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Assignment on Cash Management and Capital Budgeting

   

Added on  2020-04-21

13 Pages3888 Words249 Views
Running Head: CASH MANAGEMENT AND CAPITAL BUDGETINGCash Management and Capital Budgeting

Cash management and capital budgeting 2ContentsExecutive summary...............................................................................................................................2Profit......................................................................................................................................................3Cash flow..............................................................................................................................................3Difference between profit and cash flow:..............................................................................................3Working Capital....................................................................................................................................3Receivables............................................................................................................................................3Payables.................................................................................................................................................3Inventory...............................................................................................................................................4Changes in working capital affect cash flow.........................................................................................4Hypothetical Illustration........................................................................................................................4Recommendations.................................................................................................................................5Capital budgeting..................................................................................................................................5Purpose of Capital Budgeting................................................................................................................6Process of capital budgeting..................................................................................................................6Investment appraisal methods................................................................................................................7Payback period:.................................................................................................................................7Net Present Value:.............................................................................................................................7Internal Rate of Return:.....................................................................................................................7Advantages and disadvantages of methods............................................................................................8Hypothetical illustration........................................................................................................................8Recommendations...............................................................................................................................11Conclusion...........................................................................................................................................11References...........................................................................................................................................12

Cash management and capital budgeting 3Executive summaryThe summary includes the concise knowledge about the management of cash and working capital with illustration. It also provides the understanding of capital budgeting process and its methods. The part 1 of the report shows the difference between cash and profit and gives the reason for the shortage of cash in the business, despite of earning profits. It explains the definition of working capital and also the effects of change in it. Methods to improve company’s cash flow are also stated in part 1.Part 2 of the report includes the introduction of capital budgeting, its purpose and process. Investment appraisal methods (NPV, IRR, Payback Period) used for taking investment decisions are also discussed in part 2. Their advantages and disadvantages and illustrative examples are given to know which investment proposal is best suitable for the company. All this is included in part 2. Overall analysis of cash management and capital budgeting is done in this report.Profit: it is a surplus left after deducting total cost from the total revenue. A company earns profits when there is a reduction in its liabilities and debts and an increase in its assets, sales and owners’ equity (Knight, 2012).Cash flow: it means the amount of cash flowing in and out of the business. If there is an increase in cash equivalents than it is called an inflow and if there is a decrease than it is considered as outflow. (Periasamy, 2009).Difference between profit and cash flow:S.No.ProfitCash flow1.The revenue earned from the sale ofproducts and servicesThe inside and outside movement of cashin the business2.Earned after paying all the expensesfrom the income earned. Shows the availability of cash in thebusiness to make various payments.3.Income statement is prepared on accrualbasis, Cash flow statement is prepared on cashbasis 4.Gives the information about theprofitability of the firm.Gives the idea about liquidity andsolvency of the firm.5.A simple accounting difference betweentotal revenue and total expenditure.A movement of cash in operating,investing and financing activities ofbusiness.Working Capital: it is the capital required for day to day operations. According to ICAI, “working capital shows the surplus of current assets over current liabilities which also include short term loans. It refers to the funds available with the company for its daily operations” (ICAI, 2017).The total amount of current assets refers to the gross working capital and net working capital means the excess of current assets over current liabilities (Sagner, 2010).Receivables: accounts receivable are none other than the debtors of the company. They are those people to whom company provides its goods and services on credit. Receivables are

Cash management and capital budgeting 4part of the firm’s current assets. The customers who purchases on credit are required to pay back the desired amount within the given time and date.Payables: Account payables are the creditors of the company. They are those people from whom, company purchase the material on credit. They are shown at the liability side of the balance sheet. The creditors lend their goods and services to the company and get an desirable amount in return. Inventory: it is basically an asset of the firm. It means the stock of goods held with the organisation for the purpose of sale. It includes the item purchased by the company for the purpose of resale. There are three categories of it, which are:Raw materials: these include those products which are required at the initial stage of production.Work-in-progress: unfinished items which are still in production process are known aswork-in-progress. These items are partially finished and are not ready for sale.Finished goods: all the items or materials which have gone through the whole process of production and are ready for sale to the customers in the market are known as finished goods.Inventory is termed as a current asset because it gets converted in cash within one year (Wild,2017).Changes in working capital affect cash flow. The changes in the capital, directly affect the firm’s cash flow. An increase in it means the current assets has raised through investing the resources which will reduce the flow of cash inbusiness (Icmai.in, 2017). On the other hand, decrease in capital means that firm’s current liabilities has increased. Rise in current liabilities is considered as net cash inflow which means, the company has more cash available with it to use for other projects. It is very important to analyse the changes in working capital as they affect cash flow as well as the overall performance of the business (Faulkender, et al., 2012).Hypothetical IllustrationCash Flow StatementAmount (£)ACash flow from Operating activitiesCash received from customers70000cash paid-50000Increase/Decrease in Working CapitalIncrease in Creditors10000Increase in Debtors-5000 Cash flow from Operating activities25000BCash flow from Investing activitiesreceipts from sale of vehicle10000equipment purchase-15000Cash used in investing activities-5000CCash flow from Financing activitiesPayment of Loan-40000

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