of getting payments from debtors.
ii) The implementation of concepts to company to show the way the company is being managed
Profit and loss situation: Brightlawns Ltd. (BLL) mainly operates three factories in
London, Birmingham and Manchester that manufactures valves and fittings for garden hoses.
Company’s financial and profitability position is quite good. Company earned as a profit of £5
million last year before interest and tax. Considering the growth of BBL there is a possibility to
undertake various opportunities that may enhance the efficiency of business more effectively.
Cash flow position: Cash flow of BLL will be impacted due to increased profitability and
further investments. At present there are only two major clients (C&P DIY Ltd and BricoFrance
SA) of BLL through which company trades. The debts of company increased by £2 million due
to further expansion and operations. It is expected that company would require more investors to
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overcome debt liability. BLL also invested in a company that manufactures the ornamental
garden fountains and water features. It assimilated 30% of stake of proposed company. This
investment reduces the cash inflows however the debt financing will enhance the cash inflows of
company by £2 million. Eventually, the actions present positive signs in terms of gaining
profitability for company in near future.
Impact upon working capital management: Even after having effective profitability
position some financial challenges are waiting ahead in front of the manager of the company.
The organisation owed £1.5 million subject to a chain of huge orders made by C&P last year and
an unresolved dispute of about £2 million with BricoFrance subject to a consignment in 2017. It
is expected that if the dispute got resolved that the company’s net working capital will be
decreased by £3.5 million due to led in payments. However, the dispute with BricoFrance is still
in negotiating process. Apart from it the finished stock material at London site is another element
that may led working capital upwards because that stock level is sufficient to maintain the
working capital level and recover the damages form disputes.
iii) Recommended steps to be taken to enhance company’s cash flows of company
Considering the above case study of BLL company following factors come across on which
managers must pay attention and take effective steps. The first point of action at which manager
must focus is to allocation of funds raised form debt financing. It is important to analyse that the
cost of debt is recovered through operations or not. The returns from investment in company of
ornamental garden fountains and water structures must be reinvested in short term investments or
can be utilised at daily operations (Kettner Moroney and Martin, 2013). The investment in shares
of £10 million in company needs to pay £8 million as advanced fee for exclusive designs which
is a major factor that will reduce the working capital as well as profitability.
The Finnish stock material at London site must be utilised in order to recover the damages
from disputes. However, the company is able to correlated the required working capital
requirements with management. A new policy regarding the working capital management is
required to set up in which the optimum level of stock and duration of getting payment form
client would be at primary stage. The stock management at London site must be used in
settlement with C&P last year. Rather pressuring on customer for their payments the credit not
facility to suppliers is proposed to maintain the gap between the payments and receipts.
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PART B
Executive summary
The report executes the knowledge about the understanding the unique aspects of
alternative budgetary approach for BoatWorld plc that is planning to open a new outlet as two in
Germany and one in the Netherlands.
i) Understating of budget formation
Budget preparation has become an important aspect for the purpose of planning and
measuring the results. There are three main purposes for which the budget is prepared i.e.
estimation of the revenues, costs and income for the business, budget helps in making strategic
decisions for the business and finally it measures and monitors the performance of the business.
a) Traditional budgeting approaches:
Budgets which are prepared from the traditional method uses the process in which
previous year's budget is used to project the costs and revenues for the coming year. So, previous
year is considered as a base for the next year to estimate sales, revenues and profits and the
inflation is adjusted in the process (Kuusi, 2015).
Pros: Traditional budget is easy to prepare and implement as only some changes have to be
made in the previous budget. It is also better if the business wants to raise money from the banks
as they can show their previous estimations and can provide better reasoning. Businesses can
also cut back useless expenses and can make better decisions with it.
Cons: This budget takes too much management time as well as resources and is sometimes
inefficient. As the managers are too much involved in getting the correct numbers, sometimes the
strategic focus is lost which is the main motive of preparing any budget.
b) Alternative budget methods:
There are alternative approaches to the traditional methods i.e. rolling, zero based and
activity-based.
Rolling budgets:
Rolling budget is a kind of budget which is prepared on a continuous basis. It basically
means updating the budget and making revised plans which is prepared for the next period (Ofei-
Mensah and Bennett, 2013). So, as soon as the old one expires, the new one replaces it.
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Pros: Rolling budget helps management to plan for a short term basis rather than long
term and makes planning more efficient. It decreases the uncertainty which is there in budgeting.
The management also spends for the expenses wisely and this budget makes it easy to adapt to
the changes in the market.
Cons: The main weakness of this budget is that it is not there for the whole year and is
updated only on incremental basis. It may also demoralize the employees as the targets changes
on frequent basis. This budget is also time consuming.
Zero based budgets:
Zero based budgets are the budgets which are prepared from scratch and a completely
new budget is prepared for the financial year (Blaak, Openjuru and Zeelen, 2013). It estimates
the whole cash flows and expenses of the company again to estimate or project the future
expenses and revenues of the company. There is no link with the previous numbers.
Pros: This budget is more accurate as it shows the clear picture of all the expenses as
every functional department has to look back at their costs from scratch. It also helps in reducing
the costs and activities which are redundant.
Cons: It takes the highest time among all the budgets and many employees are required
to work on it. It requires proper training to the employees to analyse each line of item.
Activity-based budgets
Under this, budget is made with the help of activity based costing method in which all
overhead costs are also included. Each and every costs are analysed thoroughly (Laitinen, 2013).
Pros: It helps the company to remain competitive in the industry and helps to look after each
and every activity of the business by analysing every cost driver.
Cons: This requires a deep understanding of various costs incurred by the businesses. This
method is complex by nature and takes a lot of energy and resources of the organization.
ii) Implanting of methods and cost management
BoatWorld Plc is an international leisure organisation that provide boats on rent to
vacation planners and visitors. At present the operations are carried out in the UK and France.
The revenues of organisation last year were recorded as £250 million. The organisation is
seeking towards investing in new outlets in Netherlands and Germany. The budget formation
subject to implement the budgets methods in BoatWorld Plc is defined below:
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Traditional budgeting: This budgeting technique is one mainly based upon the figures and
financial aspects of past year. it is recognised that traditional approach of forecasting budgets in
organisational context helps in building stability. It keeps the cost forecasts centralised and help
accountants to make the appropriate structure for cost classification. The accountant used
traditional budgeting process in which the budgets are prepared on the last year’s financial
results. As the revenue of last financial year is calculated as £250 million. While constructing the
Budget by traditional budgeting it is required to consider the revenue forecasting by including
the revenues form new outlets. The projected cost subject to acquisition of 30 new boats, cost of
salary or remuneration to staff members as HR and administration, finance, sales and maintain
cost (Finger and El Benni, 2014).
Alternative budgets: The alternative budgetary method mainly assist the organisational
method in order to maintain the authenticity for future operations and estimations. The projection
mainly based upon the practical changes and variations with advanced forecasting tools. In
alternative budgeting various methods are analysed. In rolling budget, the transaction and
process of forming budget mainly changes as per proposed changes. In the above case of the
budget formation is mainly proposed due to business expansion. Rolling budget is recognised as
potential budgeting method for business extension projects. The increased cost of staff members,
boats maintenance, depreciation cost, taxes and charges. Zero based budget is one the alternative
approach in which organisation can use as the alternative budgetary approach. Accountants can
make the budget by forming new budget at initial stage for extended business. This will not only
assist the business operation to maintain an ethical order to consider the cost but also helps in
assessing the variations and changes at last point of stage.
iii) Evaluation of traditional or alternative budgetary system
Effectiveness of traditional and alternative budgetary approach mainly depends upon the
nature and operations of business. It is recognised that the businesses that retain a repetitive or
fixed nature organisational or business process uses traditional budgetary approach. The major
reason behind using traditional budgetary system is a consistent and moderate nature of revenues
and expenditures. The financial forecasts are prepared as these were prepared before. Whereas,
the alternative budgeting system provide wide feasibility of making budgets to analyse accurate
forecast to diverse business structures or design of organisations.
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Considering the above case examples of BoatWorld Plc an international leisure company,
the zero based and rolling budgets considered more adequate approach for new business
expansion in Netherland and Germany. Traditional budgeting process is adequate for the existing
operations of company because organisation would not have to see major changes at existing
sites of business (Mazikana, 2019). The benefit of rolling and zero based budgeting is volatile
nature of budgets. If any kind of changes regarding cost and revenues occurs during the year than
it can be adjusted in these budgets easily. So, considering the essential aspects of both the
budgeting system BoatWorld Plc must device the alternative approach of budgetary
management.
CONCLUSION
The above study helps in evaluating the aspects of business finance. With critical evaluation
of first part subject to working capital management and cash flow, it is concluded that
management of debt financing and appropriate utilisation of return form investments assist an
organisation to attain the optimum level of working capital requirement. The second part of the
report presents the critical evaluation of various type of budgets associated with financial
forecast for organisational growth. The contraction between alternative budgetary method and
traditional budgetary technique clearly states that advanced budgeting method present more
accurate forecast comparatively to traditional budgeting methods.
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REFERENCES
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managers’ perspectives on the importance of budgetary, accruals and non-financial
information. In Public value management, measurement and reporting (pp. 85-104).
Emerald Group Publishing Limited.
Brown, A.M., 2015, August. The influence of the traditional reporting model on Fijian budgetary
addresses. In Forum of International Development Studies (Vol. 46, No. 7, pp. 1-17).
Kettner, P. M., Moroney, R. M. and Martin, L. L., 2013. Designing and managing programs: An
effectiveness-based approach: An effectiveness-based approach. Sage.
Kuusi, T., 2015. Alternatives for measuring structural budgetary position.
Ofei-Mensah, A. and Bennett, J., 2013. Transaction costs of alternative greenhouse gas policies
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Blaak, M., Openjuru, G. L. and Zeelen, J., 2013. Non-formal vocational education in Uganda:
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Laitinen, E. K., 2013. Financial and non-financial variables in predicting failure of small
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Finger, R. and El Benni, N., 2014. Alternative specifications of reference income levels in the
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Mazikana, A. T., 2019. The Effect of Budgetary Controls on the Performance of an
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