Business Decision Making

This document discusses the importance of working capital and budgeting in decision making process in an organization. It explains the difference between cash flow and profit, and the impact of changing working capital on cash flow. It also explores different budgeting methods and their advantages and disadvantages. The document includes a case study of Second Sight PLC, a medium-sized corporation planning to expand their business units in India and Netherlands.

Business Decision Making

Table of Contents
INTRODUCTION ..........................................................................................................................4
EXECUTIVE SUMMARY.............................................................................................................4
PART 1............................................................................................................................................4
Meaning of cash flow and profit and difference between these two terms:................................4
B) Meaning of working capital, receivables, stocks, and payable ..............................................5
2 Effect of changing working capital on cash flow.....................................................................5
3) Recommendation:....................................................................................................................7
PART 2............................................................................................................................................7
EXECUTIVE SUMMARY.............................................................................................................7
1)Explanation of budget and advantages and disadvantages of various budgetary approaches.7
2Impact of budgets related to organization context.....................................................................9
3 Essential budgeting method used by organization..................................................................10
REFERENCES..............................................................................................................................12

INTRODUCTION
EXECUTIVE SUMMARY
Working capital management play essential part in accounting process. Success of an
organization depends how effectively their manger use their working capital in run their daily
routine business activities. In this report importance of working capital regarding decision
making and effect of their changes impact on the organization has been identified.
PART 1
Meaning of cash flow and profit and difference between these two terms:
Profit: It is financial gain arising from business activities. In other words, profit is
generated by firms when their amount of sell is higher than their cost. Business
organisations can gain profit not only from their operating business activities but also from
non-financial activities.
Cash flow: It is the net amount of cash and cash equivalent activities generated in fixed
time period. Business organisations prepare cash flow statement to identify transactions
which generates cash inflow and cash outflow activities in running business organization.
Many people consider profit and cash flow as similar term but there are some difference
among these two term these are describe below:
Particular Profit Cash-flow
Meaning It is the net value generated
by companies by providing
products and services to
customers (Armstrong, Ch.
S., Vashishtha, R., 2012).
Cash flow inflow and cash
outflow from financial,
operating, and investing
business activities.
Objective Main purpose of calculating
profit is to maintain
sustainability in running
organization.
Main objective of
preparing cash flow
statement is to analysing
activity which are more
profitable and expensive.
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Calculation Profit can be calculated by
calculating difference
between sell value and cost
of producing products.
Cash flow are calculated by
preparing cash flow
statement on monthly or
annually basis.
Time period Specific time period Cash flow statement is
prepared at the end of
financial year.
B) Meaning of working capital, receivables, stocks, and payable
Working capital: It define as that part of capital which is required to fulfil short period
requirements of an running organization. Working capital can be classified into two categories
net working capital and gross working capital. Net working capital is the difference between
current asset and current liabilities and gross working capital is the overall value of current assets
of particular organization. It is essential term as success of an company depends on how
effectively they manage their working capital (Atanassov, J., Han Kim, E., 2009).
Receivables: This term define as legal claim enforce by organization on their customers.
In other words, it is the amount of goods and services provided by business entities to their
customers. It also known as debtor receivables It considered as current assets and shown in assets
side of balance sheet.
Stocks: It is also known as inventory. Stocks considered raw material and other goods
used by organizations in manufacturing products. Success of an organization is depending on
how efficiently mangers uses their stocks. These are considered in assets side of business.
Payable: It is the net amount of debt liability arises on company due to non-payment of
material and other essential items purchases from suppliers. It shows at liability side of the
balance sheet. Manager uses payable accounts to identify their liability and anysing creditors
which provided them material on discount.
2 Effect of changing working capital on cash flow
Effect working capital on of changing cash flow: Working capital is the sum up of
current assets. Changes in working capital directly effect cash flow. Increase in current assets
will be reduces cash inflow activities and increment in current liability will be increase cash
inflow activities For example if value of debtor increases then it will generate cash outflow
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activities and if creditors value increase in balance sheet the net will raise liability amount but it
also increase cash inflow activities. Increment in working assets are result of cash out flow
activities and decrease in working capital will result in enhancing cash inflow activities
Cash flow
Cash flow is related with inflow and out flow of cash and cash equivalent activities. In
the case of MDL it generated cash inflow and cash out flow activities in last year. Debt liability
of company has been increase from 16 million to 18 million this refers that cash generated from
increment of liabilities of the business organization. MDL also invested in Italian company worth
10 million the organization paid advance amount of 8 million to the Italian business organization
for purchasing pasta food produced of their company .t will reduce cash side balance. MDL ‘S
turnover also increase in past year which will increment in their cash flow activities.
Receivables:
MDL is Multinational Corporation and turnover of this company is increase from past
years but in last year their due to dispute with their potential customers. Company’s receivable
ratio is turned down and it will negatively effect on their account. Company is own 1.5 million
pound from Delios it will adversely effect on their account balance (Banos-Caballero, S., Garcia-
Teruel, P.J., Martinez-Solano, P., 2012).
Payables:
Creditor’s situation is also adversely effect of organization conditions. As company claim
on Maltese they supply low variety of material to the company and due to low quality of material
potential customers are claim on the business.
Working capital:
Working capital is differences between current assets and current liabilities. Due to lack
of managerial policies it will adversely effect on working capital. Ratio of working capital goes
down his will imply that company’s current liability increase. But due to last year’s profits and
high turnover rate manager of MDL will be handle all situation efficiently to cover up problem
and issue related to working capital.
Ratio of debtor, creditors turnover are provided adversely effect on the company’s performance.
For changes in current situation and enhancing financial performance of the company Manager
of MDL needs to formulate ethos policies which will help them to solve issues between their
potential customers. They will also needed to identify those creditors in market place which will
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provided them material at discount and good quality of material. It will help in providing those
goods and service to their potential customers by they can satisfy their wants Manager of this
company also implements d policies which will attracted their customers.
3) Recommendation:
As per the above analysis it has been identified that financial condition of MDL
organization is not good form. Die to managerial polices and lack of working capital system their
Activity based budgeting
In this method mangers prepare budgets on the basis is of identify activity incurred in a running
business organization. In other words in this method budgets are prepared on the basis of
allocation of cost according to their activities. Following are the advantages and disadvantages of
this budgeting method
PART 2
EXECUTIVE SUMMARY
Budget is a numerical statement which are used by organizations to identify future
earnings. It plays essential part in business finance and decision making process. To understand
the use of budget approach in an organisation Second Sight plc has been taken. The business
entity is run their business in Manchester and provides sunglasses products to their customer. In
this segment essential requirements of budget and uses of various approaches of preparing
budget has been identified (Banos-Caballero, S., Garcia-Teruel, P. J., Martinez-Solano, P.,
2014).
1)Explanation of budget and advantages and disadvantages of various budgetary approaches
Budget: It is a numerical financial framework which is prepared by business entities to
estimate their future earnings and expenditure. In other words Budget is a tool of financial
management techniques which are used for decision making process in an organisation. Process
of preparing budget is known as budgeting. Business entities uses various method for preparing
budget statement. Manager also use budget for performance evaluation process of their
workforce. Budgeting methods can be classified into two techniques. Traditional and modern
methods of preparing budget.
Traditional approach: this method is one of the oldest method of preparation of budget. In this
method budgets are prepared on the basis of past year data. Usually budgets are formulated for
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last 3 years data. It is most useful in small size organisation as it is easy to formulated budget
from this method. Following are the advantages and disadvantage of this method:
Advantages: Preparation of budget statement is very easy process.
 It is cost beneficial process as organization does not need any expertise for formulation of
budget their manger can prepare it by analysing past year data.
Disadvantages: Data forecasting from traditional methods are not reliable there will be
chances of errors as in this dynamic environment budgets formulated by this method are n
Alternative budget methods:
Modern methods of preparation of budget:
With changes of time and technologies various tools are implement for the purpose of
preparation of budget. In modern method of budgeting budgets are prepared on the basis of
analysing current market situation. Modern methods included,rolling budget, activity budget,
zero base technique budgeting. Following are the benefits and drawbacks of modern methods of
budgeting
Rolling budget: Budgets are prepared for short term period in this method of budgeting.
Managers changes their policies after analysing short term period performance of business. It is
most flexible technique of preparation of budgets as business organization will be change and
formulated new police for achieving predetermined objective (Bates, T.W., Kahle, K.M., Stulz,
R. M., 2009).
Advantages:
 This tool of budget help in overcome in efficiencies of business organizations.
 Mangers enjoy flexibility power of changing polices as they can change rules and
regulations which are not suitable for business
Disadvantage:
 Preparation of budget from this method is very expensive and time consuming process as
managers need to supervise budgets within short term period.
 Due to changes of polices and structure employers of organization get frustrated and
demotivated as they can not adopt changing policies in work place area.
Zero based budgeting: It is one of the most useful method adopt by organizations to prepare
budget. In this type of budgeting technique managers prepare budget without using past data they
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start searching,formulating strategies from scratch level . In other words in this technique
budgets are prepared from initial level. Following are the benefits and drawback of using zero
based budgeting technique: Activity based budgeting
In this method mangers prepare budgets on the basis is of identify activity incurred in a running
business organization. In other words in this method budgets are prepared on the basis of
allocation of cost according to their activities. Following are the advantages and disadvantages of
this budgeting method
Advantage:
 It will help in cutting wastage and expenses incurred activities`
 Those method is useful for manufacturing industry as will help in proper utilization of
resources.
Disadvantage:
 It is hard and complicated process of preparation of budget from this method.
 This method is not applicable for all type of business organization (Damodaran, A., 2012)
Rolling budget: In this method budgets are prepared for short time period. Manger
Compare analysis their short budget activities and then prepared another budget for short term
period. The sequences of preparation of budget run continues until company achieved their
desired goal
Advantages
 This is most flexible method and manager change policies according to the need and
situation of the organization
 It provides accurate result in forecasting income and expenditure of company.
Disadvantage
 Preparation of budget by this method incurred high cost as budgets are prepared after
competition of short time period
 It will not applicable and suitable for all type of organizations
2Impact of budgets related to organization context.
Second sight is well established corporation since last 10 years. Budgeting methods
Will effectively help them in cost management and expansion of their business branch
Second sight PLC earn 250 million revenue in last year and had capitalization value over 300
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Million. The business organization will be use traditional budgeting method for preparation of
budgets
As it will help them in identity expected revenue and expenses related to their new project.
They use past year data for preparation of budgets. It will help them to save cost related to
Research and other expenses of formulated business’s. Manager of Second sight also adopt
Alternative ways of preparing budgets as they can prepare budgets from rolling method or
Activity based method . these methods will be manage their allocation of cost in various
Activities of manufacturing and selling Sunglasses to in target market of India and Netherlands
Manager will be used modern techniques of formulating budget as budget prepare from these
methods are provide accurate data related to future income and expenses. Manager of Second
Sight PLC will be used alternative methods as they have large area of income and they will
Be easily bear cost of preparing budgets. Second sight PLC will be manufacture glasses
In India after identifying demand of sunglasses in particular time period. For this purpose they
Will prepare rolling based budget . It will also be official in reducing extra curricular expense
Incurred in setting up and manufacturing process of producing sunglasses (Duchin, R., Ozbas,
O., Sensoy, B .A., 2010).
3 Essential budgeting method used by organization.
Second sight is medium size corporation and they want to expand their business units
In India and Netherlands. Manager of Second sight uses budget method to take decision
regarding
Formulation of policies . For this purpose they will traditional as well as alternative methods
Of formulation of budget statement. Both methods has their own benefits and drawback.
Business organization apply those method of preparation of budget which will be suitable and
more beneficial from other alternative. Manager of Second sight PLC can be use traditional
method of budgeting for Netherlands project .
Of their business in India .For this new start-up they need to prepare budget from rolling method.
As Target market of India is very complicated and demands and preferences of their customers
are not similar due to diversity. Thus rolling method is most useful and appropriate method for
Indian project. Traditional method of budgeting cannot be suitable on this project as Indian
market is very large. Managers may use zero budgeting method because Indian market is new
and they can benefit For Netherlands project the manager will be used traditional budgeting
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method as geographical conditions are similar of Manchester’s. Customer’s preferences are also
similar in Netherlands and Manchester. Thus traditional method provides accurate data related to
future income of their projects. In Netherlands project manager cannot use activity based
budgeting method as it will incurred more cost on calculation of each activity task. For this
project manager cannot apply zero based budgeting method as it will hire more cost on
researching of each and every element of production of products. Manager can adopt method of
preparation of budget as it will help in analysis of their profitability rate of future but not all
methods are useful and applied in running business organization Success of an entity totally
depends upon the decision of preparation of budget and how effectively they worth on their
budget (Eckbo, B. E., Kisser, M., 2013).
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REFERENCES
Books and journals
Armstrong, Ch. S., Vashishtha, R., 2012. Executive stock options, differential risk-taking
incentives, and firm value. J. Financ. Econ. 104, 70–88.
Atanassov, J., Han Kim, E., 2009. Labor and corporate governance: International evidence from
restructuring decisions. J. Financ. 64, 341–374.
Banos-Caballero, S., Garcia-Teruel, P.J., Martinez-Solano, P., 2012. How does working capital
management affect the profitability of Spanish SMEs? Small Bus. Econ. 39,
Banos-Caballero, S., Garcia-Teruel, P. J., Martinez-Solano, P., 2014. Working capital
management, corporate performance, and financial constraints. J. Bus. Res. 67,
Bates, T.W., Kahle, K.M., Stulz, R. M., 2009. Why do U.S. firms hold so much more cash than
they used to? J. Financ. 64, 1985–2022.
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Damodaran, A., 2012. Investment valuation: tools and techniques for determining the value of
any asset. 3rd edition. Wiley Finance.
Duchin, R., Ozbas, O., Sensoy, B .A., 2010b. Costly external finance, corporate finance, and the
subprime mortgage credit crisis. J. Financ. Econ. 97, 418–435.
Eckbo, B. E., Kisser, M., 2013. Corporate funding: who finances externally? Working Paper.
Tuck School of Business at Dartmouth
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