Understanding Financial Elements and Improving Cash Flow Position

BUSINESS FINANCE

Contents
PART A...........................................................................................................................................3
Executive summary................................................................................................................3
1. Basic understanding of financial elements.........................................................................3
a) Connotation of Income and Cash Flow and key differences..............................................3
b) Denotation of Working Capital, Accounts Receivables, Accounts Payables and Inventory
................................................................................................................................................3
c) How cash flow of entity impacted by fluctuation in working capital.................................4
2. Applying the above mentioned concepts in the situation of Bright Lawns Ltd.................4
3. Actions required to improve the cash flow position of company with better capital working
capital management................................................................................................................5
PART 2............................................................................................................................................7
Executive summary................................................................................................................7
1. Aim of Budget formation and diversity among various budgeting methods.....................7
2. Application of above methods and cost management........................................................8
3. Assessment and advise, if Traditional budgeting or alternative budgeting system is suitable
................................................................................................................................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

PART A
Executive summary
For each business, it is quite essential to analyse the firm's fees, sources of earnings or
cash flow situation with its financial reports such as profits and losses consideration and balance
sheet (Derrien and Kecskés, 2013). It enables investors to make big decisions whether or not to
invest in the business and to verify that perhaps the business is financially healthy until putting
their money into it. The final report Part A addresses income, liquidity, and the disparity between
the same. Furthermore, Working Capital and its key areas are discussed. For Bright Lawns Ltd,
these principles will then be implemented and evaluated.
1. Basic understanding of financial elements
a) Connotation of Income and Cash Flow and key differences
Income: The firm's income is calculated by measuring all of its costs and removing it off
the corporation's sales. It represents a company's real profit and used as a very important tool for
assessing and making decisions.
Cash flow: It provides a real of a company's solvency situation and where the cash is
absorbed throughout the organisational (Robson, Young and Power, 2017). At a given point in
time, cash flow illustrates the real amount of money accessible with both the company. There are
three places of income, i.e.: operating activity showing which revenue increase or flow from
either the storage area, putting money behaviour reflecting the purchase and sale of both the
assets, and funding exercise informs abut payments or earnings problem.
Disparity: Profit represents the disparity between firm's revenue and expenses, whereas
cash flow reflects the business's capital base and capital available for daily activities. If a
business earns funds and incur costs, this does not imply that perhaps the business's money will
actually reduce. Are both required for both the firm's plan.
b) Denotation of Working Capital, Accounts Receivables, Accounts Payables and Inventory
Working Capital: Management of liquidity is of the key function of finance experts.
Liquidity is defined by the calculation and deduction of the organization's current assets as well
as its current liabilities (Wang and Hsu, 2013). It represents the funds required for an institution's
frequent activities. The optimistic fund is generally advised when current assets outweigh current
liabilities.

Account receivables: The proceeds to be received form customers is recognised as
Accounts receivables: organisation supply the products and services on credit to reliable
customers (Pietrzak, 2013). these customers pay the due amount after a certain period. accounts
receivables are counted as current assets for a company.
Payable accounts: It reflects the amount to be paid to vendors or creditors. there is type
of Lenders are a company's current liabilities.
Inventory: Company retains several stock of the products which it sold in the
marketplace, that is named a database that is the organisation’s asset. It consists of raw product,
WIP stocks and closing stock.
c) How cash flow of entity impacted by fluctuation in working capital
Each shift in working capital elements affect the cash flow of company. key principles
for this: any rise in current assets will diminish the liquidity and vice versa, ii) any spike in
current liabilities will boost the cash flows. it is expressed as upwards and downward
adjustments in current assets and current liabilities in the operational portion of cash flow system
(Henttu-Aho and Järvinen, 2013). For instance, if the business's accounts receivables are
increasing than it reflects that company's collection period is extended therefore no cash
introduced into the business.
2. Applying the above mentioned concepts in the situation of Bright Lawns Ltd.
Profit: Last year's Bright Lawns Ltd EBIT were £ 5 m that is quite favourable in terms of
financial aspects. it is expected that the demand of company's product to grow in upcoming year.
the gross revenues have been over £50 million as well. As a result, the financial performance
performs well in terms of profitability and sales according to from last year data accessible. The
major financial challenge must not be ignored by the experts of company which is enhancement
of long term debts. It had long term debt of £16 million last year that increased by £2 million for
the current year and in total it would have to pay extra interest on £18 million for upcoming year.
The company must take steps to decide the best capital structure and should put efforts to
decrease its liabilities. Simmo believes entity want more capital to reduce debt, but it can be
challenging for the entity as raise money through equity would be costly in this case as they will
accept lower returns to invest in a business with increased debt due to high risk factor. The high
debt status is risky for business as it can impact BLL's net profitability due to raise in interest
payments.