Business Finance: Working Capital and Budgeting Approaches

Business Finance

Contents
Contents...........................................................................................................................................2
PART 1............................................................................................................................................1
1) a) Meaning of profit and cash flow and differences between them.......................................1
b) Meaning of working capital, account receivables, inventory and payables............................1
C) Effect of changes in working capital on cash flow................................................................2
2) Apply the concepts in (i) above to this company to show how the.........................................2
way the company is being managed might affect its financial results........................................2
3)Analyse what steps should now be taken to improve this company’s cash flow through better
Working Capital...........................................................................................................................4
PART 2............................................................................................................................................4
EXICUTIVE SUMMERY...............................................................................................................4
1) Explanation of a) traditional budgeting approaches and alternative budget methods: rolling
budgets, zero based budgets and activity-based budgets, explanation of their relative strengths
and weaknesses opportunities and threat.....................................................................................4
2) Effect of traditional and modern approaches of budgeting on Second sight plc....................6
3) Analysing whether a traditional or alternative budgetary system is appropriate to all or any
parts of the business in its planned future form...........................................................................7
REFERENCES................................................................................................................................8

PART 1
EXICUTIVE SUMMERY
Business Finance is a systematic process of managing funds of business organization, for
this purpose mangers use working capital in order to maintain their operation activities. Success
of enterprises depends on how effectively they manage their finance fund. In this report
importance of working capital and their relevant terms has been identify and effect of changes in
management of current assets, liabilities cash flow activites impact on working capital and
profitability of an organization has been critically analysis.
1) a) Meaning of profit and cash flow and differences between them
Profit: Financial gain generated after deducting cost of raw materials, labours, taxes and
interest on liabilities etc. In accounting term it is net value of difference between selling
value of product and cost of goods sold. Profit is essential factor of entrepreneurship.
Business organization use this term in order to identify their growth rate. Main aim of any
business organization whatever it is profitable or non profitable to earn valuable return
from their operating business activites.
Cash flow: It is the net valuable amount generated from cash and cash equivalent activites.
Cash flow is difference between cash out and cash inflow activites. Cash inflow and
outflow transactions are incurred from their day to day activites. Worth of a company
identify by their abilities of gearing positive cash flow.
b) Meaning of working capital, account receivables, inventory and payables
Working Capital: It is net amount used by business organizations for run their day to day
transactions, in other words working capital is that part of capital which is used to pay current
liabilities of an running business organization. Working capital is the sum up value of current
assets and identifying differences between current assets and current liabilities. Net wiring
capital can be calculated by identifying differences between current assets and current liabilities.
Managers uses this term to analysing their liquidity status (Gomber Koch and Siering , 2017)..
 Account receivables: This term represent amount of claim charge on potential customers
for not being payable of purchasing goods amount from the business organization. Higher
amount of receivables represent lack of managerial polices regarding their debtor thus it
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is essential for every business to make policies which help in collection of debtor amount
in short time period.
 Stock: It represents goods and raw materials available on the premises of business
organization for the purpose of selling and distribution to suppliers, mediators and
consumers. It also known as inventory. It considered as current assets of business
organization and shown on assets side o balance sheet. Stock is considered as important
term for ongoing business transactions. Success of an entity depends on effective
management of inventory.
 Account payable: Net amount of debt payable to suppliers is known as account payable.
It shown on the current liabilities side of balance sheet. It generates cash inflow activites
but is necessary for manger to pay their short term debt on relevant time, higher amount
of account payable show
C) Effect of changes in working capital on cash flow
Working capital represents amount from capital funds uses in order to mange operating
business activites. Managers uses working capital ratio to identify their capacity of
payment of current debt amount. Changes of working capital will directly impact on cash
inflow and cash outflow actives. Higher amount of working capital shows that business has
large amount of current assent compare to current liabilities it will negatively impact on
cash flow as it represents that mangers would not effectively uses their current assets and
they not pay their debt at definite time period. Decrease in working capital describe
increment of cash inflow activites by increasing their debt liabilities. Increment in cash
inflow activites may generate cash but also increase liability over the company which will
be payable in future thus manger should need to mange their working capital in a way
through which they can maintain ratio of current assets and current liabilities (Cumming,
Hou, and Lee,2016).
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