Business Finance: Profit, Cash Flow, Working Capital, Budgeting

This report provides an overview of business finance, covering topics such as profit, cash flow, working capital, and budgeting. It explains the differences between profit and cash flow, and the importance of working capital management. The report also discusses different budgeting methods and their applications in planning future cost management. Overall, it highlights the significance of these financial concepts in ensuring the success and sustainability of a business.

Business
Finance

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................1
PART 1 ...........................................................................................................................................1
PART 2............................................................................................................................................6
CONCLUSION................................................................................................................................8
REFERENCERS..............................................................................................................................9

EXECUTIVE SUMMARY
In attempt to encounter the distinct fiscal requirements of multiple meaningful business
processes, the report summarizes the different aspects of business finance in an enterprise. The
study has 2 parts, covering the valuable fiscal elements in first portion that are essential in
presenting valuable fiscal information for commercial entity.
PART 1
A. Profit and Cash flow:
Profit:
Profit relates to significant measure of any company's progress as well as long-term
sustainability. Profit is assessed by subtracting all company's expenditures and expenses from
entire incomes. For instance, if company's income arrives on a yearly basis at £ 60000 and
expenses arrive at £ 20000, then corporation's profit would be £ 40000 yearly.
Cash Flow:
Whereas Cash Flow represents how much money or cash at a particular time flows into
and out of business. It essentially represents the amount of cash produced by a company as well
as how much monies or cash has been utilised in that entire period. A enterprise will find out
right from where monies comes and goes, i.e. by running, spending or funding operations (Burns
and Dewhurst, 2016). Applying Discounted Cash Flow approach and Internal Rate of Return
(IRR) system, cash flow could be employed to calculate net present value. Cash flow reflects the
corporation's total liquidity.
Difference:
Profit as well as cash flow exhibits an entirely distinct financial view. Both are unique in a sense
that Profit represents any company's efficiency while a corporation holds cash-flow to determine
the funding needed day-to-day commercial operations. If corporation does not make enough
profits it can have a probably long-term effects both on investors ' perceptions and on business'
sustainability.
B. Working Capital, Receivables, Inventory and Payables?
Working Capital:
It focuses more at aspect of short-term and explains how much funding is needed for the
company's day-to-day functions. It could be deducted from existing current liabilities by
1

subtracting all current assets. Here Current assets comprises cash and cash-equivalents, account
accounts receivable, stocks, etc., whereas current assets includes all trade payables, outstanding
expenses etc. are included. Working Capital is indeed an useful metric to assess any company's
aggregate operational efficiency (Canales, 2016).
Receivables:
This relates to the trade debtors of corporation which indicates goods has been offered on
credit to clients and any balance still yet to receive. Also, growing debtors aren't seem a healthy
sign for corporation. Companies are required to maintain credit period given to its customers in
order to control debtors balances.
Inventory:
Inventory refers to business stock held by corporation for sale purposes. Inventory may
involve manufactured goods, work-in process and finished goods. That's the company's current
capital. These are classified as current as it provides future economic profit within one or less
than one year (Cheng, Ioannou and Serafeim, 2014).
Payables:
These simply refers to amount to paid to suppliers against goods or raw material
purchased from them. This liabilities are of current nature so classified as current liabilities and
mainly includes balance of credit purchases from suppliers. These are shown in balance sheet as
trade payables under current liabilities head. An excessive trade payable amount at year end
shows that company's current liquidity position is not good.
Any fluctuation in working capital are reflected in cash flow generated through business's
operating activities. Thus if a aggregate current asset rises as receivables have risen at year-
ending, then it will be reflected in computation of operating cash flow. While on other hand, in
case balance shown in current liabilities increases such as balance of trade payables has been
enhanced on year end then it is also impacts operating cash flows (Fernández, Paz-Saavedra and
Coto-Millán, 2019).
Apply the concepts:
Profit:
BLL has reported a turnover amounting £50 million that reflecting its brand value in
market and popularity of its products. It also shows company's position in terms of sales
generation in market or relevant industry and exhibits future long-run performance. Although its
2

not shows complete picture of entity as profit is more significant term to determine future
performance. Also company has reported EBIT or Net earnings before providing interest and
Taxes of amounting £5million during recent last year but here considerable thing is that during
same period liabilities also has been enhanced as debts of company has been enhanced by £2
million. Business needs to focus at this like a troubling sign and a potential problem since if debt
or liability continues to grow then the business might be in a situation of pressure and may have
to make payment a lot of interest costs that will further decrease the corporation's profitability
(Haeger, 2017). It may be expensive to raising funds through equity shareholders as excessive
issuance of shares sometimes leads to increase in volatility in share price of company. Hence it is
essential for corporations to maintain adequate and appropriate capital structure to avoid any
future irregularity in financial structure.
Cash Flows:
Here as in given case company has made acquisition of 30% stake in another corporation
that engaged in designing and structuring ornamental-garden fountains and water facilities or
features. In this context BLL has also given amount of £10 million in order to get such
company's shares and £8 million paid as advance against this acquisition. In case such
acquisition is in nature of cash deal, than corporation's cash might reflect erroneous balance.
However this may also enhance corporation's debt as mostly companies go for taking loan to
arrange such a huge funding (Jasuta, 2016).
Working Capital:
Here also given in case that company is troubling with legal case as because of this case
corporation's concerned assets are out of use and it also impacts company's solvency position. As
given BricoFrance and C&P bot have not still paid any amount against consignments, so
company's trade receivables balance has been enhanced by £3.5 million i.e. (£2 million of
BricoFrance and £1.5 million of C&P). Here notable fact is that excessive balance in trade
Receivables may lead to increment in company's current assets but this is not so good fact as
with this increase possibility and chances of deb-debt also increases. Thus its is considerable fact
and could affect company's financials directly or indirectly.
C. Analysis and recommendation:
As from above analysis it has been evaluated that BLL is troubling with matters
concerned with effective management of corporation's working capital which indirectly means to
3

maintenance of appropriate balance between Current Liabilities and Current Assets . Company
has to make decisions and bring actions with aims to control, manage and enhance operating
efficiencies and position of liquidity, by improvising cash inflows and outflows, Corporations
require to emphasise primary aspects of Working Capital which determine level of working
capital like trade receivables, stock, trade payables etc. Following are some key
recommendations with respect to improve cash flows via working capital management, as
follows:
Ensure a proper trade receivables or debtors collections system: Company BLL has reported
two major trade receivables named BricoFrance and C&P which are owes up-to £3.5 million.
Corporation require to take and implement immediate effective actions in this matter to ensure
arrival of money from debtors by introduction of incentive scheme for debtors and restructuring
of trade receivables which may become doubtful. Here it is considerable in this case that
corporation doesn't take any effective actions in this matter and also it is not appropriate to put
any kind of pressure on key customers to collect debt (Jordà, Schularick and Taylor, 2016).
Timely payment of debts and control interest costs: Since the corporation has so many debt
commitments, certain initiatives need to be done to minimise it. For minimizing further charges,
interest charges must be made on continuing basis. The estimation of interest costs greatly
improves the corporation's working capital.
Inventory Management: As company faced a conflict of about £ 1.5 million, its business
operations on one of the outlet have been gradually shuttered and a significant amount of stock
has been hold on London site. The organization must retain the stock volume again after conflict
is settled. To order to boost its cash-flows and working capital, organization should concentrate
on stock level (Ntuli, 2017).
Tracking of Accounts Payables: Additionally, BLL should recognize how many lenders the
business now has and it should make tactics to settle its dues as early as possible and also not
postpone them. For this company should maintain proper details and record about due dates of
payments along with duration in order to pay its creditors within reasonable time.
Resolve major disputes with Customers/Suppliers: The business is struggling from certain
legal proceedings, and care must be taken that there will be no such conflicts with both vendors
and consumers in future. When the disputes are settled in timely manner, Company BLL's cash
4

flows would be greatly improved and operating performance would also be increased by better
managing of working-capital.
5

PART 2
Aims of preparation of different budgets and alternative budgetary systems:
Budget:This is standardized presentation of calculation of profits and expenditures which will be
focused on organisational goals, goals and prospective plans of company. This is designed by the
corporation's managing personnel to track all operating functions to ensure these are done in a
satisfactory manner. Normally Budgets are formulated for annual, quarterly or on month basis.
Purposes of preparing a budget: For certain reasons & purposes, companies prepares
budgets, following are some key purposes as discussed below:
 To regulate all commercial and fiscal resources that are necessary to handle, as it may
affects both efficiency and productivity.
 Budget intention is to develop strategies and ensure that the business has sufficient
resources to effectively operate organisational activities (Mian and Sufi, 2018).
Traditional budgeting approaches: Using data from past years, this approaches are
used by companies to produce the financial budget. Following are some traditional approaches
which have their own weaknesses and advantages, as discussed below:
Incremental budget: This is an unique budget in which addition or deletions are also shown by
company to formulate final budget. It more clearly shows company's performance as it provides
more fair views about any addition or subtraction in budgeted figures. Following are major
advantages and weaknesses of this kind of budgets as shown below:
 Strengths: It exhibits more cleanly any major variation in major items in budget and
depicts future performance based on such variations.
 Weaknesses: Some times by just any addition or deletion someone can misinterpret
company performance and also it is very complex to prepare.
Alternative budget methods:
Rolling budget: Under these type of budgets managerial personnel must keep updating
the budget to include company's additional requirements. The budget is meant to review and
update final budget to ensure that the company's fiscal condition is precise. It is also helpful for
managing personnel to make appropriate decisions and also to develop policies. Boat World Plc's
director can use the latest updates to implement this plan and adjust their past budgets. Following
are core strengths and weaknesses of this kind of budget are as follows:
6

Strengths: It allows supervisors to make unexpected variations in fiscal reports more
accountable. This budget offers flexibility since managing personnel can change according to
their needs at a certain time.
Weaknesses: This budget can reduce managers ' attention from their jobs as they can lose their
attention due to daily budget changes and it takes a lot of time to plan.
Zero based budget: It is simple budget which is formed by company on the basis of
only current year figures. Here no previous data is used to formulate budget. In companies like
Boat World Plc zero-based budget are prepared by managing personnels to take quick decisions
and form strategies. Here are some major weaknesses/strengths, as discussed below:
 Strengths: Managers can justify every aspect of incomes and expenses that is beneficial
for the business to measure actual performance in the current year.
 Weaknesses: Such budget isn't considered for long-term purposes since it contains single
year data and is no longer convenient for next year (Roberts, 2015).
Activity based budget: This budget emphasises on classification of tasks as different activities
and assigning cost to these activities. This provides more clear view about how much budget is
assigned for each particular activity. Following are some strengths/weakness of these sort of
budgets, as follows:
Strengths: This helps managers determine every activity's appropriate cost It also offers
advantages in efficiently formulating marketing strategies, marketing approach, leadership and
performance-related decision-making.
Weaknesses: This approach is very time-consuming and needs enough means to gather data as
well.
Demonstration upon application of the methods to show their use in planning future cost
management:
Boat World Plc uses traditional approaches of budgeting, but company require to adopt
alternative methods to enhance their operating effectiveness and productivity. Corporation is
applying traditional approaches by which they form strategy in order to open new Germany and
Netherlands outlets. Here in this context company's Budget would be based on past year's data
and price of each boat determined based on previous figures and budgeted figures.
By applying alternative budgeting techniques, Boat World Plc may develop budgets more
precisely. Like Rolling budget which facilitates updated and reliable budget to assess real time
7

performance. The Boat World Plc may pursue activity-based budget to assign all activities as per
funds for various activities like marketing, selling, etc. It also enables the organization to
effectively or systematically carry out operational activities as expenses related to each and every
activity is already determined.
Analysing either traditional or alternative budgetary system is appropriate to all or any
parts of the enterprise:
Either Traditional or alternative budgeting approaches both are applied for different
business circumstances and fiscal events. In order to encounter different issues and problems
these distinct approaches are applied by managing personnels according to nature and extent of
such approaches. Traditional approaches are fundamental aspects of a corporation's annual
financial budgets while alternative budgets are applied for any specific purpose also. However,
for corporation like Boat World Plc application of alternative approaches along with traditional
approaches is essential to improve overall efficiency and operating effectiveness but alternative
approaches are more useful in effective decision-making (Rogers and Makonnen, 2014).
Alternative methods provides assistance to management to make their decisions more accurate
and relevant. Here these approaches provides different choices like zero based, activity based,
rolling etc. for Boat World Plc and company has to choose and formulate strategies accordingly.
Moreover these also assists corporation to make changes in strategies already formulated.
CONCLUSION
From the above study, it has been founded that business finance is quite crucial as it
contribute in management of funds which ultimately leads to improvement in organisation's
performance. The organization carries out numerous activities that are part of the corporate
operations and to be successful. Numerous concepts such as income, cash-flows, net-working
capital etc. are addressed in this study. Such concepts would allow management to devise plans
to accomplish organisational objectives, and will also favour investors for potential decision-
making activity. To carry out tasks efficiently, company should plan budgets where conventional
or traditional simple budgets are easy but don't provide reliable information for any further
analysis. However alternative approaches like zero based budgeting can help to provide precise
information for tactical planning.
8

REFERENCERS
Books & Journals
Burns, P. and Dewhurst, J. eds., 2016. Small business and entrepreneurship. Macmillan
International Higher Education.
Canales, R., 2016. From ideals to institutions: Institutional entrepreneurship and the growth of
Mexican small business finance. Organization Science. 27(6). pp.1548-1573.
Cheng, B., Ioannou, I. and Serafeim, G., 2014. Corporate social responsibility and access to
finance. Strategic management journal. 35(1). pp.1-23.
Fernández, X. L., Paz-Saavedra, D. and Coto-Millán, P., 2019. THE IMPACT OF BREXIT ON
BANK EFFICIENCY: EVIDENCE FROM UK AND IRELAND. Finance Research
Letters. p.101338.
Haeger, J. D., 2017. John Jacob Astor: Business and Finance in the Early Republic. Wayne State
University Press.
Jasuta, L., 2016. Rolling capital: managing investments in a value-based care world: a rolling
approach to capital planning offers healthcare providers flexibility and efficiency, which
ultimately improves patient satisfaction and helps control costs. Healthcare Financial
Management. 70(6). pp.82-90.
Jordà, Ò., Schularick, M. and Taylor, A. M., 2016. The great mortgaging: housing finance, crises
and business cycles. Economic Policy. 31(85). pp.107-152.
Ntuli, M. G., 2017. An evaluation of bank acquisition using an accounting based measure: a case
of Amalgamated Bank of South Africa and Barclays Bank Plc. Banks and Bank Systems.
12(1). p.160.
Mian, A. and Sufi, A., 2018. Finance and business cycles: the credit-driven household demand
channel. Journal of Economic Perspectives. 32(3). pp.31-58.
Roberts, R., 2015. Finance for small and entrepreneurial business. Routledge.
Rogers, S. and Makonnen, R., 2014. Entrepreneurial finance: Finance and business strategies for
the serious entrepreneur.
9