Business Finance: Working Capital and Cash Flows

BUSINESS FINANCE

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
Executive summary.........................................................................................................................1
PART 1............................................................................................................................................1
1. Explanations in context of the given case of Mediterranean Delights Ltd. (MDL)................1
2. Management of company affecting the financial results.........................................................3
3. Steps to be taken for improving the cash flows through working capital management..........3
PART 2............................................................................................................................................4
1. Purpose of preparing the budgets and stating traditional and alternative budgeting methods.4
2. Application of the above methods for planning future cost management...............................7
3. Analysing the traditional and alternative budgetary methods.................................................7
REFERENCES................................................................................................................................9

Executive summary
Business finance refers to funds and credits employed in business. For every business
finance is considered as the foundation on which whole business is based. The present report is
based over the business finance. It covers two parts where part 1 provides understanding about
the working capital and cash flows. Part 2 covers the need and purpose of budgeting approaches.
From this report it could be concluded that business finance is an important factor for any
business enterprise. Companies continuously strive for management of the finance of company
in most efficient manner. Cash flows and working capital both are important part of every
business that are essential for their survival and growth. Budgets helps business to keep its
expenditures and costs under control. Traditional budgeting methods due to various defaults are
not being much used by companies. Alternative budgeting methods like zero based budgets and
activity based budgets are helping the organisations to make more effective budgets by proper
allocation of resources.
PART 1
1. Explanations in context of the given case of Mediterranean Delights Ltd. (MDL)
a) Difference between profit and cash flow.
Profits – It refers to the income left with company after carrying out all the expenses of
business. Profitability is important for its growth and survival. Every business organisation runs
business with the motive of earning profits.
Cash Flows – It refers to the money flowing in and out of organisation. Cash flows are
important for running the business successfully. Company may not survive if it is profitable but
do no have cash for running its operations.
Profits and cash flows are two separate parameters, that are essential for running the
business successfully. Cash flow shows the inflow and outflow of money from the organisation.
This may be from various activities like operating, financing and investing activities. Profits
shows the performance of company during the year. It represents the gain from carrying out the
business. Company is considered profitable if it is left with income after meeting all its expenses
(Mayangsari and Mulya, 2017). There are possibilities that it is profitable but struggling with
cash flows and vice versa. Both are different and are required to be taken care for survival of
business.
b) Working Capital and meanings of inventory, receivables and payables.
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Working capital can be defined as financial indicators reflecting short term status and
financial position of company. This is also termed as measure of the overall efficiency. This is a
difference between current assets like accounts receivable, cash and the inventories and current
liabilities like accounts payables, creditors. Net operating working capital refers to the measure
of liquidity position and measured as difference between the operating assets and liabilities. It is
used for measuring the liquidity, short term health and operational efficiency of company
(Filbeck, Zhao and Knoll, 2017). When a company is having positive working capitals it is
assumed to be having potential of investment and growth. Company with negative working
capital is not considered profitable by the investors. Sources of working capital could be both
long term and short term. Companies regularly strive for maintaining their working capital so
that they do not go out of cash affecting the business operations. Inventory - It refers to the product which company trades or manufactures. It is regarded
as current asset of company. Inventory of the company is always valued at cost or net
realisable value whichever is low. Receivables – When a company sells its product or services on credit it is issues them
accounts receivables that represent the amount due from customers against the purchases
made (Fernandez, Fernández Acín and Ortiz Pizarro, 2017). It is treated as current assets
in the balance sheet.
 Payables - It refers to amount owed by company to the suppliers of raw materials. This is
issued by suppliers to company for goods supplies made on credit. This is presented
under current liabilities in balance sheet.
c) Effects on cash flow due to changes in working capital.
Working capital reflects difference between current assets and liabilities of a firm. It is
essential for the business to maintain their working capital as it impacts the cash flows of
business. When company is not having enough working capital, the ability of company of
operating optimally is decreased. Increase or rise in working capital reflects company has
invested more cash in the working capital and it reduces the cash flows. Companies that have
significant requirements of working capital can see that the working capital growing and the
growth in working capital reduces the cash flows (Lyngstadaas and Berg, 2016). As per this
relationship between cash flows and working capital, it could be seen that companies who are
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