Importance of Working Capital Management and Budgeting Approaches in Business Finance

BUSINESS FINANCE

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
EXECUTIVE SUMMARY.............................................................................................................1
PART 1............................................................................................................................................1
i)Explanation of the flowing:.......................................................................................................1
ii) Effects of management of business over the financial results................................................2
iii) Recommended steps to improve cash flow with better working capital management..........3
PART 2............................................................................................................................................4
i) Purpose of preparing the budgets.............................................................................................4
ii) Application of the traditional plus alternative budgeting approach in business.....................6
iii) Analysing the more appropriate budgeting methods between traditional and alternative
budgeting method........................................................................................................................7
REFERENCES................................................................................................................................8

EXECUTIVE SUMMARY
Business finance is an essential requirement of the organisation. Finance is the life blood of
every organisation for running business operations smoothly. Report is based over the
importance of working capital management in the business organisation. This has also provided
about the budgeting approaches like traditional and alternative methods for management of
organisation. They help in increasing the productivity and efficiency of the business operations.
PART 1
i)Explanation of the flowing:
Profit and cashflow and their difference
The profit is defined as the financial gain which is enjoyed by the company by deducting
for all the losses and expenses. This is also referred to as the difference between the income and
the expenses. If the income is more than it is termed as profit and if the expenses are more than
the company is said to have suffered a loss (Ylhäinen, 2017). On the other hand, the cash flow is
referred to as the movement of money in and out of the business. The cash can have either a cash
inflow or the outflow. The inflow is defined as the cash coming to the business and outflowis
termed as the cash going out from the business. There needs to a balance between both the flows
of cash as if anyone will be more then it will not be profitable for the company. Also, it is very
necessary for the company to have immense amount of profit so that the company never faces
any problem.
The major difference between profit and cash flow is that the profit is of two types that
isgrossand net. The gross profit is the profit whichis earned after the direct cost is deducted and
the net profit is the one which is calculated after all theindirect expenses being deducted. On the
other hand, cash flow is the one which includes either cash inflow or outflow.
a. Working capital and meaning of receivables, payables and inventory
The working capital is defined as the capital which is applied within the business for
meeting their day to dayexpenses and cost. This working capital is calculated as current assetless
current liabilities. Working capital is very important for the business as it help the company in
managing the day to day activities. The working capital is defined as the ability of the company
to pay of the current liabilities with help of the current asset presentby the company (Adhikary
and Kutsuna, 2016). The working capital increased either by the increase in the current asset or
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decrease in the current liabilities. The four common mechanism involved in the management of
working capital are cash management, inventory management, debtors management and the
financing management.
Receivables- this is referred to as the amount of money which the company has to take
form other person. This is the amount of money which needs to be received by the company
from any other party. The receivable presents the debtorsof the company and is a significant
component of the working capital.
Payable- this is the system which present the data to which the amount id due by the
company to someother party. This amount the company has to pay to some other company or
any other party. The payable arethe creditors of the company which either provides money to the
company for managing the working of the company.
Inventory- this is referred to as the stock which is produced and manufactured by the
company and the inventory includes the raw material and the work in progress. Without the
inventory the company cannot run and operate and this is because of the reason that if the
inventory will not be managed in successful manner then the working will not take place in
effective manner. Thus, for this Mediterranean Delights Ltd uses the ABC analysis.
b. Changes in working capital affecting the cash flow
The working capital depicts the changes taking place within thecurrent asset and the
current liabilities. The changes within the working capital affectthe cash flowto a great
extent.This is majorly because of the fact that if the working capital will be positive then it
means that the current assets is more for MDL and they have more liquid cash with them
(Connolly and Jackman, 2017). This condition states that cash flow is notmuch with the
company and they are having current assets which can be converted anytime into cash. If the
working capital is negative then it means thatthe current liabilities are more for the company and
they have to arrange for the cash to pay these liabilities.
ii) Effects of management of business over the financial results.
Management of the company plays an important role in the business. The way in which
business is being managed has direct influence over the financial results of company. Businesses
are required to be managed efficiently by the company. MDL is operating in the industry
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