Working Capital Management and Budgeting Approaches

This report discusses the concepts of working capital management, profit and cash flow, and different budgeting approaches for financial planning. It provides insights into the impact of changes in working capital on cash flow and recommends steps for improving cash flow through better working capital management. The second part of the report focuses on the purpose of budgeting, traditional budgeting tools, and modern methods of budgeting. It suggests that BoatWorld Plc should consider alternative budgeting methods like rolling budgets and zero-based budgets for better financial planning.

Business Finance

TABLE OF CONTENTS
PART 1............................................................................................................................................1
INTRODUCTION...........................................................................................................................1
1. a. Explaining the meaning of profit & cash flow and the different between both..................1
1. b. meaning of working capital, receivable, payables and an inventory..................................2
1.c. In what way changes in the working capital affects the cash flow......................................3
2. Applying the concepts, showing ways in which management of an enterprise may affect
financial results...........................................................................................................................3
3. Analysing and recommending the steps for improving cash-flow of the company with
better management of working capital........................................................................................4
CONCLUSION................................................................................................................................4
PART 2............................................................................................................................................5
INTRODUCTION...........................................................................................................................5
1. Purpose of framing a budget with description of traditional budgeting tools and modern
methods of budgeting..................................................................................................................5
2. Application of traditional and alternative budgeting methods................................................8
3. Analysing the method of budgeting that is most suitable for the business.............................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

PART 1
Executive summary
In the dynamic business arena, company is required to exert effectual control on expenses
and thereby ensures optimum use of monetary resources. It can be summarized from the report
that aspects pertaining to profitability and cash flow differs from each other. Further, it can be
presented from the evaluation that by taking into account working capital \management practices
Brightlawns Ltd can meet day to day operations effectually.
INTRODUCTION
Business finance is associated with the procurement and utilization of fund which in turn
helps in carry out organizational functions and operations effectually. The present report is based
on the case scenario which will provide deeper insight about the aspects of working capital
management. It will also shed light on the manner in which profit and cash flow differs from
each other. Besides this, report will also highlight the strategies that can be employed for
working capital management.
1. a. Explaining the meaning of profit & cash flow and the different between both
Profit- It refers to the amount of the money earned which exceeds expenses for a particular
period (Aktas, Croci and Petmezas, 2015). In other words, it is described as the financial benefit
that is been realized at the time when the revenue is been generated from the business activity
that exceeds an expenses, taxes and the cost involved in sustaining an activity.
Cash flow- It means a net amount of the cash that an enterprise disburses and receives at a
specific period of time. Positive level of the cash flow should be maintained for the firm to
remain within the business.
Cash flow Profit
It referred as outflow and inflow of the cash for
a specific business.
It is defined as the revenue generated after
deducting expenses.
It represents the money from the various
sources.
It means the money that is left over from the
sales revenue where once the cost has been
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deducted.
It is affected by timing of payment in and out
of an entity.
Profit is computed before a money is been
received.
Cash flow is very critical for survival of an
organization.
However, profit is not counted as crucial in
respect of firm's survival.
1. b. meaning of working capital, receivable, payables and an inventory
Working capital- It is defined as the difference between current assets of an entity like
inventory, accounts receivable etc. and its current liabilities such as trade payables, short term
borrowings etc. It is considered as a measure of operational efficiency, liquidity and its current
financial health. In other words it also means that the money available for funding the routine
operations of the business and maintaining adequate cash flow within a workplace.
Receivables- It means the account receivables or the debts that are owed to the company
by their their customers for the goods and services which had been used or delivered but are not
yet paid. Receivables are been recorded at time of the sale of the good for which the payment is
due on part of the buyer or debtor.
Payables- When the company buys goods on the credit basis for which the payment
needs to be paid back within a short period of the time, it is called as accounts payable. It is been
treated as liability and is recorded under the head of current liabilities. It refers to the short term
payment of debt which is required to be paid for avoiding any default (Talonpoika and et.al.,
2016). Accounts payable means a liability due in relation to a specific creditor when he or she
orders for the goods and services on credit.
Inventory- It means an accounting term that reflects the goods that had been gone
through several stages of production being made for the sale including the finished goods and
work in progress. Moreover, it means a common thought of the finished goods that an enterprise
accumulates before selling it to the end users. It can also be described as the raw material that is
used for producing a finished goods as it go through the process of production or the goods in
transit.
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1.c. In what way changes in the working capital affects the cash flow
Any changes resulted in the working capital are been reflected in the cash flow statement of an
enterprise. There are various ways in which changes in the working capital impacts the cash flow
are as follows-
If a particular transaction increases the current assets and liabilities by similar amount,
the working capital does not change. For instance- if the company receives a cash from the
current debt that is to be paid in the time period of 60 days then there would resulting an increase
in a statement of cash flow (Singh, Kumar and Colombage, 2017). However, there would not
resulted any increase in the working capital as the proceeds from loan would be indicated as cash
or current asset and note payable as a current liability as it is a short term borrowings.
If an entity purchases fixed asset like machinery, cash flow of the company will decline
and this results to decrease in the working capital as cash proportion of the short term assets
would reduced but the current liability will remain unchanged because it will be counted as the
non-current or long term borrowings or debt. On the other side, selling of the fixed asset would
be boosting the working capital and cash flow of the company.
In case if the firm purchases an inventory with the cash, there would not result any
change in the working capital as the cash and an inventory both are considered as the current
assets. Contrary to this cash flow would get reduced with purchase of an inventory.
Thus, a positive amount of working capital reflects cash inflow for a particular period,
however, negative value of the working capital means an enterprise has spent more and more
cash outside than it had bought for managing their working capital within an accounting year.
Assessing the changes in the working capital could be very important for any of the business
enterprise but is specifically crucial for the company with seasonal needs of cash flow.
2. Applying the concepts, showing ways in which management of an enterprise may affect
financial results
Brightlawns Ltd is bee managed by Simmo, who is the grandson of the company's
founder he had believed that issue regarding BricoFrance had been arisen from the faulty
workmanship by the contractor in which BLL is engaged in the year 2017. Due to this he had
refused for paying to contractor who threatens the legal action (Abor, 2017). This leads to a great
impact on the financial results of an entity as because of it the work area of an entity has been
suspended and a large stock of the material and the supply has been built up at the organization's
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London site. Simon also putted a pressure on his key customer for making payment which in turn
affects the brand reputation of the company and the customers will not prefer to buy the goods
from the firm. This in turn affects the working capital and the financial state of an enterprise.
3. Analysing and recommending the steps for improving cash-flow of the company with better
management of working capital
Managing the working capital effectively helps the firm in making more and more
improvements in its cash flow by incentivize the receivables, meeting the debt obligations,
choosing the vendors who are offering for the discount, analysing the variable and the fixed cost,
examining an interest payment, managing the inventory effectively, automating the receivables
and the payment monitoring and resolving the disputes with the vendors and the customers.
These measures enables in creating more and more cash inflows and reducing the outflows so
that improved cash flow is resulted (Masri and Abdulla, 2018). Earning an additional amount of
profit also results in improvement of the cash flows as higher profit means huge funds through
which the working capital of the company could be managed in a better and effective manner.
Selling the non-current assets for the cash and issuing the preferred stock for the cash also results
in improving cash flow.
CONCLUSION
By summing up this report, it has been articulated that significant difference takes place
between profit and cash flow. It can be seen in the report that profit implies for the return
generated by the firm over expenses. Further, it can be concluded that BrightLawns can ensure
effectual working capital management through developing suitable strategies regarding
inventory, debtors and creditors. It can be summarized from the evaluation that through receiving
payment from creditor’s earlier company would become able to meet day to day monetary
requirements prominently.
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PART 2
Executive summary
This part of the projects related to the case scenario of BoatWorld Plc which is planning to
do changes in the existing budgeting practices. From evaluation, it has assessed that currently
traditional budgeting practices followed by the firm. By taking into account overall evaluation it
can be depicted that BoatWorld plc should employ alternative or modern techniques in
comparison to the traditional one. By undertaking ZBB firm would become able to set competent
financial plan or framework.
INTRODUCTION
In the recent times, manager plays a vital role in developing competent financial framework
which contributes in the organizational growth and success. Moreover, managers assess financial
needs of business and thereby identifies source from which fund can be generated. This report
depicts budgeting approaches or methods which can be used by the firm for setting financial
framework. It also entails budgeting system which is more appropriate for business organization
from planning purpose.
1. Purpose of framing a budget with description of traditional budgeting tools and modern
methods of budgeting
Budget implies for the financial plan or framework which in turn includes planned sales
volume, revenue, quantities, cost and profitability (Budget: Definition, Purpose, Elements and
Steps, 2019). On the basis of cited case situation, BoatWorld Plc comes under the category of
international leisure which rents boats to holiday makers. Company is listed on London stock
exchange and now planning to explore business operations in Netherlands as well as Germany.
Currently, company is following traditional budgeting system for setting financial plan or
framework. Now, manager of the firm is planning to undertake different system of budgeting
which in turn complies with modern business environment. Hence, there are several budgeting
systems which BoatWorld Plc can undertake for developing monetary plan such as rolling,
activity and ZBB. However, there are several benefits and drawbacks which in turn associated
with budgeting aspect. Hence, by evaluating all such aspects BoatWorld Plc can select
appropriate budgeting framework.
Purpose of preparing budget
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 By employing budgeting system BoatWorld Plc can take compete decisions and develop
short-term plan
 Further, by undertaking budgeting system business unit can monitor and control
departmental performance through doing comparison of actual outcome with standards.
In this way, by identifying causes of deviations firm can take corrective measure for
improvement (Purpose of budgeting, 2019).
 It may be served as a tool which helps in motivating personnel in relation to fulfilling
their responsibility and gaols.
Traditional budgeting approaches
Incremental budgeting:
Advantages Disadvantages
 Easy to implement and does not
involve complex calculations
 It is highly appropriate for the
companies where requirements
pertaining to funding are fixed.
 Under incremental budgeting, impact of
change can easily be assessed or
identified
 Eliminates rivalry and emphasizes on
building equality among departments
 Incremental budgeting may result into
unnecessary spending
 Lack of innovation so there is no
reduction in terms of cost aspects
 With the motive to get favourable
results or variances incremental
budgeting encourages higher spending
(Incremental Budgeting – Meaning,
Advantages and Disadvantages, 2019).
Alternative budgeting methods
Rolling budgets: It may be presented as a dynamic approach which in turn updated when
one year is completed. As per this method or approach, budgets are setting down for a quarter or
month. Unlike static budget, they are prepared for high short time frame or period. Hence, it may
be presented as the extension of existing budgeting framework. In comparison to incremental
framework, rolling budget requires more efforts for the development and implementation of plan.
Advantages Disadvantages
 Facilitates no manipulation as it does  Time consuming activity
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not include fixed targets
 Less detailed over others
 In this, focus is placed on the driver of
resources while setting budget
 Ensures effective panning, control and
change adaptation
 Negatively affects employee motivation
as budget is revised every time (Rolling
budget: advantages and disadvantages,
2019).
Zero based budgets: On the basis this method, budget starts with zero base or from
scratch. Hence, according to ZBB, BoatWorld Plc is required to re-evaluate every line of item
presented in cash flow statement. In addition to this emphasis is placed on justifying all expenses
that departments are planning to be incurred.
Advantages Disadvantages
 Ensures effective co-ordination and
communication
 Helps in identifying redundant
activities (Zero based budgeting, 2019)
 It removes undesirable activities from
the operations and thereby facilitates
accuracy as well as efficiency
 High manpower requirement as each
and every line of item is evaluated
 Its highly time intensive exercise
because budget starts with zero base
 In the lack of having expertise business
unit would not become able to set
financial plan as per ZBB.
Activity based budgeting: According to this, budgets are prepared referring overhead
costs or expenses. This management accounting tool does not consider past year’s financial
framework for arriving at current plan. Hence, emphasis is placed on analyzing cost aspect
deeply. Thus, as per the outcome derived resources are allocated to each activity for utilizing
monetary resources effectually.
Advantages Disadvantages
 Helps in setting appropriate prices and
thereby assists in gaining competitive
advantage.
 ABB assists is identifying and
eliminating bottlenecks and facilitates
 Highly complex in nature because for
each activity cost driver needs to be
identified
 For setting budget according to ABB
company needs competent personnel.
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optimum use of financial resources
(Activity based budgeting: advantages
and disadvantages, 2019).
 Emphasizes on evaluating each and
every cost driver.
Hence, for this company needs to
conduct training session for personnel
which in turn imposes cost in front of
the firm.
2. Application of traditional and alternative budgeting methods
Application of different types of budgeting system is enumerated below:
Incremental: Cash budget
In this, for developing plan for the near future and making forecast, additions are made in
the previous plan. By undertaking this, BoatWord Plc can evaluate performance of each
department effectually. For example: pertaining to expansion plan cash budget of BoatWorld Plc
is enumerated below.
Cash budget for the period of six months is as follows:
Particulars January February March April May June
Cash inflow
Opening cash balance 5000 15600 26488 37672.64 49162.82 60967.7
Sales 20000 20600 21218 21854.54 22510.18 23185.48
Other income 5000 5000 5000 5000 5000 5000
Total cash inflows 30000 41200 52706 64527.18 76673 89153.19
Cash outflow
Material 5000 5150 5304.5 5463.635 5627.544 5796.37
Labor 3000 3090 3182.7 3278.181 3376.526 3477.822
Selling & distribution
expenses 2400 2472 2546.16 2622.545 2701.221 2782.258
Other expenses 4000 4000 4000 4000 4000 4000
Total cash flows 14400 14712 15033.36 15364.36 15705.29 16056.45
Cash deficit / surplus
or closing cash
balance 15600 26488 37672.64 49162.82 60967.7 73096.73
Alternative or modern budgeting methods
Activity based budgeting:
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It is highly effective which provides assistance to the company in reducing cost level and
maximizing profitability aspect. ABB assists in identifying cost driver and thereby allocates
resources to the business activities.
Zero based budgeting:
From assessment, it has found that applicability of ZBB is too wide in the context of
BoatWorld Plc. By using this, company can prioritize activities and thereby becomes able to
reallocate resources effectually (Ellegård and Glenngård, 2019). ZBB is highly prominent which
facilitates cost-benefit analysis and aid in decision making.
3. Analysing the method of budgeting that is most suitable for the business
By doing assessment, it has identified that alternative budgeting system is highly appropriate
over traditional. In the modern era, ZBB, rolling and ABB are found to be more effectual in
comparison to incremental approach. Moreover, incremental approach only focuses on doing
additions in the previous plan. On the other side, modern budgeting systems are highly realistic
in nature. Moreover, all such techniques emphasize on the assessment of activities that need to
be performed. ABB allocates overhead expenses on the basis of relevant cost drivers identified.
In addition to this, ZBB lays focus on the assessment or finding best alternative which can be
used for performing functions (Miller, 2018). Hence, such techniques assist in developing
monetary plan by taking into account current environmental condition or aspects. In this way,
modern budgeting techniques help in making effectual use of financial resources over
incremental.
Referring all such aspects, BoatWorld Plc is advised to employ zero based budgeting
system for setting financial plan. Moreover, using this, manager can easily assess activities
associated with new outlet. The rationale behind this, in comparison to the traditional budgeting,
ZBB assumes that there is no balances which in turn carry forwarded for the near future. Ibb lays
focus on assessing task and then allocates resources irrespective of the current structure
pertaining to both income as well as expenses. In other words, by applying ZBB, firm can
identify ways through which each activity can be performed at lower cost. Along with this, by
taking into account ZBB, BoatWorld Plc can make proper estimation about profit which will be
generated after specific time period. By this, company can make proper plan about how to
effectively utilize resources for getting desired profit.
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CONCLUSION
In conclusion to this report, it can be inferred that by employing modern budgeting
methods BoatWorld plc would become able to develop suitable pan for the near future. Hence, in
the context of BoatWorld Plc, alternative budgetary system namely zero based budgeting will
prove to be more beneficial for the firm. By considering this, company can make proper
estimation of expenses and income aspect pertaining to the future time period.
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REFERENCES
Books and Journals
Abor, J. Y., 2017. Working Capital Management. In Entrepreneurial Finance for MSMEs (pp.
225-255). Palgrave Macmillan, Cham.
Aktas, N., Croci, E. and Petmezas, D., 2015. Is working capital management value-enhancing?
Evidence from firm performance and investments. Journal of Corporate Finance. 30.
pp.98-113.
Ellegård, L. M. and Glenngård, A. H., 2019. Limited Consequences of a Transition From
Activity-Based Financing to Budgeting: Four Reasons Why According to Swedish Hospital
Managers. INQUIRY: The Journal of Health Care Organization, Provision, and
Financing. 56. p.0046958019838367.
Masri, H. and Abdulla, Y., 2018. A multiple objective stochastic programming model for
working capital management. Technological Forecasting and Social Change. 131. pp.141-
146.
Miller, G., 2018. Performance based budgeting. Routledge.
Singh, H. P., Kumar, S. and Colombage, S., 2017. Working capital management and firm
profitability: a meta-analysis. Qualitative Research in Financial Markets. 9(1). pp.34-47.
Talonpoika, A. M. and et.al., 2016. Defined strategies for financial working capital
management. International Journal of Managerial Finance. 12(3). pp.277-294.
Online
Activity based budgeting: advantages and disadvantages. 2019. Online. Available through: <
https://efinancemanagement.com/budgeting/activity-based-budgeting>.
Budget: Definition, Purpose, Elements and Steps. 2019. Online. Available through: <
http://www.accountingnotes.net/cost-accounting/budget/budget-definition-purpose-elements-
and-steps/4795>.
Incremental Budgeting – Meaning, Advantages and Disadvantages. 2019. Online. Available
through: < https://efinancemanagement.com/budgeting/incremental-budgeting>.
Purpose of budgeting. 2019. Online. Available through: <
http://www.leoisaac.com/budget/bud031.htm>.
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Rolling budget: advantages and disadvantages. 2019. Online. Available through: <
https://efinancemanagement.com/budgeting/rolling-budget>.
Zero based budgeting. 2019. Online. Available through: <
https://efinancemanagement.com/budgeting/zero-based>.
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