Business Finance: Working Capital and Budgeting Methods

Business finance

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
PART-1............................................................................................................................................1
i(b) Explaining the meaning of working capital, receivables, inventory and payables..............2
i (c) Defining how changes take place in working capital affects cash flow..............................2
ii Applying the concept of working capital on concerned business organization......................2
iii Recommending the steps that needs to be taken in improving cash-flow of the company
with better WCM........................................................................................................................3
PART-2............................................................................................................................................4
EXECUTIVE SUMMARY.............................................................................................................4
1. Explaining purpose of framing budget with describing traditional and alternative budgeting
methods.......................................................................................................................................4
2. Demonstrating an application of budgeting methods with example.......................................7
3. Assessing the most suitable budgeting approach....................................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Business finance means the money that is been employed within the business for the
purpose of earning profits and in attaining growing success in the future periods. It includes
acquisition and use of the funds so that the firm might be able in carrying out the operations
efficiently. The present study is based on the Brightlawn Plc, operates its business in London,
produces fittings and the valves for the garden hoses. Boatworld Plc, a global leisure company
that rents a boats to the holiday makers, operating in France and UK. In this, report will provide
deeper insight about the ways through which firm can manage its working capital. Besides this,
report will entail budgeting method that BoatWorld Plc should undertake for managing funds.
PART-1
i (A) Presenting difference between profit and cash flow
Profit: It implies for the difference which takes place between the amount of money
earned and spent during specific time frame.
Cash flow: This statement presents net cash balance by subtracting all the outflows from
inflows associated with specific time period.
There is significant difference take place in cash flow and profitability aspect in the following
manner:
Basis of difference Profit Cash flow
Assessment It is determined by applying
the following formula:
Profit = Sales revenue –
expenses
(Opening capital + cash
inflows) – cash outflows =
closing cash balance
Survival In the context of Bright Lawns
Ltd, profitability is not highly
required for firm’s survival.
Positive cash balance is the
prior requirement of an
organization.
Sources Profitability states money that
received after deducting
expenditure from revenue
generated (Difference between
cash flow and profit, 2019).
This represents sources from
which cash generated within
specific time period.
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i(b) Explaining the meaning of working capital, receivables, inventory and payables
Working capital implies for the funds which business unit maintains for managing its daily
activities and operations. By deducting current liabilities from assets Bright Lawns Ltd can
determine working capital.
Payables: It is the key element of working capital which implies for the money that
company must pay over the period of short-term. With regards to WCM, Bright Lawns ltd
should take credit from supplier for higher period (Chen and Kieschnick, 2018).
Inventory: In the context of business organization, success of the firm can be measured
from the period within which it converts into sales. Hence, by selling stock within less time
period company can manage its working capital effectually.
Receivables: This may be defined as revenue that owed to the company from their
customers or debtors. When company does sales on credit then it falls under the category of
receivables. For effective working capital management Bright Lawns should give credit to the
customers for fewer periods.
i (c) Defining how changes take place in working capital affects cash flow
By doing assessment, it has found that working capital has significant impact on cash flow
aspect. Moreover, when company receives payment from debtors timely then it may result into
higher cash flow and vice versa. Further, if company is highly able to sell its inventory more
frequently then cash flow of the firm increases significantly. On the other side, when business
organization has to make payment within less time then cash flow of the firm decreases (Peng
and Zhou, 2019). Thus, at the time of working capital management company should keep in
mind all such aspects.
ii Applying the concept of working capital on concerned business organization
Cited case situation presents that Bright Lawns Ltd is managed by Simmo who believes
that issue occurred in business practices due to the faulty workmanship by a contractor. Due to
this, Simmo refused to contractor in relation to making payment which in turn results into legal
action. This in turn place direct and adverse impact on company’s brand image. Along with this,
case study presents that Simmo failed to generate payment from the customers timely. Hence, for
managing working capita Simmo is required to make changes in the existing framework. Thus,
firm should focus on receiving payment from customers or debtors timely (Mahadevan, 2019).
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