Budgeting Methods and Their Impact on Second Sight Plc

This report discusses the meaning of budget and the advantages and disadvantages of various budgetary approaches. It analyzes the effect of budgeting methods on Second Sight Plc, a multinational sunglasses company, and their expansion plans. The report also explores how traditional and modern budgeting methods impact business decision-making.

Business finance and accounting
Table of Contents

PART 1............................................................................................................................................1
EXICUTIVE SUMMERY...............................................................................................................1
1) a) Explanation of profit and cash flow and their differences..................................................1
b)Explanation of the terms working capital, account receivables, inventory and payables.......2
C) Effect of changing working capital on cash flow..................................................................2
2)Effect of working capital on Mediterranean Delights Ltd.......................................................3
3)Analysis and recommendation for effective cash flow management......................................3
PART2.............................................................................................................................................4
EXICUTIVE SUMMERY...............................................................................................................4
1)Meaning of budget and advantages and disadvantages of various budgetary approaches.....4
2)Effect of budgeting methods on Second sight plc...................................................................6
3)Analysing whether traditional or modern budgetary system is
appropriate for all or any parts of the business for future projects............................................6
REFERENCES................................................................................................................................8
PART 1
EXICUTIVE SUMMERYYou must be very careful re your spelling. This is not a
very good opening to your report!!
Working capital is net value of current assets available in business organization. The term
is used by organization to identify their liquidity status available to fulfil short term liabilities of

business organization. In this report concept of working capital and their related terms has been
defined and effect of changes in working capital on running organization has been analysis.
The summary should very briefly explain the main points of you report, the conclusions and the
recommendations
1) a) Explanation of profit and cash flow and their differences
Profit: Financial benefits generated from operating activities is known as profit. In other
words profit is the excess of income over expenditures incurred at fixed period of time. It can be
calculated by preparing profit statement and through using difference managerial accounting
tools like marginal costing or standard costings. Profit is an essential term for any organization
whether it is financial or non financial . Profit helps in maintain sustainability in market place.
Business organization uses profit to identify how much gain business earn from their business
activities .
Cash flow: It is the net value generated from cash inflow and cash out flow activities.
Cash flow is the summery of cash and cash equivalent transactions of an organization at fixed
period of time. It only considered those activities which effect liquidity status of running
business organization.
Many business organization considers cash flow and profit as smilier term but there will be
difference which are mention below:
Particular Profit Cash flow
Definition Financial gain earned by
organizations through their
business activities.
Sum up value of cash inflow
and cash outflow activities.
Purpose Main purpose of calculation of
profit is to identify growth rate
of company.
To analysis liquidity status of
an organization to pay their
day to day business
transactions.
Calculation Profit is difference of selling
amount and cost of production
It can be calculated by
preparing profit statement.
Cash flow is net value of cash
inflow and outflow activities.
Managers prepared cash flow
statement for calculating net

amount.
b)Explanation of the terms working capital, account receivables, inventory and payables
Working capital: It is financial metric which represents money available for daily
business transaction within an organization. It is essential part of an entity, managers uses
working capital term to analysis financial position of their organizational market place. It
determined operation efficiency of business. Working capital is the sum up of current assets of
company. Manager uses net working capital which ca be calculate by identifying difference
between current assets and current liabilities (Bassemir and Novotny‐Farkas, 2018).
Account receivables: Net amount claim by company on their customers for utilizing
their products and services. It is considered as assets of business entity and shown in current
assets side of balance sheet.
Inventory: It is most essential part of working capital. This term is defines as net value
of raw materials and essential equipment used by business organization for producing and
supplying their product to customers.
Payable: This term defines as amount claim by creditors to company for trading their
products to run business organization. Account payable generates liabilities on company thus it
will be shown in current liability side in balance sheet.
C) Effect of changing working capital on cash flow
Working capital and cash flow both are essential terms for organization to run their
business organization effectively. Managers uses working capital ratio to identity their liquidity
rate. Cash flow considered only cash and cash equivalent activities Increment in current liability
increase cash inflows and increment in current assets value generated cash outflow actives. This
defines that when ratio of working capital increase then it will adversely effect on cash flows as
cash outflow activities generated .In this case sales are made on the basis of accrual concept thus
they did not receive cash from sales at the time when transactions accrued. Depreciation and
other expenses are not considered as they are the part of income statement.
You need to include the very important point that in the income statement sales are recognised
when they are realised or when the goods are delivered (the sale is made), and all related costs

and expenses are also recognised then. This is the accrual method of accounting, which is very
different from the cash method. The cash from sales might be received 30, 60 or 90 days later,
for example. Also, depreciation and other non-cash charges appear as expenses in the Income
Statement but never in the cash flow statement
2)Effect of working capital on Mediterranean Delights Ltd
Mediterranean Delights Ltd is one of the leading company of south England. So what?
You are writing a report to the shareholders of this company, so you can assume they know
where it is located. The company had supply chain of restaurant at different places all over
England which help in provides their products and services to their customers. Effect of working
capital and their related terms are mention below:
1. Profit: Mediterranean Delights Ltd earn 50 million pound in preceding financial year.
Due to lack of knowledge available related to interest amount and liability of tax it has
been assumed that 250 million is their net amount of value after analysing their financial
statements. Where do you get this figure from?
2. Receivables: Due to dispute arises with San Pedro, ration of receivables increase which
adversely effect on working capital cycle as it will be chances company lost their
potential customers.
3. Payable: Due to lack of managerial policies company unable to found suppliers with
whom they trade on benefits. Ratio of payables is increase which means company take
long time to pay their debt. In case of MDL conflicts arises them with Maltese
agricultural group, Valletta Ltd as they provides them low quality of material.
4. Cash flow: This term considered only cash and cash equivalent activities. In the last year
cash inflow activities generated by selling their products. Company invest with Italian
company and pay amount to them it will generated outflows. Company also has turnover
of 50 million in last year (Cockcroft and Russell, 201Hasibuan and Syahrial, 2019).
5. Working capital: The term refers to net amount of current assets after deducting current
liabilities. Working capital of Maltese agricultural group, Valletta Ltd will be adversely
affect on their business activities due to disputes and effective management policies
Companies working capital status is shown negative result but due to strong financial
position company van bear their day to day operation activities transaction easily.

3)Analysis and recommendation for effective cash flow management
Mediterranean Delights Ltd is run their business in England . No. Read the case. The
company earn excellent profit in past year but due to lack of effective policy of management,
company suffers from many problems. Mediterranean Delights Ltd have conflict with their
potential customers and their supplier also sue on them regarding non payment of purchasing raw
material. All the things will adversely effect on their cash flow activities. It will decrease their
growth rate. To overcome this problems manager needs to formulate effective working capital
management policies through which they can easily bear debt liabilities of their operational
activities. For this purpose they need to make effective debtor policy which help in attracting
customers and influencing them to pay their liability in short time period. It will help in
generating cash inflow activities. They need to solve dispute problem with their creditors so that
they cannot bear penalty amount . Mediterranean Delights Ltd needs to use effective
environment scanning tool which help in identifying potential supplier which provides them
high quality of raw materiel at discount rate. They also need to change their cash management
policies. They need to focus on activites by which they generated more profit (AugustKim, Li,
and Liu, Z2018).You are not identifying the key issues facing this company. Focus on the
receivables, the inventory, the legal dispute which is costing money etc.
PART2
EXICUTIVE SUMMERY
Budget is detailed plan of a business organizations which covered all the part of business
activities. Managers prepared budgets to identify future income. It play important role in
business finance. In this report concept of budgeting methods has been analysis and how
effectively traditional and modern methods of preparation of budget effete on business decision
process is defined specifically It will help in understanding how management take decision
related to preparation of making budget.
1)Meaning of budget and advantages and disadvantages of various budgetary approaches
Budget: It is a numerical statement which is used for identifying future income and
expenditure of an running business entity. In other words, Budget is predetermined statement of
expected future earning and payments. It is technique of managerial accounting. Every
organization. prepare budget it is essential part of managerial process. Managers prepared budget

for performance evaluation of their employees. Business organisation prepared budget for taking
best decision which help in achieving goals with optimum utilization of resources. Process of
preparation of budget statement is known as budgeting. Following are the methods managers
used for preparation of budget.
Traditional budgeting method: In this method budgets are prepared by considering past
year data. Managers prepared future budget with the uses of previous years performance data of
company.
Advantages:
 It is cost effective technique of budgeting as organizations need not to incurred expense
on research and hiring expert for preparation of budget.
 Preparation of budget with this method is very easy to understand statement of budget
Disadvantage:
 It does not provides accurate and reliable data as budgets is prepared by considering last
past years data.
 Employees does not feel motivated because budgets are prepared by top level of
management (Linares-Mustarós, Coenders, G. and Vives-Mestres, 201MnifSellami, and
Gafsi, 2019).
Alternative methods: With changes of business environment new methods are
developed. Following are the methods of modern techniques of preparation of budget
 Rolling budget: In this method budgets are prepared on continuously basis until the time
period of achieving goal does not completed. It is also known as roll-over budget.
Advantages:
 With the use of this method workforce focusing on achieving their goal at fix time.
 This method help in identifying performance evaluation of various departments.
Disadvantage:
 It is very time consuming process.
 Using rolling budgets can increase uncertainty of regular activities running organization.

Zero based budget: In this method budgets are prepared from scratch level. Managers started
from initial level and prepared budget on the basis of collection of research data. This type of
method is useful for newly established organization.
Advantage:
 By using this method organization can be utilizing their resource effectively.
 It will provided accurate information related future earning and expenses.
Disadvantage:
 Due to rigid process of budgeting business organization can not focusing on opportunities
and threat in market economy.
 It incurred high cost of preparation of budget by this method.
Activity based budgeting: It is most useful technique for manufacturing organizations.
In this technique budgets are prepared on the basis of activity costing. Managers identify cost
incurred on allocation of resources and then prepare budget on the basis of collection of allocated
data. It is very useful method. Following are the benefit sand drawbacks of activity based
budgeting method:
Advantage:
 It will help in managing time of organization by reducing wastage activities.
 It is flexible method manager can be used this method by analysing market demand.
Disadvantage:
 It is complex and hardly to understand process.
 Budgets are prepared on the basis of second source of information.
2)Effect of budgeting methods on Second sight plc
Second Sight is multinational business organization which run their sunglasses business all over
the England. Headquarter of this is situated at Manchester. Now the company want to expand
their business units in India and Netherlands. Management can be used traditional as well as
modern technique of budgeting to identify future earning and formulation of policies to achieve
these project. In traditional budgeting method, budgets are prepared on the basis of past year
data. Manager will be used this method as it will help them in saving their cost and provided
data. Manager department of this organization will be used modern methods of preparation of
budgets as it will help in provides accurate data which will help in deicide in best options related
to projects (Muñoz‐Torres, Fernández‐Izquierdo, Rivera‐Lirio and Escrig‐Olmedo, 2019). Zero

based All this section needs to be reviewed. method help them to prepared budget on the basis of
analysing present information. If they prepared their budget from activity budgeting then it will
help them in utilization their resource efficiently. Second Sight Plc is run their business since
past 10 years their revenue was 250 million in last year.No. Read the case It is responsibility of
their managers to countries run their business by current probability rate and for this purpose
they can be apply methods of budgeting which help them in taking better decision.
3)Analysing whether traditional or modern budgetary system is
appropriate for all or any parts of the business for future projects
Budget is essential part of strategic management. This numerical statement help
management to determined best alternative among other alternative. Success of business models
depends on the skills of managers preparation of budget. Business organization choose methods
for budgeting process according to external and internal environment factors of organization. In
the case of Second sight manager will be choose budgeting method which help in providing
accurate information related to future. Budgeting methods help in providing direction and
guidelines of preparation of budget but not all methods are suitable on particular budgets. Each
budgeting method has its own benefits and drawbacks. Second Sight is prepare budget for their
new projects which is run in Indian and Netherlands target market. For Indian market they can
use Zero based budgeting and rolling budgeting methods both provides relevant information
related to future earning because trading in Indian market is too risky and difficult process.
Business organization would not apply traditional and activity based budgeting method for
Indian project because Second Sight would not trade their products in India (Ng, 2018.).
Market segment is also difference in Indian sector thus they need to start from zero basis to
research all the market condition of India and formulate polices on the basis of new data. Rolling
based budget is also effective for this project as in this technique they ca change their polices
after analysing market condition within short time period but it is time consuming process as
compare to zero bas3ed budgeting method. For Netherlands project manager will be choose
traditional method. Market requirement of this country is similar as Manchester market thus it is
effective for Second Sight plc to apply this method it will give best results. They can also used
activity based budgeting technique for this project as market area is limited. Activity based
budgeting method help in in allocation of resource in best ways.

REFERENCES
Books and journals
Bassemir, M. and Novotny‐Farkas, Z., 2018. IFRS adoption, reporting incentives and financial
reporting quality in private firms. Journal of Business Finance & Accounting, 45(7-8).
pp.759-796.
Cockcroft, S. and Russell, M., 2018. Big data opportunities for accounting and finance practice
and research. Australian Accounting Review, 28(3). pp.323-333.
Hasibuan, R. P. S. and Syahrial, H., 2019, August. Analysis Of The Implementation Effects Of
Accrual-Based Governmental Accounting Standards On The Financial Statement
Qualities. In Proceeding ICOPOID 2019 The 2nd International Conference on Politic
of Islamic Development (Vol. 1, No. 1, pp. 18-29).
Kim, J. B., Li, B. and Liu, Z., 2018. Does social performance influence breadth of
ownership?. Journal of Business Finance & Accounting, 45(9-10). pp.1164-1194.
Linares-Mustarós, S., Coenders, G. and Vives-Mestres, M., 2018. Financial performance and
distress profiles. From classification according to financial ratios to compositional
classification. Advances in Accounting 40 pp.1-10.
MnifSellami, Y. and Gafsi, Y., 2019. Institutional and economic factors affecting the adoption
of international public sector accounting standards. International Journal of Public
Administration, 42(2).pp.119-131.
Muñoz‐Torres, M. J., Fernández‐Izquierdo, M. Á., Rivera‐Lirio, J. M. and Escrig‐Olmedo, E.,
2019. Can environmental, social, and governance rating agencies favor business models
that promote a more sustainable development?. Corporate Social Responsibility and
Environmental Management, 26(2) pp.439-452.
Ng, A. W., 2018. From sustainability accounting to a green financing system: institutional
legitimacy and market heterogeneity in a global financial centre. Journal of Cleaner
Production, 195.pp.585-592.
Why have you given this list of references, most of which have no relevance to this
assignment??