Case Study on Financial Analysis Concepts and Working Capital Management

This case study explores financial analysis concepts and working capital management in the context of Mediterranean Delights Ltd (MDL). It discusses the difference between profit and cash flow, the meaning of working capital and its components, and how changes in working capital impact cash flow. It also provides recommendations to improve MDL's cash flows through working capital management.

Making a report after a
case study
(Business Finance)

Contents
PART A...........................................................................................................................................3
Executive summary................................................................................................................3
Explaining financial analysis concepts...................................................................................3
Applying financial analysis concepts to Mediterranean Delights Ltd (MDL).......................4
Recommendation to improve company’s cash flows through working capital management 5
PART B............................................................................................................................................6
Executive summary................................................................................................................6
Understanding purpose to preparation of budget...................................................................6
Application of methods and cost management.......................................................................8
Evaluation of traditional or alternative budgetary system......................................................8
REEFRENCES..............................................................................................................................10

PART A
Executive summary
Section A of this article, focused on Mediterranean Delights Ltd (MDL), summarizes that
this business is experiencing financial difficulties as it will need to gain sufficient income and its
liabilities are constantly rising. It has outlined from this study that this business will receive its
due valuation from the consumers and allow efforts to preserve its healthy working capital
(Kettner, Moroney and Martin, 2013).
Explaining financial analysis concepts
MDL is a medium-sized business that has recently been faced with numerous issues owing
to heavy debt liabilities. To clarify this company's problems, separate financial reporting
principles are explored as followed:
a) Difference between the Meaning of profit and cash flow
Profit is really the amount each company received by its activities after clearing all its costs
and taxation. Income is a commodity that is perceived to be a gain to a corporation that is
allocated to owners on the basis of their proportion to income. This benefit is gained by the
profitability that the organization earns from activities in the economic environment
Free cash flow differentiates around net cash capital inflows as well as cash capital outflows.
Earning healthy cash flows in your company is vital to an organization.
Basis Profit Cash flow
Source Profit sum in a company may
be generated from the income
from purchases and profits
maintained.
At the other side, cashflow
through an organization,
involving debtors, creditors,
interest, etc., may originate
from a number of sources.
Recording In the income statement
documents/report profit or
loss which is received by a
company during a financial
period is recorded.
In comparison, cash flows are
reported in cash flow
statements of an organization
(Kuusi, 2015).
Types The operating, the gross profit There have been specific

as well as the net income are
multiple categories of profit.
kinds of cash flows either
inflows or outflows.
b) Meaning of working capital, receivables, inventory and payables
The difference between Current assets and current obligations within a company is known
as working capital. The money is being used by a company to fulfil its everyday needs. In a
company, this capital must be retained in order to run smoothly. The primary goal of preserving
a sufficient operating capital is to retain business liquidity that often needs existing liquid assets
to pay back the loans. The following study includes three components of working capital:
Inventory – The element consists of three forms of materials like raw products, products
under construction and finished products contained in the storage space. Stock is shipped from
the manufacturers and the amount paid to them is from working capital (Watson Laitinen, 2013).
Receivables – The component of working capital is debts like customers 'inflow from credit
sales. This dimension improves the working resource volume and has been reported within
current assets.
Payables – The amount spent by the business towards manufacturers in the context of raw
materials is also an important component of working capital. Such payables are being entered in
line with current obligations and boost the working resources surplus.
c) Stating how changes in working capital impacts cash flow
Changes in working resources may both be beneficial and harmful; however, both
influence an organization's liquidity. The disparity between current debt and assets is working
capital. If CL is smaller than CA, the company has a good working capital. In this scenario, the
flow of money will be increased. If CL is above CA, the business has unfavourable working
capital throughout the reverse scenario. Cash outflows would rise in the enterprise.
Applying financial analysis concepts to Mediterranean Delights Ltd (MDL)
Mediterranean Delights Ltd (MDL) is a medium-sized company that uses specific financial terms
to influence its financial performance. From the above portion, the very first financial definition
is profit. The business makes 5 million pounds in income. By subtracting all costs, the
organization considers this income an operating income. The impact is just 10% of its 50 million
euros operating profit. Throughout this case in which the firm's operating income is just 10%, the
total net income is even smaller. Net income below 10% was not considered accurate. This

strategy has led to reducing productivity performance for businesses with large business
expenses (Mazikana, 2019).
Cash flow is yet another financial term discussed above case study. The Mediterranean
Delights Ltd (MDL) revealed that the firm was experiencing an adverse cash flow condition, as
its main clients sold the loan to Delios Limited 1.5 million euros and Sam Pedro Limited 2
million lbs. The firm's method of supplying their clients with higher credit sales has resulted in
weak working capital economic performance.
Working capital is considered to be an important components financial element defined in MDL
case study. The Mediterranean Delights Ltd (MDL) case studies have shown that claims are
available in the business but the payment sum is fairly growing. Also, after the liability raise,
from 16 million to 18 million euros, this company continues to lease its goods and as a
financial result are unfavourable working capital and heavy current obligations. This way of
funding the credit policies would also affect on the business's sustainability, and insolvency is
sure to follow in nearby time (Ofei-Mensah and Bennett, 2013).
Recommendation to improve company’s cash flows through working capital management
The functional administration of resources is the way to handle the strategies and
approaches of the business that improve credit supply and acceptance. Mediterranean Delights
Ltd (MDL) may use this method to boost cash inflows for their business. The working capital
planning process or approach comprises the following 3 proportions: working capital ratio, the
inventory ratio as well the average collection period.
Mediterranean Delights Ltd (MDL) is advised to compensate its liabilities as well as
increase its current assets in order to sustain a healthy working capital percentage. The above
business will make every effort to ensure its people pay their owing amounts as Delios Limited
has been provided with 1.5 million pounds of credit and Sam Pedro Limited 2 million pounds by
MDL. The average collection proportion is also needed to be improved by the company. As in
current scenarios the company’s collection percentage is weak, since they have to collected huge
amount for the existing market which they are unable to do the same. For this reason, it is
advisable to modify this company's recovery policies for setting total loan duration of 60 days,
under which each borrower shall pay the sum due less than 2 months.
The last suggestion is to retain its inventory ratio. The cost of production produced and the total
inventory shall be measured accordingly (Weetman, 2010). This is why the company spends

only an appropriate amount on this expense of sold goods which corresponds to its estimated
inventory, to ensure the maintenance of this proportion. This company will generate a large
profit and therefore will increase its profitability by 10%.
For Mediterranean Delights Ltd (MDL), almost all of the measures and processes discussed
above are relevant, as this business will help to obtain its appropriate amount from its buyers and
it will able to maintain better profits in future time (Head, 2016).
PART B
Executive summary
Second Sight corporation is a multinational corporation that advocates use of rolling budgets.
This has been evaluated that this corporation has increased growth opportunities as a result of
which they should avoid their conventional budgeting method and implement rolling budget.
Understanding purpose to preparation of budget
A budget regards to plan that anticipates all the spending and incomes that an entity may in
future spends or receive. Budget is implying to a report formulated to fulfil an objective. There
are different budget planning and preparation objectives which are listed and discussed as below:
 The primary aim of budget is to facilitate effective decision-making process. A budget
offers a mechanism for estimating receipts and spending. An entity can depend on a
budget to make correct decisions (Aktas, Croci and Petmeza, 2015).
 Another significant budgetary aim is to offer a baseline for actual operations under way.
 The budget also seeks to establish a consistent balance of control and accountability by
establishing pre-determined targets that should be met.
a) Traditional budgeting approaches
These approaches to budgeting utilize a traditional framework whereby a budget is designed
using financial reports or facts of the past year. The approach is focused purely on previous
year's fiscal results, which excludes any additional problems which variables. There are multiple
advantages of this approach which involves the fact because it is simple to adopt, it provides
flexibility in features and it also gives the potential to merge multiple projects within a specific
one (Atrill, 2014).

Compared to any technique, this strategy also has few drawbacks that are its stiffness and
dependency on data from prior year. This sort of budget is tough to change and causes confusion
between work and uncertainty.
b) Alternative budget methods
Rolling budget – It is kind of modern budget that incorporates a revolutionary method to
continuous budget creation. The operations are periodically checked within this budget, as well
as any adjustments may be made if needed. This style of budget has many advantages including
lower uncertainty, flexibility as well as ability to adapt. There’re also some drawbacks of
such budget that prohibit businesses from adopting it. Such drawbacks are that this form of
budget is beneficial for projects in short term. There are still no goals in this program, owing to
which personnel lack support and inspiration (Atrill, 2015).
Zero based budget – Those kinds of budgets are developed from scratch or zero and are not
cantered on annual statements or budgets of previous year. Both expenditures and profits are
estimated applying external environment and there's no connection between budget for the 2
periods. This strategy takes a different approach, since it has several strengths and weaknesses.
This method's advantages include precision and reliance on present situation as a result of which
contingencies are which. Demerit points of this strategy are that this form of budget is ideal for
programs with restricted time periods and not unrestricted time frames for organizations.
Activity based budget – Each form of spending involves overheads on a per operation basis. This
budgetary strategy is known to be one of most effective, since it contributes to the evaluation of
costs linked with increasing operation (Blaak, Openjuru and Zeelen, 2013). This method has
multiple advantages and demerits that involve the following:
This method benefits from the ability of a company to distinguish costs related with each
operation. This approach also aims to achieve a strategic advantage by contrasting the effects of
their operations with those of other organizations. This method also has several demerits that
cover dynamic nature because it is not easy to cost computing against each operation/activity.
There is a broad disparity between conventional and modern forms of budgeting as
analysed from the aforementioned analysis. Alternative budget methods are useful for
contemporary entities like Second Sight corporation.

Application of methods and cost management
Second sight plc is a multinational corporation that actually makes use of conventional budgeting
approaches. This business is involved in the manufacture of prescription spectacles and
accessories for numerous leading firms. This company has plans for future of building a new
plant in Netherlands for that they intend to form joint venture with Indian corporation. In this
situation, evaluating which budgetary strategy would support this business is significant. In the
background of this enterprise, the approach of all budgets is discussed below as along with
analysis of how goods and procedures should be planned for this enterprise (Brown, A.M.,
2015).
Traditional budgeting systems – This method is employed by the organization under which
they create a budget plan based on budget estimate from a previous year. When the corporation
begins with joint venture, this will no longer be allowed to use this method. The system includes
reports and expenditures from last year so this organization would not be able to utilize this
method in absence of last year's budget plan as joint venture would be newly formed enterprise.
Alternative budgeting systems – Usage of alternate budgetary methods is strongly
recommended for this organization. If this company wants to choose rolling schedule, instead
they can continue to manage their expenses. They can make changes anytime they want. If
businesses prefer zero base budgeting, they must schedule their upcoming annual expense
control. Each year, such organization will form new budget and each framed budget has no
connection with the budget of the previous year. The organization must monitor its projected
expenses in the case of task-based expenditures by assessing and defining costs linked with each
operation or activity (Drury, 2016).
Evaluation of traditional or alternative budgetary system
Traditional and alternate budgetary frameworks are two terms of separate existence. Both work
differently as per their characteristics. Traditional is used only in older times and also has
significance in case of routine or continuous in nature activities. The unusual improvements can
be easily recognized by the use of traditional budgetary framework process. More changes in
environmental events or variables are the primary reason for its use in past. It has the least
impact on an organization's overall operation, including the efficiency of various divisions. Now,
switch the situation (Finger and El Benni, 2014). Organizations are globalized and there is a
great deal of change in the international world that has an immense impact on activities. Owing

to the lack of understanding of other considerations, the strength of the conventional method of
budgeting is inadequate in this context. The end result of this would be calculated in the forms of
adverse consequences and unfounded forecasts which are not accurate for possible choices to be
made. Here, the alternate budgeting method is the right way to follow in keeping with today's
environment. This is a method that involves the integration of multiple financial strategies that
can aid in the estimation of potential operations, taking into account both the relevant external as
well as internal variables.
Every decision has its own preference. It will also offer an incentive to pick one that is
ideally suited to the individual departments functioning structure. A company must in future
determine the value of reducing threats, implementing integration initiatives and building a
robust internal operating climate. Overall, this gives confidence to all different teams that are
able to meet the operational objectives within a defined timeline.

REEFRENCES
Books and Journals
Aktas, Croci, Petmeza, 2015. Is working capital management value-enchancing. Journal of
Corporate Finance 30, pp. 98-113.pdf
Atrill 2014. Financial Management for Decision Makers. 7th ed. London FT Prentice Hall.
Chapter 10 - Working Capital.pdf
Atrill, 2015. Management Accounting for Decision Makers. 8th ed. London Pearson. Chapter 6
Budgeting.pdf
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Budgeting Process.pdf
Finger, R. and El Benni, N., 2014. Alternative specifications of reference income levels in the
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Ofei-Mensah, A. and Bennett, J., 2013. Transaction costs of alternative greenhouse gas policies
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Watson Head, 2016. Corporate Finance. 7th ed. London Pearson. Chapter 3 - Working
Capital.pdf
Weetman, 2010. Management Accounting. 2nd ed. London FT Prentice Hall. Chapter 13
Preparing a budget.