Business Finance: Cash Flow, Working Capital, and Cash Budget

This report discusses the difference between cash flow and profit, working capital and its impact on trade receivable, inventory, and trade payable. It also provides steps to improve the cash flow of Victory Plc and prepares a cash budget for Bemus Ltd. for 4 consecutive months from March 2022.

Business Finance

Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
PART A:..........................................................................................................................................3
Report to Board of Director: -.....................................................................................................3
1. Explain the difference between Cash flow and profit.............................................................3
2. Explain working capital and also explain the effect of change in working capital.................4
3. State the steps to improve the cash flow of Victory Plc..........................................................5
PART B...........................................................................................................................................6
1. Prepare the Cash Budget for Bemus Ltd. for 4 consecutive months from March 2022..........6
2. Prepare an analyse report of cash budget of David Bemus.....................................................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Business finance is the life blood for any organization. All the day to day operations
performed in the organization require funds. For effective management, it is necessary to look at
the financial statements and take numerous decisions accordingly (Barnhill and Rundio, 2021).
This report is divided into two parts. In part one, it consists the difference between profits and
cash flow. It also comprises the meaning of working capital and impact on trade receivable,
inventory, and trade payable. There are various measures which can be taken to improve the cash
flows of the enterprise. In part two, it encompasses the preparation of cash budget on monthly
basis. It comprises the recommendation to the firm for improving the management.
MAIN BODY
PART A:
Report to Board of Director: -
Organisation can raise funds from various sources that fulfil the requirement of business.
The rates may vary of funds received based on the source from where it has been derived. An
organisation uses sources such as issue of equity shares, debentures, loans from the bank, raise
further capital from existing shareholders by issuing right shares, etc. In order to raise funds the
organisation has to choose the best option very the repayment is lowest and it can be paid within
a reasonable period of time. Banks loans are provided at the cheaper rates are considered as one
of the best option as it does not dissolves the ownership of the business (Ríos and et.al., 2018). It
the organisation chooses to issue right share then it will reduce the shareholdings of the existing
shareholders as well it will dilute more ownership of the business. In the following case Victory
Plc. Is already suffering from financial crises so the business does not have to opt for bank loan
as it has to be paid on regular basis and business have to arrange funds for the repayment of loan.
Thus the organisation can choose any of the other options available.
1. Explain the difference between Cash flow and profit.
The net profit is derived by deducing the operating expenses from the gross profit of the
organization. On the other hand, cash flow encompasses all the detailed aspects about the inflow
and outflow of the organization. There are three activities in the cash flow statement such as
operating activities, investing activities and financing activities. There are certain situation in

which firm is having adequate amount of profits but does not have optimum level of cash in the
organization. Hence, it can be interpreted that cash flows signifies the in and out of the money
from the enterprise whereas profits is the net income which is computed by subtracting expenses
from total amount of sales.
2. Explain working capital and also explain the effect of change in working capital.
Working capital is the requirement of funds for the business operations of a business
concern. This funds helps in making payment of routine payment and short term liability or
arranging funds for meeting the business requirements. Working capital requirements are
generally sourced from short term finances such as trade credit, commercial paper, etc. Long
term funds are mainly used for the purpose of making investment (van der Cruijsen and van der
Horst, 2019). It can also be used by the organisation in order to meet the working capital
requirement. Long term finance includes debentures, equity shares, retained earnings, etc.
Working capital is determined by subtracting the current assets from current liabilities. There are
different types of working capital such as reserve margin working capital, seasonal working
capital, special variable working capital, permanent working capital and variable working
capital. In order to achieve efficiency in managing working capital requirement, business
concern has to view more efficiently on the working capital cycle to reduce the risk of shortage
of funds. Working capital cycle is defined as the time period in which the raw material is
converted in monetary terms.
Consequence of liquidity on various actions is as follows:
1. Effect on Operation activities: Cash flow from operating activities includes activities
which are of recurring nature and generates income and expenditure related to the
production (Mazzarol and Reboud, 2020). Level of liquidity affects the creditworthiness
of a corporate. An organisation that has a significant amount of liquidity does not need to
do much for the loans from the banks. But organisations that do not have a significant
liquidity in their business, this type of entities has to try hard for the credits as they
already lag to meet the daily needs of the funds.
2. Effect on investing activities: These are activities which are concerned with the sale and
acquisition of property or savings. For example, an administration buy a machinery for its
business operations, that will eventually increase the entire assets of the corporation as

well as causes outflow of cash, that will ultimately reduce the existing cash in the
management.
3. Effect on financing activities: financing activities includes alter in number of share
issued, redemption of debenture, securities and long term loans (Ponco Azi, 2018).
Liquidity is affected by the financing activities such as reduce in the liability, redemption
of debenture of the organisation.
3. State the steps to improve the cash flow of Victory Plc.
Cash flow assists in knowing the flow of cash in the organization. There are various steps which
can be taken by the organization to improve the cash flow. These can be described as given
below:
 Negotiate quick payment terms: When credit sales are made to various clients, the
organization should ensure the timely payment from the debtors. The debtors collection
should be not be too high, it will create the debts in the organization. Eventually,
organization has to face negative cash flows (Akatwijuka, 2018).
 Studying cash flow patterns: The organization should analyze the previous year’s cash
flows and it helps in taking present as well as future decisions of the enterprise. The
enterprise forecasts the performance of the concern.
 Cut unnecessary spending: There are various expenses of the enterprise which should
be minimized for achieving the positive cash flows of the organization. When the
expenses of the enterprise are greater than its income, firm has to experience negative
cash flows.
Cash Flow forecast of Next 5 Years( Figures in £ Million)
Particulars 31/12/22 31/12/2
3
31/12/2
4
31/12/2
5
31/12/2
6
Cash Inflow -
Sale with wholesaler 324 350 378 408 441
Sale with retail shops 35 35 175 175 175
Clothing Sale 5 6 7 8 9
Total Cash Inflow 364 391 560 591 625
Cash Outflow -

Payment of Tax Liability 4
Cost to Open Retail Outlets 26 26 156 156 156
Payment of Disputed claim 8
Total Cash Outflow 38 26 156 156 156
Net Cash Inflow Expected 326 365 404 435 469
From the above cash flow statement, it can be analyzed that firm should focus on reducing
the operating costs of the organization. For improving the level of profitability, organization
must cut unnecessary operating cost and focuses on maintain the good level of liquidity in the
enterprise. The regular monitoring of the cash flows helps to boost the level of liquidity in the
organization (Salehi and et.al., 2020).
PART B
1. Prepare the Cash Budget for Bemus Ltd. for 4 consecutive months from March 2022.
Cash Budget
Particulars
Marc
h April May June
Opening Cash balance 1380 5950 -98344 -47655
Cash Collection
Cash received from Sales 80100
11490
0 89250 89430
Total Cash inflows 80100
11490
0 89250 89430
Cash Outflow
Purchases for the resale of goods 35100 92000
10650
0 76200
Overheads 22000 17500 16000 19500
Rent 36000
Purchase of delivery vans 43400
Shop fittings 15000 7000

Drawings 0 6894 5355 5365.8
Outstanding tax Liability 58800
Annual Salary to Bemus Daughter 2050 2050 2050 2050
Total cash outflows 74150
21324
4
13690
5
14651
6
Net cash balance 5950 -98344 -47655 -57086
2. Prepare an analyse report of cash budget of David Bemus.
Analytical Document for the management of Bemus Ltd.
David Bemus is one of the corporate businesses that is operating its operations on the Bern-on-
Sea. For this, it is important that the top company of David Bemus takes in consideration all the
numbers that are mentioned in the arrivals and cash discharges, also taking into account sales
income that was earned on credit basis. Business prepares budget analysis report to take better
decisions relating to all the finance that is used in operating the company (Heald and Hodges,
2020). It is necessary for the company to improve its cash related transactions by attracting
clients and providing more markdowns which means providing trade rebate for all the cash
expenditures made during the sales. The company is also earning a huge amount of direct and
operational expenditure which can be controlled and reduced by meeting the exploiting revenue
of the entity. The acquisition can also be performed with less expense by confirming with the
contractor to provide cash rebate and deduction related to trade for making the payment
immediately (Seppänen and Teinilä, 2022). Thus, the net cash balance reflected in the month of
April, May and June is representing the adverse amount which clearly defines that the amount of
expenditures are more than that of cash arrivals. The concluding balance related to the previous
month affects the amounts of the following financial years as it gets delivered as the initial
amount of cash balance. So, it is very important to maintain a proper cash budget of every month
for better flow of cash in the company. The drawings that are affected by the occupational
expenses could be reserved from the expenses of corporate, as these are defined in the name of
individual spending capacity for which the company is responsible to pay the amount. Moreover,
the overhead cost related to the company unit is resulting huge amount of transactions, which
must also be controlled affectively for earning good amounts of profit for the company. It will

help the administration department in managing the position of fluidity in the company by giving
a proper concern that cash balance related to a particular month are suffering from losses
(Majumdar and Bose, 2018). The main thing that company must take into consideration for
achieving high growth and productivity in the market is make the sales and cash disbursement.
This will help the company in maintaining their stability in the next months and also helps in
identifying the debt which has been paid by the firm regardless of the purchases and sales. The
unsettled liability of tax must also be satisfied for the previous months, as it will affect the
current balance and cash and balances of upcoming months (Tran, 2020).
CONCLUSION
The above report explains about the Estimation of cash flows in the Victory Plc and
suggestions by the Board of directors. The following company is planning appropriately to
increase around 100 million Pounds from the market in order to earn stability and profits. The
company also has to select a desirable option from the different options mentioned for availing
credit facility. There are different types of methods and sources that an organization consider at
the time of preparing statement of Cash flow of 5 years. The report also includes Part B which
consists of preparing cash budget for Bemus Ltd. and recommendation has also been given after
analysing the prepared budget.

REFERENCES
Books and Journals
Akatwijuka, M., 2018. Assessing cash management in small and medium enterprises: a case of
small and medium enterprises in Jinja district (Doctoral dissertation, Makerere University).
Barnhill, C. and Rundio, A., 2021. Developing a Cash Budget for the Savannah Squares. Case
Studies in Sport Management, 10(1), pp.42-45.
Hoitash, R. And et.al., 2018. An input-based measure of financial statement
comparability. Available at SSRN 3208928.
Mazzarol, T. and Reboud, S., 2020. Work Book: Cash Flow, Profit and Working Capital.
In Workbook for small business management (pp. 117-125). Springer, Singapore.
Ponco Azi, P., 2018. PERENCANAAN KEUANGAN JANGKA PENDEK DENGAN
MENGGUNAKAN MODEL CASH BUDGET PADA CV. PRATAMA KARYA
YOGYAKARTA TAHUN 2018 (Doctoral dissertation, Universitas Teknologi Yogyakarta).
Ríos, A.M. and et.al., 2018. The influence of transparency on budget forecast deviations in
municipal governments. Journal of Forecasting, 37(4), pp.457-474.
Salehi, M., and et.al., 2020. Auditors’ response to readability of financial statement notes. Asian
Review of Accounting.
Seppänen, H. and Teinilä, T., 2022. Two minds of credit professionals: accrual vs. cash
accounting information. International Journal of Managerial and Financial Accounting, 14(1),
pp.56-83.
Tran, Q.T., 2020. Corporate cash holdings and financial crisis: new evidence from an emerging
market. Eurasian Business Review, 10(2), pp.271-285.
van der Cruijsen, C. and van der Horst, F., 2019. Cash or card? Unravelling the role of socio-
psychological factors. De Economist, 167(2), pp.145-175.