Relevance of Finance in Business | Desklib

This report presents the relevance of finance in a business, including important financial terms, working capital management, and budgetary methods.

Business Finance

EXECUTIVE SUMMARY
This report present the relevance of finance in a business. The report is divided into two
parts under two scenarios. The part one states about the important financial terms such as
working capital, receivable, payables and cash flow. The importance of working capital
management and cash flow to the business. The second part talks about the different budgetary
methods and the evaluation of the best method for the organization. Based on the findings, the
alternative methods are best for organization to plan its future goals and objectives.

Table of Contents
INTRODUCTION...........................................................................................................................3
PART 1............................................................................................................................................3
a. Meaning of cash flow and the profits with the difference between both ...............................3
b. Explaining meaning of the working capital along with receivables, payables and an
inventory ....................................................................................................................................4
c. Explaining the ways in which the changes in the working capital might affect or impacts the
cash flow ....................................................................................................................................5
How company is managed might affect its financial results.......................................................5
Steps that should be taken to improve the organisation cash flow through working capital
management................................................................................................................................5
PART 2............................................................................................................................................6
Purpose of preparing budgets along with strength and weaknesses...........................................6
Application of different methods to plan future cost management.............................................8
Analysing the appropriate method of budgeting system.............................................................9
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Business finance means the credit and the money that is been employed within the
business. Finance is stated as the basic need for running the business smoothly. It is needed for
purchasing an assets, raw material, goods and the other flow of an economic activities (Connolly
and Jackman, 2017). In other words it could be defined as provision of the money at time when
it is required by an enterprise. The present study is based on Mediterranean Delights which is
produces 30 delicatessens for an entire South of England. Furthermore, the study presents deeper
insights towards the meaning of the profit and the cash flow in addition to the effect of changes
in the working capital. Moreover, it also highlights the objective behind framing of budget with
describing traditional and modern approaches of budgeting.
PART 1
I.
a. Meaning of cash flow and the profits with the difference between both
Cash flow- It is referred as the net amount of the cash that an enterprise disburses and
receives during a time period (Canales, 2016). Positive value of the cash flow needs to be
maintained for the company in order to remain within the business and it is also required for
creating value for the stakeholders.
Profit- It means the financial gain that is left after deducting the cost from the
revenue generated. In other words, it seems as the financial benefit that is been realized
when the revenue resulted from business operations exceeds an expense, taxes and the cost
included in sustaining an activity. Moreover, company could gain profits constantly but
can be short of the cash resources. For example- depreciation is a non-cash expense that
results to reduce profits.
Cash flow Profit
It refers to the cash inflows and the outflows
for the specific business.
It is revealed as subtracting expenses from the
revenue.
Cash flow is represented as the money
collected for various sources.
It reflects the money that is left over from the
sales revenue once the cost has been reduced.
It is been impacted by timing of the payments Profit is computed prior to the receiving of

into and outside of an entity as it is an accrual
method because it records for both revenues
and expenses when they had incurred and not
at the time when the cash is received or paid.
money.
It indicates the cash position of an organization
and counted as critical for the survival of the
company.
It depicts performance of the corporation and is
not considered as critical to the survival of
firm.
b. Explaining meaning of the working capital along with receivables, payables and an inventory
Working capital- It means the capital of an entity that is been utilised in its routine
trading operations. It is determined by deducting current liabilities from the current assets. It is
mainly depicted as the short run indicator in terms of the financial position of the company and is
considered as the measure of an overall efficiency (Afrifa and Padachi, 2016). The ratio of
working capital reflects that the processes of the company possess adequate assets in covering its
current debts. Working capital shows the liquidity position of an enterprise in respect of
managing its daily expenses by covering cash, accounts receivable, accounts payable, inventory
and the short run debts.
Receivables- It is stated as the amount of the debts that are owed to firm by its respective
customers in exchange of the products and the services delivered to them. It is counted as an
assets which is recorded at time of sale which means that when the goods and the services had
been delivered but is not been paid for it (Dempsey, 2017). Receivables are counted as liquid
assets as they could be utilised as the collateral for securing loan in order to meet with the current
obligations. It is the part of an entity's working capital as it includes immediate follow up with
the customers who has not yet paid their payment for the goods and the services.
Payables- It refers to an amount owed for purchasing goods and the services at a
particular date. It is been recorded as the current liability as they are usually paid within a period
of one year. There are different types of the payables that includes dividends payable, accrue
expenses, wages payable etc.

Inventory- It is a term for goods that is available for the sale and use of raw material for
producing the goods that are available for the sale. It is represented as a most essential assets of
the business and is deemed as the primary source for generating revenue. It is expressed as the
current assets on the balance sheet of the firm and serves as buffer in between production and
fulfilling order.
c. Explaining the ways in which the changes in the working capital might affect or impacts the
cash flow
The changes in working capital h flow statement of the organization. The operating cash
flow section provides a complete detail about the working capital needs. A positive working
capital refers to cash inflow and negative working capital refers to cash outflow (Sankar and
Kumar, 2018). For example, in case of increase and decrease on current assets and liabilities by
the same amount, then there will be no change in the working capital. Another example of it is if
the firm purchases the inventory with cash, then there will be no change in working capital
because both cash and inventory are current assets. But, the cash flow will decrease with the
inventory purchased. It is very essential for the businesses to make sure working capital is intact
and positive because a negative working capital will depict financial problem and required to be
handled carefully.
II.
How company is managed might affect its financial results
Currently, MDL is facing the huge problem in terms of large amount of debt, legal
dispute in relation to £2 million delivery to San Pedro which has lead to the withholding of
payment, low quality of materials and availability of large inventories. These things might make
the situation even worse. It will directly affect the cash flow and profits of the organization.
Also, it will increase the liability of the MDL because of increase in debt which is required to
repaid along with interest. Other than this, the storage of large inventory for long, waiting for the
dispute to settle will also incur inventory cost to the organization with no assurance whether
after resolving dispute, it will be useful or not. MDL should for now hold its investment plan in
order to improve its current situation so that debts can be met first.
III.

Steps that should be taken to improve the organisation cash flow through working capital
management
 MDL needs to make sure to met its obligation on time by using electronic payment
system which will help in ensuring timely payments and also helps in avoiding the
situation of delay payments.
 It should contact vendors to who offer better discounts which will help in saving the
finances. And it is also required to maintain a cordial relationship with the vendors which
will help in at the time of crisis.
 MDL should sold out its inventory before it starts inuring cost to it. It should also
minimize the production to avoid the situation of overstock.
 It should also implement automated account receivable which will be very helpful in
tracking and monitoring the inflows and outflows. Also, it can reward its employees who
were able to collect dues on time.
 It should start looking for new investors by assuring them higher returns or some other
benefits which can be used in meeting up with the organization's debt.
 The organization should also carefully examine its interest payment on debts to check
whether the MDL is eligible for any modification in interest rates or any change in the
payment method which will help in reducing the cost of the paying interest or instalment
in the future.
 Based on the cash flow and working capital available it can reschedule the loan
repayment.
 It can also analyse the dividend paid and take actions like reducing the dividend and
retain certain amount for expansion or other business needs.
 MDL can also postpone the current capital expenditure plan in order to meet its current
cash needs.
It can be summarized from above that effective management of working capital will help
in maintaining the proper cash flow in the organization. Also, with the help of different working
capital management strategies, the financial position of the business can be improved.
PART 2
I.

Purpose of preparing budgets along with strength and weaknesses
Budgeting is used by the businesses for various reasons but the major reason is planning
and control. Budget is prepared on past performance as the basis with the incremental amount
added to the new budget, thus it is incremental in nature. There are various methods of budgeting
a detailed description is given below.
Traditional budgeting: It is a method which is used for preparing budgets by taking last year as
the base year. It depends upon the exact previous year's expenditure to carry out the budgeting
for the current year. It involves changes with respect to inflation or any change in business. This
method cannot be used for newly established business as it requires previous year's data.
Strengths:
 This approach is easy to use and implement.
 It brings stability in the organization are people are used to it. It promotes better decision making because issues can be identified easily.
Weaknesses:
 These budgets are fixed as changes cannot be done once prepared.
 Budgets are prepared by top level teams which promotes bureaucracy.
 Budgets are relied upon the past year's budget which can prove wrong at times.
 It gives better opportunity to managers to make changes on their own which is called
budget slack.
 It also increases the chances of getting errors as it is prepared exact on the previous year
data.
Some alternate budgets are stated below.
Rolling budgets: This budget is a continuous budget which is revised in a specific period when
the previous budget period expires. It is also known as budget rollover. It is an extension of the
existing budget. It requires full attention of the management to implement changes. This budget
can be extended to one year.
Strengths:
 It does not require more time as it is an extension of earlier budget.
 It is flexible enough to make changes in between. This budget helps in identifying the strength and weaknesses of the organization.
Weaknesses:

 It requires highly skilled staff.
 It is not advisable for organization where the business conditions do not change.
 It can be a costly as it might require additional workforce.
Zero based budgets: This budget is used widely and involves preparing the budgets from the
zero level. It includes re-evaluating every departmental needs and also justifying all the
expenditure incurred by different departments (Sridhar, 2017). Based on the evaluation, budgets
are prepared. It requires more time as compared to traditional method because it checks the
justification of each expense before adding it to the budget. It follows some steps which includes
identifying the organizational goals, formulating ways to achieve those goals, identifying the
sources of funds and prioritizing it.
Strengths:
 It very useful for service and non-profit organizations.
 This budget is flexible enough to make changes as per the requirement. It provides clear picture of the financial resources available.
Weaknesses:
 It requires lot of time and efforts.
 It can promote personal bias in decision making process.
 It can prompt manipulation by the managers.
Activity based budgets: In this method, budgeting is done by identifying the cost drivers. It
analyses the different cost to be incurred and based on which resources are allocated to the
respective activities (Dhubea and Al-Riami, 2017). This method is carried out in three stages
which are identifying the cost along with the cost drivers, forecasting the units of cost drivers to
attain the required activity level and then calculating the cost per unit.
Strengths:
 It eliminates unnecessary activities which results in cost saving.
 It evaluates each cost separately with its driver and only important activities becomes part
of business. It improves the relationship with customers by serving them with the best quality.
Weaknesses:
 It requires research with regards to different factors which makes it complex.
 It needs highly professionals to prepare budget,

 This method focusses on short term needs of the business.
II.
Application of different methods to plan future cost management
A detailed explanation of different methods of budgeting that can be useful for Second
Sight Plc are stated below.
Traditional budgeting approaches: Second Sight Plc currently uses traditional method
of budgeting. This approach has been used over many years. The organization is having various
department and this method of budgeting has been very simple and has form a coordination
across all the functional units (Traditional Budgeting. 2020). It's easy to use framework has
made it easy for organization to manage its activities because they are use to it. This method can
be used by Second Sight Plc if the change is no major change in the budget and the business goes
the same. For example, last year the budget for expenses was £5 million and for the current year
also, the budget remains the same with minor changes so this can be used by the organization.
Rolling budgets: This method is beneficial because it takes into consideration the
changes taking place in the organization. The Second Sight Plc can use it in forecasting its
business plan as relevant changes can be done in the budget as and when required to achieve the
desired goals (Bhimani, Sivabalan and Soonawalla, 2018). For example, the company has
implemented 12 month plan from January to December and budget for it. After 1 month, it adds
a budget, so that it can still be 12 month from February to of present year to the January of next
year.
Zero based budget: This is one of the alternative methods of budgeting that can be used
by Second Sight Plc in its planning and budgeting process. In this budget is prepared from the
scratch. For example, if the Second Sight Plc hires a new employee, this will result in increase in
budget of the organization as new wages are required to be added to the payroll expenses. This
more time consuming than traditional method as everything starts from the scratch. So, this
method can be beneficial for the business.
Activity based budget: This budget is prepared based on the different cost such as direct
material, labour and overhead expenses (Activity Based Budgeting. 20200. For example, Second
Sight Plc, estimates the sales of 50000 units costing £2 for processing. So the budget for expense
will be £100,000 (50000 * £2). So, this method can be used by the organization based on its sales
units.

III.
Analysing the appropriate method of budgeting system
The traditional method of budgeting is not appropriate as it is an adjustment to the
previous year budget which can be in respect to inflation or increase in revenue. On the other
hand, the other alternative methods of budgeting such as activity based, zero based and rolling
budget takes a more deeper look into the various business activities. These methods can be
implemented by the organization in case of any material changes like business location, products
etc. Second Sight Plc, has been looking to expand its business in other nations so it important for
it to use appropriate method which will result in better forecasting. Thus, activity based
budgeting system will be appropriate for it as it will help in identifying the cost for different
activities and processes separately. Also, it will lead to identifying any errors or unnecessary cost
in the operation so that steps can be taken to reduce it.
From the above it can be said that there are different types of budgeting system that can
be used by the organizations as per the requirement which will help in effective management of
processes and in reducing cost.
CONCLUSION
It can be summarized from above that understanding the business finance is very crucial
for every business. It is very essential to understand the different terms related to business
finance such as cash flow, profits, working capital, receivables, payables etc. to analyse the
financial position of the business. Also, determining the effect of change in working capital on
the cash flow of the organization is import for the businesses to take proper business decisions
and the strategies that can be applied to improve the working capital of the organization which
will eventually lead to management of cash flow. Apart from this, the different budgeting
methods that can be used by the organization to improve its future plans such as traditional;
budgeting methods, activity and zero-based budgeting etc. thus, all these factors are importance
for better business management.

REFERENCES
Books and Journals
Afrifa, G. A. and Padachi, K., 2016. Working capital level influence on SME
profitability. Journal of Small Business and Enterprise Development.
Bhimani, A., Sivabalan, P. and Soonawalla, K., 2018. A study of the linkages between rolling
budget forms, uncertainty and strategy. The British Accounting Review. 50(3).
pp.306-323.
Canales, R., 2016. From ideals to institutions: Institutional entrepreneurship and the growth of
Mexican small business finance. Organization Science. 27(6). pp.1548-1573.
Connolly, E. and Jackman, B., 2017. The Availability of Business Finance. RBA Bulletin,
December. pp.55-66.
Dempsey, M., 2017. Maintaining practice profit and cash flow. Practice Management. 27(7).
pp.38-39.
Dhubea, H. M. S. B. and Al-Riami, S. A., 2017. THE APPLICATION OF ACTIVITY-BASED
COSTING AND ACTIVITY-BASED PLANNING INFLUENCES DECISION
MAKING. Asia-Pacific Management Accounting Journal. 12(1). pp.1-38.
Sankar, D. G. and Kumar, B. R., 2018. Empirical analysis on financial performance through cash
flow statements. International Journal of Accounting & Finance Review. 3(1).
pp.1-12.
Sridhar, M. S., 2017. Unit-11 Budgeting Techniques. IGNOU.
Online
Activity Based Budgeting. 2020. [Online]. Available
Through:<https://www.educba.com/activity-based-budgeting/>.
Traditional Budgeting. 2020. [Online]. Available
Through:<https://efinancemanagement.com/budgeting/traditional-budgeting>.