Business Finance: Working Capital and Cash Flow Analysis

This document provides an overview of business finance, focusing on working capital and cash flow analysis. It includes a case study of Mediterranean Delights Ltd and discusses the steps taken to improve cash flow and working capital management. The document also covers the concepts of profit, account receivables, account payable, and inventory. Suitable for students studying business finance or related subjects.

Business Finance

Table of Contents
EXECUTIVE SUMMERY..............................................................................................................1
PART 1............................................................................................................................................1
Question 1...................................................................................................................................1
Question 2...................................................................................................................................3
Question 3 .................................................................................................................................3
PART 2............................................................................................................................................4
EXECUTIVE SUMMARY:............................................................................................................4
Question 1...................................................................................................................................5
REFERENCES ...............................................................................................................................9

EXECUTIVE SUMMERY
Business finance refers to those activities which are related with acquisition and
allocation of monetary funds require by company. In other words, it is a systematic process of
planning organizing allocating and controlling of monetary funds. Business finance play
important role in running organisation it helps in achieve competitive advantage to the
organisation.
In order to understand concept of business finance in a better way, Mediterranean Delights Ltd
has been taken. In this report concept of working capital and their related elements, has been
defined, how changes in working capital effect on the result of financial activities has been
analysis.
PART 1
Question 1
A) Explanation of meaning of profit and cash flow and their differences:
Profit: It defines as differences between cost of goods sold and selling amount of a
product. Profit refers as incentive mechanism of capital invested in a project.
Cash flow: Net value generated through cash inflow and cash outflow related activities
are define as value of cash flow. In other words, cash flow refers as the amount generated
through cash and cash equivalent transactions (Bassemir and Novotny‐Farkas, 2018).
Many people define profit and cash flow as equivalent term but there are huge differences
between profit and cash flow, these differences are mention below:
Particular Profit Cash flow
Definition Net value of monetary
transaction an organisation
generates through their
operating activities
Net amount of Inflow and
outflow of cash related
transactions.
Objective Main objective of
calculating profit is to
enhance capital growth in
market place.
Main objective of preparing
cash flow statement is to
analysis activities which
help in accumulation of
monetary fund.

Period Profit transactions recorded
on accrual basis (Benlemlih
and Girerd‐Potin, 2017.)
Inflow and out flow of cash
related activities are
recorded in ledger when
company receive or pay
actual amount of cash.
B) Explanation of working capital, account receivables, account payable and
inventory:
Working capital: It defines as total computed value of current assets of an organization.
Working capital is an essential term used in day to day transaction of an organization.
Manager uses working capital to fulfill basic needs of their running business transactions.
Gross working capital is the sum up of current asset and net working capital is the differences
between current assets and current liabilities of an organization. Working capital uses to
identify s operational level efficiency and short term financial health of an entity.
Account receivables: This term refers as total amount organizations claim on their
customers due to nonpayment of products and services acquire by them. It treated as current
assets of business organizations. Ratio of debtor receivables are used by managers to identify
efficiency level of their customers to pay their debt amount.
Account payable: This term defines as sum up value of monetary fund’s owned by business
entities from their creditors to run their business successfully. It generated liabilities on
business organization. This term shows at the liability side of balance sheet. Managers use
this term to identify net amount of short term liabilities of an organization (Brooks and
Oikonomou, 2018 ).
Inventory: In accounting term inventory has been defined as net value of raw materials and
other tools and equipment’s require by an organization to produces goods and services to
their customer. It is also known as stock. It is essential part of current assets of an
organization.
C) Effect of changes of working capital on cash flow:
Managers use working capital to regulate their day to day activities of business. Working
capital ratio can be calculated by dividing current assets upon current liabilities. Higher
working capital ratio negatively impact on cash flow as cash out flow activities are increase

on the other side when ratio of working capital is decrease it defines that company generated
more cash by taking loan from their creditors (Fenton, Schopohl,and Walker, 2019).
Question 2
Effect on financial results of Mediterranean Delights Ltd by applying concepts of working
capital and others:
At present scenario profitability rate of Mediterranean Delights Ltd has been decrease due to
various issue arise within their organisation. They have conflict with their potential investors
and their vendors who supply them raw materials. To change the atmosphere of the
organisation, manager of Mediterranean Delights Ltd needs to change their policies related
to working capital. As due to their issues ratio of working capital and cash flows activities
are changed. Company needs to change their polices related to debt collection, cash payment
and stock management activities. By applying effective policies organization can maintain
their profitability ratio and enhance their market per share. Manager of Mediterranean
Delights Ltd needs to solve their conflicts with their customers because San Pedro is
potential customer of this organisation, and dispute with them will be negatively impact on
their goodwill (Dorion, 2016). To solve the issue of lack of financial capital managers needs
to influence shareholders of this organisation in a way so that they get ready to invest in this
company in order to enhance business. By applying all these policies manager of
Mediterranean Delights Ltd will be solving their conflicts with related parties and overcome
problem of uneven cash flow activities.
Question 3
Followings are the steps taken by manager of Mediterranean Delights Ltd to Improve
company’s cash flow for better working capital management:
 Determination of organizations activities: Managers first needs to analysis those
activities which helps in generating cash flow transactions.
 Set up business plans: After analyzing business activities manager of Mediterranean
Delights Ltd decides plans and policies related to collection of debtor’s amount,
management of stock, valuation of creditors debt, polices related to settlement of
transactions etc.

 Computation of working capital: Manager of this company calculate amount require
for operating their business transactions. This helps them to identify financial status of
their company to pay their short term requirement (Esty, B Mayfield, and Lane, 2016).
 Analysis of market environment: For effective working capital management, manager
of Mediterranean Delights Ltd uses various environment scanning techniques to identify
best creditors which provides them loan at low interest rate. This will help them to reduce
debt liability of the company.
 Attractive policies for debtors: To manage working capital effectively, manager of this
company needs to make discounted polices or by one get one free policies to which helps
in influencing their customers to timely pay their debt amount.
 Effective utilization of inventories: To improve cash flow activities organizations
needs to uses various inventory management technique which help managers to generate
high stock turnover ratio.
 Resolve dispute with related parties: The company has dispute with their potential
customers and their vendors of raw material. This will effect on cash flow activities
adversely,
 Internal audit: For maintaining balance of working capital manager of this company
decided to verify their documents and procedure of finance through auditor. This will
help them to control unwanted activities in organization. And internal audit help in
reducing wastage activities running in organization.
By applying all these steps manager of Mediterranean Delights Ltd can utilize their
resources effectively. And this will help in maintaining cash and cash equivalent
activities of the organisation in order to manage working capital of their entity.
PART 2
EXECUTIVE SUMMARY:
Budget is a numerical statement which is prepared to analysis income and expenses of an
organisation for predetermine time period. Business entities prepare budget to take essential
decisions in order to achieve organisation objective. In order to understand importance of
budget Mediterranean Delights Ltd have been taken. In this report essential requirements of
budget in decision making and various methods of making budget statement has been

classified briefly. This report identifies best method of budgets which helps organisations to
build those policies by which they can minimize their cost and maximize profit.
Question 1
A) Explanation of the concept of budget and benefits and drawbacks of traditional and
modern technique of preparation of budget.
Budget is a numerical business plan which represent revenue scale of an running
organisation for future time period. Managers prepare budget to identify profitability rate
of their project in future time. Process of preparation of budget is knows as budgeting.
Managers uses different methods for prepare budget. Budget is a tool of management
accounting process which helps business entities to evaluate performance of their
workforce. Various technique is used for preparation of budget which includes
traditional method and modern methods.
Traditional budgeting approach: In this approach budgets are prepared on the basis of
past data. It is one of the easiest method of preparation of budget. In this approach
manager prepares budget on the basis of analysing last past year performance.
Advantage: It is one of the easiest method to prepare and understand results of budget if
compare to other budgetary methods (Mertzanis, 201Ortiz and Muniesa, 2018).
It is time consuming and cost saving technique of preparation of budget.
Disadvantages: Budgets are preparing on the basis of past results thus there will be no
chances of expansion of business units.
Traditional budgeting methods does not provide accurate result as future is
unpredictable.
Modern methods of budget: With changes of technologies new methods and techniques
are implemented to prepare budgets, these are mention below:
Zero based budget: It is a tool of budgeting process. Managers prepare budget on the
basis of data collected by them through researching and analysing current scenario of
market. In this method past recorded data are not considered. New ventures use this
method to prepare their budget.
Benefits: Budget prepare by this method provides accurate data as it is based on
collection of present research data.

Zero based budgeting method helps in reducing extra wastage activities. It will help in
minimizing profit.
Drawbacks: It is very time consuming activity as collecting data from research is take
lot of time (Roche, 2016).
Accuracy level of the result of these data is totally depends on the capabilities of
researchers.
Activity Based budgeting: Budgets from this technique are prepared on the basis of
collecting data of cost from allocated cost related activities. It is one of the most popular
method of preparing budget. These type of budgets are useful for manufacturing
industries.
Benefits: This method helps in utilization of resources as managers use these budgets to
identifies activities on which expenses incurred.
This method helps in maintaining better coordination between managers and their
subordinates.
Drawbacks: Preparation of budget through this method is very hard process.
Preparation of budget with this tool is not possible for each organisation special services
industries where they cannot allocate their cost on the basis of activities. Thus it has
limited area.
Rolling budget: In this method budgets are prepared for short term period like quarterly
or on half yearly or monthly basis. Managers analysis last budget and then mould their
polices after considering their limitations.
Benefits: This tool help organisation to achieve goal with optimum utilization of
resources.
This technique helps in consuming time.
Drawbacks: Rolling based budgets are required high cost as it take times and cost to
prepare budgets and comparing them with last budgets.
Due to changes in budgetary policies uncertainly among work environment arises and it
causes of disputes between human resources (Schaltegger, and Wagner, 2017).
2) Uses of traditional and modern techniques for preparation of budget.
Second Sight Plc is an multinational corporation situated in Manchester. It provides
high quality of sunglasses and prescription glasses products to their potential customers.

At present time the company wants to expend their business in India and Netherlands.
For expansion purpose manager of the company will be used traditional budget method
to for preparation of budget. Manager of Second Sight plc can use their past budget data
for take decision regarding Netherlands project as there will be lots of similarities
between target market customers between Netherlands and London. They can uses
traditional budget method for Indian project as they can recognize future profitability
rate of their project at there and they can easily analysis target market area in India.
Manager of Second Sight plc with the use of traditional budgeting technique can identify
effect on introducing their new venture in market area (Siciliano, 2017).
Explanation of weather traditional and modern techniques of budgets are
applicable for all parts of the project
Second Sight Plc's headquarter situated in Manchester and their production units are
established at London and France, manager of Second Sight expand their isinglasses
business at Netherlands and in India. For this purpose they make budgets. Traditional
and alternative method of budgeting can be beneficial for many parts of this organisation
but both methods are not applicable for all parts,. Organisation can use Zero based
budgeting method for their Indian project as it is newly target market area for their
organisation and due to large market area customers preferences are different. Manager
of Second sight any use traditional budgeting method but this will never provided
accurate data compare to modern budgeting technique. Second sight plc will be use
activity based budgeting method for their Netherlands project as their market are is
limited and it will positively impact on this project. Rolling budgeting method will be
beneficiary for their Indian project as manager prepare budget for short term period and
after competition of their project they can analysis profitability margin of their product
in Indian market . They can implement those policies which helps in increasing sales
ratio in Indian market. But this technique of budgeting planning is not applicable for
Netherlands project as if manager use this method for Netherlands project then cost of
preparing budget incurred very high. Traditional approach of budgeting will be
applicable on their local branches as second Sight built plans and polices according to
past data.

From the above analysis it has been identified that manager can be uses traditional
budgeting methods and modern methods for identifying their future income and
expenses. But not al technique will be beneficial foe all cases. Managers needs to
prepare their budget on the basis of analysing all market factors of their business
environment (Susan Parcells CPA, 2016).

REFERENCES
Books and Journals:
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Benlemlih, M. and Girerd‐Potin, I., 2017. Corporate social responsibility and firm financial risk
reduction: On the moderating role of the legal environment. Journal of Business
Finance & Accounting, 44(7-8) .pp.1137-1166.
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disclosures and performance on firm value: A review of the literature in accounting and
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Brooks, C., Fenton, E., Schopohl, L. and Walker, J., 2019. Why does research in finance have so
little impact?. Critical Perspectives on Accounting, 58. pp.24-52.
Dorion, C., 2016. Option valuation with macro-finance variables. Journal of Financial and
Quantitative Analysis,. 51(4). pp.1359-1389.
Esty, B., Mayfield, S. E. and Lane, D., 2016. Supply chain finance at Procter & Gamble. HBS
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Mertzanis, C., 2017. Ownership structure and access to finance in developing countries. Applied
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malinvestment. The Review of Austrian Economics, 29(3). pp.253-276.
Schaltegger, S. and Wagner, M., 2017. Managing and measuring the business case for
sustainability: Capturing the relationship between sustainability performance, business
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Siciliano, M., 2017. A citation analysis of business librarianship: Examining the journal of
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Susan Parcells CPA, C. G. M. A., 2016. The power of finance automation. Strategic
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