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Capital Budgeting - Assignment

   

Added on  2019-12-17

11 Pages3700 Words182 Views
Business Finance1

Table of ContentsINTRODUCTION ...............................................................................................................................3TASK 1.................................................................................................................................................31.1Differentiating Profitability from Cash Flows............................................................................31.2 Application of Working Capital Management...........................................................................41.3 Steps to improve working capital management.........................................................................6TASK 2 ................................................................................................................................................72.1Satges of Capital Budgeting and Main Capital Investment Appraisal Methods.........................72.2 Potential application of methods to projects under consideration ............................................92.3 Analysing applicability of various methods...............................................................................9CONCLUSION ..................................................................................................................................11REFERENCES...................................................................................................................................122

INTRODUCTION Finance is the fuel for the Business Organisation. It is of prime importance for any businessto manage the cash flows and working capital effectively and efficiently. In order to make thetimely payments and carry out all the business operations smoothly the technique of fundmanagement is of utmost importance. The present report elaborates the same concept and is focusedon the view that how the business can satisfy its liquidity requirements (The Difference BetweenCash Flow and Profit, 2016). The analysis of the present situation and problems faced by the WildFrontiers Builders Ltd has been made in the report. Also, various measures for the improvement ofworking capital management has been suggested. Another part of the report deals with the companynamed Eye Watering Inc. facing the capital budgeting issues. The importance of capital budgetingalong with the various methods suitable for the company has been suggested.TASK 11.1Differentiating Profitability from Cash FlowsWild Frontiers Builders Ltd is into the business of property maintenance. The shares of thecompany are divided in between the brother and 3 sisters. Presently the company is facing cash orliquidity crises and its overdrafts have been increased in the past nine months. There are workingcapital crises in spite of the fact that business is running in profits. Hence the owners of thecompany are concerned about the working capital management. Both Cash flows and profits are very crucial for a business in order to continue all theoperations effectively and efficiently (The Difference between Cash Flow and Profit, 2016).However, both of the concepts differ with each other to a large extent. That means high cash flowsin the business does not necessarily mean profits. Similarly, profits of the business are also not anindicator of the smooth cash flows in the business.Cash flows is a statement which reflects the difference between actual cash inflows andoutflows in the company. The timing of these particular flows helps to find out the cash loan andcash rich periods (Arnold, 2014). Hence, the decisions regarding when to buy and sell off assets, orregarding the availing of the overdrafts from the banks etc. Cash flows are very crucial for thesurvival of any business. As every business has to ensure the timely payments to all the creditors inorder to maintain the supplies. Also, a business has to make payments to its employees and incurother expenses in order to maintain the flow of operations (Baños-Caballero, García-Teruel, andMartínez-Solano, 2014). Business should have sufficient cash flows in order to maintain adequateliquidity and to prevent the situation of bankruptcy (The difference between cash flow and3

profitability, 2016).Every week, month, quarter, half-year company receives funds and makepayments. This statement supports company in analysing balances of creditors or other due bills andthe eligibility of payment on due date.Profitability, on the other hand, is the net income earned by the above-stated company fromall its operations and other activities irrespective of the fact that whether cash received or not. Forinstance, in the case of credit services provided by Wild Frontiers Builders Ltd (WFBL) willincrease the profits of the company but will not increase the cash flows of the company until thecredit has been paid off by the creditor. Profitability of any business is an indicator of theperformance of the business. Profitability is derived by the carrying efficient operations bysimultaneously cutting all the wasteful expenditures. Profits of the firm can help the business inachieving growth, become more successful and provide a competitive edge. Also, profitability playsa major role in the development of services of WFBL. Cash flows are prepared and examined on the basis of cash concept of accounting whichimplies that transactions are recorded in books of accounts as and when the cash is received or paid.Cash flow indicates the liquidity and fluidity of cash into the business. However, profitability isdirected by accrual concept of accounting. In case of Wild Frontier Builders Limited, it is earning reasonable profits on the contraryrunning into overdraft position since nine months which indicates that sales are happening on agood scale but cash is not realised from the same and therefore causing the liquidity crunch. Sincethe inability to pay off its creditors has posed a problem for the company as they are initiating alegal action. If creditors not paid on time it will cause negative goodwill in the market. Also,contractors would become reluctant to work with WFB Limited. Cash flow ignores the non-cashexpenses such as depreciation, which are the crucial part of business and accounting and are criticalfactors for organisation's success. Profitability indicates the net income earned after considering allthe cash and non-cash expenses for the period. Financial Statements of the company includes Cash Flow Statements indicating cash inflowsand outflows and Income Statements reflecting the total net profitability of the business afterconsidering all the expenses and incomes during the year.1.2 Application of Working Capital ManagementWorking capital management refers to managing short-term funds of the company. Thisrefers to effective utilisation of assets and liabilities. Working capital management is an art as wellas science to plan and monitor the payments, disbursements and collections. To carry out workingcapital management effectively for keeping the funds of the business liquid and mobile is a skilful4

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