Business Finance: Concepts, Analysis, and Recommendations

This report discusses the concepts of profit, cash flow, working capital, receivables, inventory, and payables in the context of Mediterranean Delights Ltd. It provides analysis and recommendations for better working capital management. The second part focuses on the purpose of preparing a budget and different methods for future cost management.

Business
Finance

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................1
PART 1............................................................................................................................................1
(1) Different concepts.............................................................................................................1
a..............................................................................................................................................1
b. ............................................................................................................................................2
c. Changes in working capital impact on cash flows..............................................................2
(2) Application of above discussed concepts in context of Mediterranean Delights Ltd:......3
3. Analysis and recommendations..........................................................................................4
PART 2............................................................................................................................................5
EXECUTIVE SUMMARY.............................................................................................................5
(1) Purpose of preparing budget and different methods.........................................................5
(2) Plan of future cost management........................................................................................6
(3) Traditional and alternative budget system........................................................................7
REFERENCES................................................................................................................................8

EXECUTIVE SUMMARY
As per the above report it is summarises that to operate different business activities
require to finance. The concept of business finance based on the different resources, obligations
and investments (Choi, 2016). There are mainly role played by the managers as well business
operator in order to control various business activities. This report based on the Mediterranean
Delights Ltd which is conducting activities into restaurant chains. This report categorised into
two parts. In first part, shareholders identifying issues in business which is related with the profit,
cash flows, working capital, receivables, inventory and payables. Along with identify the
changes in cash flows that impact on the financial position. At the end provide appropriate
recommendations for better working capital.
PART 1
(1) Different concepts
a.
Profit: Profit is known as financial benefit that arises when the amount of revenue gained
from a business activity is more than the expenses, costs and other taxes. It is the amount of
earning that gain by the business when incomes greater than of expenses in particular financial
year. The financial benefit accomplished when revenues obtained from business operations. The
term of profit use by the business to identify financial status. There are two types of profit like
gross profit and net profit. Gross profit is not defined as actual profit of a business which is
calculating by deduction from COGS and get amount of net sales. Net profit is actual profit
which is differences the revenues and expenses. To calculate net profit apply formula of total
expenses – total income.
Cash flow: It is a financial statement that concise the figure of cash and cash equivalents
entering and leaving an organisation. Through this statement analysis about the cash inflow and
cash outflow of a business in set period of time. It helps to measure how well a business manage
cash availability to paid for debt liabilities and fund for operating expenditures (Berger and
Black, 2011).
Difference between cash flows and profit:
Net profit Cash flow
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It is the profit of an organisation that earned in
particular financial year.
Cash flow is operating activities in which
identified cash inflows and outflows in day to
day activities.
To calculate of profit focus on the income and
expenditure in specific time.
It is related with time at which transaction of
cash take place.
It presents actual financial position of business Cash flow present liquidity position of a
company.
b.
Working Capital: It represents ability of business to pay its current liabilities with its current
assets. The term of working capital is essential for any business organisation that helps to
measure actual financial health since creditors measure a ability to pay off its debt in certain
period of year. It is indicating of liquidity levels of business where cover daily basis operations
which is related to financial position (Cumming, 2012). To calculate working capital apply
formula of Current assets – current liabilities.
Receivables: It is the amount that proceeds or payment which is received by the business from
the customers on credit transactions. An organisation set specific credit time to collect amount
from the debtors that categorised into months and a year. The term of receivables present in the
balance sheet under the section of current assets.
Inventories: The concept of inventories defined as a products available in the firm for sales so
according to that raw material utilised to manufacturing products for sales. Stock is most
essential term of any company that helps to conduct different business activities because it is
presenting as primary sources of generate income.
Payables: When an organisation buy goods and other services on credit and have to be paid in
specific period of time is known as payable. Accounts payable is defined as obligation which is
required to paid by business to its suppliers as well as creditors. This term presents in balance
sheet under the section of current liabilities.
c. Changes in working capital impact on cash flows
The changes in working capital direct impact on the cash flow because it is related with
different variation in the amount of working capital like changes in current assets and liabilities.
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Generally, the operating cash flow statements based on the changes in working capital activities
because when current assets increase so impact on cash inflows and outflows. Similarly, current
assets & liabilities decrease so impact on the operating section of cash flow. In contrast, negative
WC presents firm spent more cash on business activities within a year. Examining all the
changes in WC of a business is essential for an enterprise but is especially require for firm with
year-round or planetary cash flow needs.
(2) Application of above discussed concepts in context of Mediterranean Delights Ltd: Profit: Profit is a measure of profitability which is the owner's major interest in the
income through market production. It is received by the organisation when expenses less
from sales after done all the business activities. There is analysed profit of Mediterranean
Delights Ltd company in last year EBIT has been £5 million. It is determined that goods
& services sensible request about revenues in the year was 50 million pounds. All the
expenses are 50 million. The company conduct activities effectively and earning the firm
as per the last data basis. But organisation face the problem in increasing debt such as 16
million pounds last year generate by company but this year 18 pounds. This time fire take
decision to recognise the set structure for resources and set a limit of liabilities (Finger
and El Benni, 2014). Cash Flows: This statements is mainly based on the cash inflow and cash out flow to
present actual liquid position in business. Recently, MDL has taken 25% stake to manage
the business entities. They are investing amount £10 million to acquire the shares and all
people agree with this so they were paying £8 million in advance for unshared supply of
the items. The transactions are impacted on the cash flow as well as on profitability.
Furthermore, in case of MDL is supposed for cash sales only after that cash flow get
results from sales in 50 million. Therefore, owned to insufficiency of results of actual
data sum of cash inflows which is not easy to examine net sum cash flows so it is
essential for cash flows to analysis to deflect any upcoming unfavourable position. Receivables: From the case study of MDL has trade receivables of Delios and San Pedro
Ltd. It is offered the corporation will get amounting £1.5 million against of purchase
order. Thus, total of £2 million had been received from San Pedro that occur as a
difficulty of undergoing problems.
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 Inventories: In this case study there is no provided any information about stock but there
is identified some important fact that become reason of disputes. San Pedro and
suspension of working focus on the large qualities of raw material as well as procedure of
goods kept at company's London site.
Payables: It is known as current liabilities which is played important role in working capital
valuation. As per the case situation of MDL, no clear trade payable data and approximation of
debts are given (Hussain and Scott, 2015).
Working capital: There is identified two debtors such as Delios Ltd and San Pedro. The company
offered to Delios a credit standard valued £1.5 million. According to this case total of working
capital WILL Ltd may be analysed by deducting the trade payables balance from the collected
cash and accounts receivable amounts. A negative total of WC presents firm does not follow its
business practices on daily basis.
3. Analysis and recommendations
As per the analysis of given case study, the manager of MDL can amend cash flow by
effective management of working capital and for this follow these steps that are defined below: Analysis fixed and variable cost: The analysis of fixed and variable cost helps to
manager to manage working capital easily. These costs are helping to decrease sudden
expenses and arrange liquidity for working capital. It is advantageous for business of
MDL with the changes of operating cash flow. Tight policies for debtors: MDL company has set up effective credit policies to maintain
good liquidity position. The company face stringent demands on its mortgage holders
dues but they still have to inflexible and take assessment and get Delios Ltd and other
capital of debtors. These debtors take advantages of these policies and pay late to firm
(Jansen, 2016). The business wants to get rid of from San Perdo dispute case with the
matter of urgency. Observing accounts receivables and payables: To maintain good position of cash in
business require to company manage accounts and reports of cash inflows and outflows.
 Resolve disputes with customers and vendors: It is essential for any business to create
good relation in between customer and staff members. The manager of MDL resolve the
disputes in between customer and suppliers ASAP (Mazikana, 2019).
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PART 2
EXECUTIVE SUMMARY
Business finance involves those business practices which are related with the acquisition
and betterment of capital funds in meeting the financial requirements as well as overall
objectives of a business enterprise. In this section discuss about the purpose of preparing budget
and analysing different types of budget. Along with, apply different methods for future cost
management in regard of particular business.
(1) Purpose of preparing budget and different methods
To estimate the future revenues and expenditure of any organisation analysis by the
budget. It helps to make important decision for business and according to prepare effective
strategies for MDL. The budget is designed by business with three main purposes which are
expenses, profits, company's revenue, helping to take strategic decision on the market, tracking
the actual performance of business (Keuper and Lueg, 2015).
(a) Traditional budgeting approaches
It is a method of preparing of budget in which analysis activities of last year budget and
making changes in current year budget. Therefore, in traditional budgeting predict income and
expenditure to apply all the adjustments to enhance the profitability in current as well as future
year. Advantages: It is a simple, systematic and provide value of time budget which is
executing and implementing in business. To prepare of this budget require to apply some
modifications on those areas which are not existing in last year. Traditional budget ease
the processes of taking loan and helps to remove the unproductive operation that are
covering under the operating cost are greater and prepare better plan to enhance
profitability.
 Disadvantages: It is taking more time and money by management which is wasteful and
include as extra activity. From the executive perspective have different right numbers that
are becoming purpose of planning a proposal and overlooked for competitive things.
(b) Alternative budget methods
Rolling budgets: It is defined as continuous budget which is updated on daily basis or it
is extension of existing period budget. To prepare of this budget require to review on budget
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activities and planning for new proposals for future activities. Therefore, after the expire of old
budget prepare new plan and implement in firm (Laitinen, 2013). Advantages: It is helping a business to prepare plan and control business activities in
accurate manner. Thus, it supports in deducting the uncertainty of budgeting and
developing plan for future sales and profitability.
 Disadvantages: The main disadvantage of this budget that it take more time to prepare
new plan and spend on time on fresh forecast.
Zero based budgets: This budget is prepared by organisation to analysing all the
departments from starting and take base as Zero. According to this method all the expenses must
be justified foe new financial year after that company take strategic decision. Advantages: The main benefit of this budget that it helps to identify the strength and
weakness of each department after that according to that focused on operational
activities, lower cost and more discipline implementation.
 Disadvantages: The major drawback of this budget that it is consisting of chances of
resources intensiveness, converted results by top managers and bias towards short term
planning (Kopnina and Blewitt, 2018).
Activity based budgets: It is another type of budgeting method which is applied by most
of the organisation in order to using activity based costing after focusing on overhead costs
rather than the activities that occur the cost which are deeply determined and conduct research.
According to result all the resources are allocated to an activity. Advantages: This budgeting procedure may have control the business activity and stay
competitive by the sector and helps in determination of all costs of every commercial
entity.
 Disadvantages: The primary drawback of this method that applying of this method is
more expensive and connecting more expensive compare with traditional budgeting
methods.
(2) Plan of future cost management
Second sight plc is an international business that conduct different activities into
prescription glasses and sunglasses for leading international brands. The headquarter of business
set up in Manchester and main production centre established in United Kingdom and France. It
has been generated about 250 Million Pounds the year before. The company want to spread out
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their business activities and open new facility in the Netherlands with the help of joint venture.
There are discussed some budgetary topic that are applied in Second Sight Plc:
Traditional Budgeting: It is a financial strategy which is depended on approximation
and last year's financial side. This method is identified as traditional method in which forecast of
expenses with the help of development in operational manner (Vasant, 2013) . It concentrate on
the cost estimation and also provide help to accountant to identified effective cost structure. The
last year projected to be £250 million where depended on the performance of last year. In order
to preparing the program and sales projection must be focused on the account by incorporation of
new prospects in selected market of Netherland.
Alternative Budgets: The effective monetary procedure supports to maintain the
genuineness of present operations and predication. It is mainly depended on the authentic
adjustments and improvements with refined predicting instrument. There are applying different
alternative method to apply changes in business. The budget application is advised that from the
case primarily due to growth and development of plan. Budget is defined as effective tool that
utilised by business for money management, taxes, depreciation and costs. Other Zero based
budget apply by business to spread out business activities properly by customer at the starting
level.
(3) Traditional and alternative budget system
Second Sight Plc apply alternative budget method to analysis the plan for business to
predict future income and expenses. There are discussed different reason which makes
alternative budget more effective such as:
 It is connecting and orienting the profit & expenditure of Second Sight Plc like in this
perspective of enlargement strategy may be appropriate for the annually budget.
 The rolling budget is more effective which helps to collect updated information and
prepare new plan after expire old strategy and fulfil the requirement of business task.
 Second sight plc can decrease project details and make them more descriptive to compare
with the key performance perspective. Through traditional budget plan about the KPI and
shift their emphasize (Ziemba and Vickson, 2014).
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REFERENCES
Books and Journal
Choi, T. M., 2016. Multi-period risk minimization purchasing models for fashion products with
interest rate, budget, and profit target considerations. Annals of Operations Research.
237(1-2). pp.77-98.
Cumming, D. ed., 2012. The oxford handbook of entrepreneurial finance. Oxford University
Press.
Columba, F., Gambacorta, L. and Mistrulli, P. E., 2010. Mutual Guarantee institutions and small
business finance. Journal of Financial stability. 6(1). pp.45-54.
Berger, A. N. and Black, L. K., 2011. Bank size, lending technologies, and small business
finance. Journal of Banking & Finance. 35(3). pp.724-735.
Hussain, J. G. and Scott, J .M. eds., 2015. Research handbook on entrepreneurial finance.
Edward Elgar Publishing.
Jansen, K., 2016. External finance in Thailand’s development: An interpretation of Thailand’s
growth boom. Springer.
Keuper, F. and Lueg, K. E., 2015. Finance bundling and finance transformation. Springer
Gabler.
Kopnina, H. and Blewitt, J., 2018. Sustainable business: Key issues. Routledge.
Laitinen, E. K., 2013. Financial and non-financial variables in predicting failure of small
business reorganisation. International Journal of Accounting and Finance. 4(1). pp.1-34.
Mazikana, A. T., 2019. The Effect of Budgetary Controls on the Performance of an
Organization. Available at SSRN 3445247.
Oakshott, L., 2012. Essential quantitative methods: For business, management and finance.
Macmillan International Higher Education.
Vasant, P., 2013. Meta-heuristics optimization algorithms in engineering, business, economics,
and finance. Information Science Reference.
Ziemba, W .T. and Vickson, R. G. eds., 2014. Stochastic optimization models in finance.
Academic Press.
Online
Capital Budgeting. 2017. [Online]. Available through:
<http://accountingexplained.com/managerial/capital-budgeting/>
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