Business Finance: Understanding Financial Terms, Cash Flow, Working Capital, and Budgeting

This document provides an overview of business finance, including explanations of financial terms, cash flow, working capital, and budgeting. It discusses the impact of working capital on cash flow and provides steps to improve cash flow. The document also includes a case study on Mediterranean Delights Ltd and Second Slight Plc.

BUSINESS FINANCE

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................3
PART 1............................................................................................................................................3
PART 2............................................................................................................................................6
EXECUTIVE SUMMARY.............................................................................................................6
REFERENCES..............................................................................................................................10

EXECUTIVE SUMMARY
The term business finance can be defined as those business activities which are related to
managing available monetary resources for a particular time frame (Danbolt and Maciver,
2012). Under this detailed process of acquiring and allocating of finance is included. The
project report summarises about different elements of finance which contributes in an
effective manner for decision making. The project report is based on Mediterranean Delights
Ltd; whose managers want to apply different aspects of finance. In addition, in further part
of report suggestions are also given to company for better decision making.
PART 1
Question 1) Explanation of financial terms and their differences:
 Profit- It can be defined as cost of product and generated sales revenue for a
particular time period. This is common goal of all firms to gain higher amount of
profits from its operations and activities.
 Cash flow- This is defined as flow of cash in a business. Basically, under it those
activities are identified which are related to receipts and payments (Almeida, Kim
and Kim, 2015). This is prepared by help of three different activities which are
investing, operating and financing.
Variation between profit and cash flow:
Particular Profit Cash flow
Explanation This is related to generating revenues
from different kinds of activities after
deducting all expenses.
It is linked to calculating flow of cash in
a business entity for a particular time
period.
Purpose The objective of calculating profit is
to find out actual value of cost and
revenues.
Its objective is to assess those activities
which are related to generating and
spending of cash.
Presentation The value of profit is presented in
income statement.
While cash in and out flow are being
shown in the ledger account.

Explanation of working capital, account receivables, account payable and inventory:
(A) Working capital: It can be defined as difference between current assets and
liabilities for a particular accounting period. This is computed with an aim of finding
volume of assets available for making payment of day to day expenses. An organisation
can enhance value of its working capital if they focus on increasing current assets. If a
company does not have enough amount of current assets than it will be difficult for them
to control day to day expenses. As they will not current assets to pay their current
liabilities.
(B)Account receivables- The term accounts receivables can be defined as those debtors by
whom companies collect their debts (Du Preez, 2013). The accounts receivables arise in
business entities when they make credit transaction and sell goods on credit.
(C) Accounts payables- The accounts payables are different from accounts
receivables. These can be defined as those creditors which needed to be paid by
companies before deadline. The accounts payables arise in businesses due to credit
purchase of raw material or taking financial assistance from external parties.
(D) Inventory- The term inventory can be defined as volume of goods which a company
stores in warehouses for purpose selling or transforming raw materials into finished
goods. Under it, different forms of stock are involved such as raw material, work in
progress product and finished goods.
Impact of changes of working capital on cash flow:
The working capital has a significant impact on cash flows of business entities. It is so
because under working capital current assets and liabilities are included. If value of working
capital will be negative than cash flow will also produce negative outcome (Hope and Vyas,
2017). In the case when working capital will produce negative result than cash flow will also
negative. The effectiveness of working capital depends on volume of current assets and
liabilities. If current assets are more than current liabilities than working capital will also
positive.
Question 2. Financial results of Mediterranean Delights Ltd.

 Profit- On the basis of given case study of above company this can be find out
that they earned net profit of 5 million pounds in last years. As well as their
products and services were of 50 million pounds during the given time frame. It is
indicating that company’s profitability condition is better for last year. Though
they have higher amount of debts such as their debt amount was of 16 million
which raised and became of 18 million. Due to which company has decided to
take suitable steps so that debt can be reduced. The owner of company has
decided to take more money through debts and this can be too costly for them. As
well as due to this their profitability will also get affected in a negative manner.
 Cash flow- The above company already collected 40% interest from brunches of
companies which also paid 8 million pounds in advance regards to operational
from cost from total sum of 10 million pounds. This will affect cash flow of above
company in a negative manner. It is so because productivity is deduced from
company’s payment in full.
 Working capital- On the basis of above mentioned case study this can be find out
that there are two debtors which are San Pedro limited and Delios Limited. The
mentioned company offers loan services to Delios limited of 1.5 million pounds
as well as there is a problem with San Pedro of 2 million pounds. Apart from this,
the balance of accounts payable is also raising in an effective manner and there is
lack of cash inflow for that accounting time frame. These aspects will affect
working capital condition of above company due to lower profit margin.
Question 3 Steps to improve cash flow.
This is essential for companies to manage their cash flows in an effective manner. There
are different types of methods of improving cash flows. Herein, below steps to improve cash
flow are mentioned in such manner that is as follows:
 Determination of all business activities- This is the key steps to improve cash flow of
companies. Under it, this is crucial for companies’ managers to determine all business
activities so that it can be find out which activities are cash generating and which ones are
not (Bugeja, Czernkowski and Moran, 2015).

 Computation of working capital- It is one of the crucial stage for managing cash flow
of companies. If working capital will be positive than it will be easier for companies to
generate higher cash inflows.
 Better evaluation and utilization of inventories- It is also an important way to improve
cash flow condition of companies. This is so because if a company will be aware about
stored value of inventories than it will be beneficial for them to take appropriate decisions
regards to purchasing of new materials.
 Internal audit- This is related to making evaluation of prepared financial statements of a
company in an effective manner. By help of it, this becomes easier for them to manage
cash flows.
PART 2
EXECUTIVE SUMMARY
In the aspect of business entities this is essential for them to prepare financial plan in an
effective manner so that allocation of funds can be done systematically. The term budget can
be defined as an estimation of income and expenses for a particular accounting time period.
The project report summarises about requirement of budget for effective decision making
and for effective understanding about budget it is practically implied with company that is
Second Slight plc.
Question 1
A) Explanation of the concept of budget and benefits and drawbacks of traditional and
modern technique of preparation of budget.
The term budget can be defined as a projection of income and expenses for further time
period so that better usage of available financial resources can become possible. The
process of preparing budget is called budgeting (André, Filip and Paugam, 2015).
Basically, there are two types of method of budgeting which are traditional and modern
approaches. Herein, underneath detailed analysis of each budgeting approach has been
done below in such manner that is as follows:

Traditional budgeting approach- It can be defined as a type of method for preparing
budget in which previous years’ financial information is used for new budget creation.
This is one of the oldest technique to prepare the budget. Herein, below key benefits and
drawbacks of this budget has been done below in such manner that is as follows:
Benefits-
 This technique’s key benefit is its suitability and it can be applied in any kinds of
business.
 In addition, it is simple and easy method as this does not require any specific
skills.
Drawbacks-
 This technique is not so effective in the case of higher fluctuation in business
activities.
 It is not suitable for new business entities due to lack of enough financial data.
Modern budgeting approach- This budgeting approach is different from the above
mentioned method. In this, various kinds of budgets are included and herein detailed
analysis of each budget has been done below in such manner:
Zero based budget- It can be defined as a type of budget which is related to preparing
budget on the basis of justification of each activity of business. Under this budget,
previous years' budget is ignored and each activity is assigned in accordance of its
reliability for companies (Korniotis and Kumar, 2013). It has some benefits and
drawbacks which are mentioned below in such manner:
Benefits- It is helpful for companies in order to provide accurate result for estimated
income and expenses. As well as this budget is useful for making efficiency for
utilisation of both financial and non financial resources.
Drawbacks- The main issue of this budget is that it considers too much time and cost. It is
so because under this each activity is justified. Due to this, small business entities can not
imply it.
Activity based budget- This is a type of budget which is related to including those
activities which are related to cost per activity. The main purpose of this types of budget

is to keep an extra sight of eye on overall expenses during a particular time frame. This
types of budget is widely used in those business entities which are involved in production
sector.
Benefits- This budget is beneficial for companies in order to manage overall cost of
different operations and activities (Mitra, 2012).
Drawbacks- The main issue of this budgeting approach is that it is not easier to use. Due
to more number of activities, it brings complexity in its operations and functions.
Rolling budget- It can be defined as a type of budget which is related to making
estimation of income and expenditures on the basis of past years' information. Under this,
new activities are not included, in the case when there is any change in new years'
business activities than changes are done. It is generally prepared for time period of six
months, one year. It has below mentioned advantages and disadvantages which are as
follows:
Benefits- This budget is helpful for companies in order to minimise cost and time of
preparing the budget.
Drawback- It is not useful for business entities for long time period because companies
can not rely on this.
B) Uses of traditional and modern techniques for preparation of budget.
This is important for companies to implement different types of budget into their business
activities so that better usage of financial resources can become possible. Second Slight Plc is an
international company which produces vital range of glasses and sunglasses. This company is
located in Manchester and its production department is at France. Company is using traditional
budgeting approach and generated revenues of 250 million in last year. Currently company want
to expand its business in Netherlands in the form of Joint venture with an Indian company.
Herein, underneath implementation of different form of budgets in above company is done below
in such manner:
 Traditional budgeting approach- In the context of above company, this budgeting
approach can be applied only after end of first year in new venture at Netherlands. This is
so because it can be applied only when companies have past years' financial information.

Thus, in the starting phase of new venture, this budgeting approach can not be applied
due to lack of financial information in first year.
 Alternative budgeting approach- As above stated that this budgeting approach consists
vital range of budgets and some of them are explained above (Agnes Cheng, Zishang Liu
and Thomas, 2012). In the aspect of above Second Slight plc, they can apply zero based
budget. This is so because it is suitable for new business entities and it provides accurate
results.
C. Explanation of weather traditional and modern techniques of budgets are applicable for
all parts of the project.
Each types of budget has a crucial role in the context of business as well as has some
limitation too. The reliability of budgets depend on efficiency and outcome of companies.
Herein, below critical evaluation of each budget has been done below in such manner:
 The traditional budgeting approach can be useful for companies in order to track daily
income and expenditures. Though, it has some difficulties too such as lack of accuracy in
produced results.
 The zero based budget is suitable for companies in order to make accurate prediction of
income and expenses. Though, this is quite expensive but can be useful for new business
entities (Gyapong, Monem, 2016).
 In addition, activity based budget is useful for companies in order to track volume of cost
for each activity. But its too complex to understand.
 The rolling budget can be evaluated as a form of budget that can be prepared by making
some modifications in past years' budget. The plus point of this budget is that it is less
costly and time consuming.
So this is the complete analysis of all budgets. In the context of above company, they are needed
to apply zero based budget among different types of budget of modern approach. After some
years, they can implement traditional budget too because by help of this budget they generated
higher amount of revenues in last year.

REFERENCES
Books and journal:
Danbolt, J. and Maciver, G., 2012. Cross‐border versus domestic acquisitions and the impact on
shareholder wealth. Journal of Business Finance & Accounting. 39(7‐8). pp.1028-1067.
Almeida, H., Kim, C.S. and Kim, H. B., 2015. Internal capital markets in business groups:
Evidence from the Asian financial crisis. The Journal of Finance. 70(6). pp.2539-2586.
Du Preez, W., 2013. The status of post-commencement finance for business rescue in South
Africa (Doctoral dissertation, University of Pretoria).
Hope, O. K. and Vyas, D., 2017. Private company finance and financial reporting. Accounting
and Business Research. 47(5). pp.506-537.
Bugeja, M., Czernkowski, R. and Moran, D., 2015. The impact of the management approach on
segment reporting. Journal of Business Finance & Accounting. 42(3-4). pp.310-366.
André, P., Filip, A. and Paugam, L., 2015. The effect of mandatory IFRS adoption on conditional
conservatism in Europe. Journal of Business Finance & Accounting. 42(3-4). pp.482-
514.
Korniotis, G .M. and Kumar, A., 2013. State‐level business cycles and local return
predictability. The Journal of Finance. 68(3). pp.1037-1096.
Mitra, D., 2012. The role of crowdfunding in entrepreneurial finance. Delhi Business Review.
13(2). pp.67-72.
Agnes Cheng, C. S., Zishang Liu, C. and Thomas, W., 2012. Abnormal accrual estimates and
evidence of mispricing. Journal of Business Finance & Accounting. 39(1‐2). pp.1-34.
Gyapong, E., Monem, R .M. and Hu, F., 2016. Do women and ethnic minority directors
influence firm value? Evidence from post‐apartheid South Africa. Journal of Business
Finance & Accounting. 43(3-4). pp.370-413.