Business Finance

Business Finance

Table of Contents
PART A...........................................................................................................................................1
Executive summary.....................................................................................................................1
Question 1...................................................................................................................................1
2. Applying the above mentioned concepts in Mediterranean Delights Ltd (“MDL”)...............3
3. Recommend what steps to improve company’s cashflow......................................................4
PART B............................................................................................................................................5
Executive summary.....................................................................................................................5
i) Understating of budget formation............................................................................................5
ii) Implanting of methods and cost management........................................................................6
iii) Evaluation of traditional or alternative budgetary system.....................................................7
REFERENCES ...............................................................................................................................9

PART A
Executive summary
Financial statements are important to determine the actual and yearly picture of financial
strength and status of company. This report summaries the important concept of financial
statements such as profit, cash flow, working capital, receivables, payables and inventory. Proper
recommendation and valuable step that help in improving the overall cash flow by managing
working capital in better manner.
Question 1
a) Difference between profit and cash flow.
Profit
Profit is amount subtracted from the total revenue and total cost. It is the financial gain
which a company gets from its business activities, after covering up of all its cost and expenses.
Profit = total revenue (total sales) – total cost.
Cash flow
Cash flow is the transfer of cash or cash-equivalents in the business. It refers to the
inward and outward flow of cash or cash-equivalents in business. If the difference is positive, it
indicates that a company liquid assets are increasing (Kuusi, 2015). But if the difference is in
negative, the it indicates that a company liquid assets are decreasing. If it is negative, the
creditors of company will not decrease, the company may not be able to invest more into
business's capital, cannot repay its short-term loans and so forth. Negative cash flow is also a
sign of bad operating activities of business which may lead difficulty for business in acquiring
any kind of loan.
Basis Profit Cash flow
Meaning It is the financial gain which
the company attain from
business activities.
It is the inflow and outflow of
cash and cash-equivalents in
business during a particular
period of time.
Purpose Its purpose is to calculate the
earnings businesses made.
Its purpose is to calculate the
total cash and cash equivalent
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available with a company after
paying for its expenses.
Basic formulae Profit= Total sales- total cost Cash inflow/outflow = Total
cash receivables- total cash
payables (Ofei-Mensah and
Bennett, 2013).
b) Meaning of Working Capital,
Receivables, Inventory and Payables
Working capital
Working capital is the difference between company's current assets and current liabilities.
Current assets include – cash available in hand and bank, debtors and inventories of raw
materials and finished goods. Whereas current liabilities include- creditors, tax, wages, and the
current portion of long-term debt. Working capital is used to evaluate company's operational
efficiency and its short term financial health. Where as, a company has positive working capital
if the ratio between its current assets and liabilities are equal or more than. But high working
capital is also not good because it indicates that the business has excesses inventory or they are
not investing its excess cash.
Receivables
Receivables are the amount which the customers or other party owned to the company. It
is the amount which the company will receive in near future. They are shown under assets
category in balance sheet as people ( to which the company allows to purchase goods or services
on credit) owe to the company. Receivables are recorded into books at the time of sale and get
erase when the payments are done from customers. The amount of total receivables decreases
when payment is received.
Inventory
Inventory is the stock or goods available with the company which it meant for resale.
Inventory may include the stock of raw materials, finished and semi-finished goods company has
stored with itself or in warehouse (Blaak, Openjuru and Zeelen, 2013). It is classified as an asset
and shown in assets category in balance sheet. There are 3 types of inventories, namely, raw
materials, work-in-progress, and finished goods.
Payables
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Payables are the creditors to which the company owe. They are considered as liabilities
for company as the company needs to make payments to them. Payables are short-term loans
which business avails.
c) Change in working capital
The fluctuation and modification in the cash flow is mainly linked with variation in the
figures of working capital such as changes current assets and liabilities. There have been simple
concepts behind the changes in cash flow like increase in current assets definitely diminish cash
inflows and outflows. Similarly any rise in current liabilities would raise the cash flow amount
and vice versa. This reflects + /- alters in current assets and liabilities as just an operating portion
of the cashflow. For instance, when the firm's debtors raise, reflecting the corporation provided
the products on credit aspects and therefore no money was actually received in that period, it is
demonstrated by subtracting them from firm net earnings.
2. Applying the above mentioned concepts in Mediterranean Delights Ltd (“MDL”).
Profit: From last year EBIT for MDL has been £5 million. The goods and services of
Mediterranean Delights Ltd were on reasonable request and revenues in the year was 50 million
pounds. The aggregate profits and earnings of the firm are well-functioning according to last
year's data (Laitinen, 2013). But perhaps the obstacle for the firm is the growing debt, i.e. this
was 16 million pounds previously but now 18 million pounds. The business decides to take
measures to identify the best framework for resources and make efforts to limit its obligations.
Wade the manager, believes that they would like further capital. But this could be hard for him,
since it is very difficult to raise cash by equity, since they would pay higher yields for investing
in a rising debt firm due to the current significant risk factor. The higher debt rate becomes risky
for businesses because of increased interest costs that could reduce the competitiveness of MDL.
Cash flow: Currently, MDL has taken a 40 percent stake in a brunches and associated
products business. This also compensated £8 million of that same operating expenses in ahead of
time, out of £10 million. The above exchange will influence the cash Flow of the firm as the
profitability for payments paid in full is removed from MDL. Though, it only works if this
contract is a full cash transaction. This is generally found that neither company buys from the
internal money and normally takes credit from banks. It will be a threat for the firm because the
deficit is already growing, and new debt may even harder scenarios. Therefore, it is certainly not
wrong to buy a business if it is purchased without taking into consideration cost reductions there
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are a few benefits for doing so. A further downside is that the current capital bought from the
firm often goes together with the transaction and thus enhances cash inflow.
Working capital: There are actually two debtors, i.e. Delios Ltd and San
Pedro Ltd. MDL offered Delios on a credit standard valued £ 1.5 million. Respective company
often struggles with San Pedro conflict of £ 2 million in deliveries. As a result, MDL accounts
receivable increases and thus no cash enters company that decreases the cash flow and thus
negatively affects the profitability and financial state of the business.
3. Recommend steps to improve company’s cashflow
From the cash study, it is determined that MDL has been facing number of issues which
impact the cash flow. So proper measures must be provided to improve the profitability of
company. These are discussed underneath:
 Managing payable and receivable: MDL can successfully manage the investors by
growing liquidity as capital stays in the business for a longer period. They could thus
demand the suppliers to repay for the products which are purchased on credit basis. As a
results this will improves their operational investment cycle (Finger and El Benni, 2014).
 Tight policies for debtors: Mediterranean Delights Ltd still has very stringent demands
on its mortgage holders' dues, but they still have to be really rigid and take measures and
get Delios Ltd as well as other debtors' capital. As they can provide overpayment
opportunities to creditor. The firm must also overcome the San Pedro dispute as a matter
of urgency which help to increase the cash flow.
 Assessing the debt volume: MDL must consider cutting the loans and sometimes even
take out loans of interest quickly such that upcoming punishments can be avoided. This
aid to increase the working capital of company in respective accounting year.
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PART B
Executive summary
The below report summaries the actual purpose of making budgets including traditional
and alternative budgeting approaches. It also covers the application of these different budgets
applied to Second Sight Plc and proper recommendation which help in getting over the future
targets.
i) Understating of budget formation
The planning of the budget has become an important aspect to plan and measure results
(Mazikana, 2019). The budget is designed for three main purposes like forecasting the company's
revenue, expenses and profits and helping to take strategic decisions on the market and
ultimately assessing and tracking the company's performance.
a) Traditional budgeting approaches:
All those spending plans which are formulated with traditional procedure that idly
includes last year budgeted information in order to plan for future income and expenses. Thus in
traditional budgeting previous budgets are consider base which support to predicts the income,
profit and sales and make proper adjustments to increase the profitability in current or future
year. Some of important advantages and disadvantages are discussed underneath:
Advantages: This budgets is simple, systematic and less time taken to formulate and
implement. This is because in current year budgets only few changes are made mainly on areas
which are non productive in previous year. Most importantly traditional budget ease the process
of taking loan from bank as company can easily present the income and expenses throughout the
year. It also support company to eliminate the unproductive operation due to which operating
cost are higher and make better plan to increase profit.
Disadvantages: This expenditure plan takes too long and money for administrators and is
wasteful at many-times due to additional activity coming in the action. As the executives have
too many of the right numbers, the key reason for planning a proposal is often overlooked in the
competitive emphasis (Buck and et. al., 2013).
b) Alternative budget methods:
Rolling budgets:
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The expenditure rolling is indeed a sort of continually getting organized program. This
essentially includes reviewing the budget and planning new proposals for the next cycle. Thus, it
is stated that ones the old budgets get expired a new plan is prepared to get implemented.
Advantages: The revolving budget lets action plan quick instead of lengthy-term so
effectively preparing. This reduces the volatility in the program. Managers is also strategically
saving on savings and it can be easily adapted to market changes with this strategy.
Disadvantages: The budget's major weakness is that it's not available all year round and it
will only be modified incrementally. The workers can also become demoralized as when the
goals change frequently (Hofstede, 2012). This plan requires more time and cost to get prepared
and implemented.
Zero based budgets:
Zero-based budgets are plans designed by conception as well as for the fiscal year a
totally new program is being planned. This forecasts the company's entire profitability and
investments once more for forecasting or preparing the future growth expenditures and profits.
Advantages: The budget is more comprehensive because it gives a clear understanding of
all spending, since each functioning agency will take a close look at its expenditures. It also adds
to increasing unnecessary expenses and events.
Disadvantages: This budget requires more and more time and good strength of worker
are engaged to prepare ZBB. This also increase cost for company as entire member engaged on
ZBB required specific training and guideline which make easier for them to analyse each product
line of company.
Activity-based budgets
This spending plan is prepared by considering the method of activity costing. As a results it
includes entire overhead costs in order to make sure which activity are better and profitable.
Advantages: It allows the company to stay competitive throughout the sector and supports
the analysis of all costs of each commercial activity.
Disadvantages: It ensures that the different risks incurring by companies are well known.
The approach is dynamic in nature which needs a lot of corporate resources and energy (Cardoş,
2014).
ii) Implanting of methods and cost management
Second Sight Plc is an international company which produces prescription
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glasses and sunglasses for a number of leading international brands. The company
headquarter is in Manchester and have production centre in UK and France. The company
reported profits of 250 million pounds the year before. The organization seeks to spend and open
a new facility in the Netherlands with an Indian company as a Joint venture. The following are
defined budgetary topic which are applied to Second Sight Plc:
Traditional budgeting: This financial planning strategy is based primarily on estimates
and last year's financial side. It is recognized that a traditional method to expenditure forecasts
helps to build continuity in an operational sense. It centralizes the cost predictions and helps
bookkeepers build a suitable cost identification framework. In the conventional budget process
the accountant has used where estimates are based on the financial performance of the last year.
The last full year's income is projected to be £250 million. In the process of designing the
program, the sales projections must be taken into account through the incorporation new outlets
with Indian company in a new market of Neatherland.
Alternative budgets: The alternative monetary procedure primarily helps maintain the
genuineness of current operations and estimates. The prediction is based primarily on realistic
adjustments and developments with sophisticated forecasting instruments. Different methods are
explored in alternate budgeting. The transaction and expenditure formation method change
primarily according to the proposed amendments in the rolling spending plan. The budget
formulation is suggested from the above case primarily because of growth and expansion.
Budget rolling is known as a possible tool for money management business development
programs. Enhanced personnel costs, repairs of boats, depreciation costs, taxes and costs.
Another alternative approach in which companies can use the alternate expenditure method is the
zero-based strategy (Pais and Gama, 2015). A new budget for expanded market can be produced
through clients at the initial stage. It allows not only to preserve a legal framework in which risks
are weighed, but also to evaluate differences and improvements at the final stage.
iii) Evaluation of traditional or alternative budgetary system
Second Sight Plc form now onwards must implement the alternative budget prcoess in order to
plan for future income and expenses. This is because there are different reason which makes
alternative budgeting more effective. Such as:
 This aid in connecting and positioning the income and expenses of Second Sight Plc such
as in the respective scenario expansion strategy might be suitable for the yearly budget.
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Furthermore Balance Scorecard techniques may be implemented to review the prepared
budget.
 Moreover, rolling budget is more effective than fixed plans as they can be modified and
altered according to the need of business task, market condition as well as economic
circumstances. It can be altered on monthly, weekly basis and make easier for manager to
focus on short-term goals.
 Second Sight Plc can also reduce project details and make them more descriptive and
compatible with the key performance metrics (Hofstede, 2012). Traditional plans are
highly detailed and KPIs can shift their emphasis. This will also permit decentralization
in the decision-making process and will therefore make the budget clearer for everybody.
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REFERENCES
Books and Journals:
Kuusi, T., 2015. Alternatives for measuring structural budgetary position.
Ofei-Mensah, A. and Bennett, J., 2013. Transaction costs of alternative greenhouse gas policies
in the Australian transport energy sector. Ecological Economics. 88. pp.214-221.
Blaak, M., Openjuru, G. L. and Zeelen, J., 2013. Non-formal vocational education in Uganda:
Practical empowerment through a workable alternative. International Journal of
Educational Development. 33(1). pp.88-97.
Laitinen, E. K., 2013. Financial and non-financial variables in predicting failure of small
business reorganisation. International Journal of Accounting and Finance. 4(1). pp.1-34.
Finger, R. and El Benni, N., 2014. Alternative specifications of reference income levels in the
income stabilization tool. In Agricultural Cooperative Management and Policy (pp. 65-
85). Springer, Cham.
Mazikana, A. T., 2019. The Effect of Budgetary Controls on the Performance of an
Organization. Available at SSRN 3445247.
Buck, N. and et. al., 2013. Working Capital: life and labour in contemporary London.
Routledge.
Hofstede, G. H., 2012. The game of budget control. Routledge.
Cardoş, I. R., 2014. New trends in budgeting–a literature review. SEA–Practical Application of
Science. 2(04). pp.483-489.
Pais, M. A. and Gama, P. M., 2015. Working capital management and SMEs profitability:
Portuguese evidence. International Journal of Managerial Finance. 11(3). pp.341-358.
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