Business Finance: Profit, Cash Flow, Working Capital, Budgetary Tools

This study evaluates the concepts of profit, cash flow, working capital, and budgetary tools in business finance. It explains the difference between profit and cash flow, analyzes working capital components, and assesses the impact of working capital changes on cash flow. The study also examines how the current management affects financial results and recommends ways to improve cash flow. Additionally, it explores traditional budgeting and alternative budgetary methods for future cost management.

Project Business Finance

EXECUTIVE SUMMARY
This study has evaluated that, business finance helps company to manage their funds
effectively within the business. This study has highlights that, profit is referred to as the income
generated by the business after deducting total cost from the total revenue. Cash flow is referred
to as the amount of money that has been transferred in and out of the business. It has been
determined that, working capital is referred to as the difference between current asset and current
liability of the company. This study conclude s that, change in working capital results in change
in cash flow of the company. Furthermore, this study has developed an understanding on
traditional budget and various alternative budgetary tools. Lastly, it concludes that, budgetary
tool helps in planning future cost management.

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION...........................................................................................................................4
PART 1............................................................................................................................................4
1. a.) Assessment of Profit and cash flow....................................................................................4
b.) Analysing working capital, inventory, receivables and payables..........................................5
c.) Assessing how change in working capital influence cash flow of the company....................5
2. Determining how the current management of the company affects financial results..............6
3. Analysing and recommending ways to improve cash flow of the company...........................6
PART 2............................................................................................................................................7
1. Understanding on the various budgetary tools.........................................................................7
2. Application of budgetary tools for planning future cost management....................................9
3. Analysing traditional and alternative budgetary system........................................................10
RECOMMENDATION.................................................................................................................10
CONCLUSION .............................................................................................................................10
REFERENCES..............................................................................................................................12

INTRODUCTION
The main purpose of budgeting is that it is useful in controlling, planning, executing and
monitoring the performance of the business. The key role of budget is to forecast the budget by
effectively developing various strategies and analysing the trends. Budget gives input or
evaluating performance of each departments and thereby helps in setting appropriate
remuneration. Business finance is referred to as the information which is contained in the
financial reports like balance sheet, income statement and cash flow statement (CFS). It helps
company to manage their funds effectively within the business in order to attain higher
operational goals and efficiency. This study will highlight, the difference between Profit and
cash flow statement. It will further analyse working capital, inventory, receivables and payables.
This study also demonstrating how change in working capital influence cash flow of the
company. Furthermore, this study focuses on developing an understanding on the various
budgetary tools and it helps in determining how is it useful in planning future cost management.
PART 1
1. a.) Assessment of Profit and cash flow.
Profit is referred to as the financial gain from the business after deducting all the
expenses. Profit is referred to as the income generated by the business after deducting total cost
from the total revenue. Cash flow is referred to as the amount of money that has been transferred
in and out of the business. This is the net amount of cash which has been received and disbursed
by the business during the particular financial year (The Critical Difference Between Profit and
Cash Flow, 2019). The cash flow of the company can be positive while having no profit. This
happens when the company has other source of funds other than income. On the contrary, the
cash flow of the company can be negative while having large profit. This happens when the
company tends to make various personal expenses. Profit is one of the most common measure to
evaluate the financial position and success of the business. On the contrary, cash flow is
considered to be more important for the business because it focuses on running the business for
the sustainable period (Aktas, Croci and Petmezas, 2015). Profit is useful in determining the
success of the business. Cash flow is considered to be one of the important metric to effectively
evaluate and assess the long term and short term borrowings of the business.

b.) Analysing working capital, inventory, receivables and payables.
Working capital is referred to as the capital of the company which is effectively used for
carrying out day to day operations of the business. It is referred to as the difference between
current asset and current liability of the company. The key elements of current assets includes
inventories, accounts receivables and cash. The key elements of current liabilities includes
accounts payables and bank O/d.
Receivables: This is an amount which is owed to the company. It is a small capital raised
by the company by effectively unlocking the money which has been tied up in invoices.
Accounts receivables is considered to be an asset for the company.
Inventory: It is referred to as the raw material and the goods which are available for the
sales. The key function of inventory is to increase the profitability of the business by optimally
utilizing the resources. The inventory of the company consists of raw material, goods in progress
and finished goods.
Payables: This is an amount which is owed by the company to its creditors in exchange
for certain goods. It is the obligation of the company to pay off its short term debts to its
suppliers and creditors.
c.) Assessing how change in working capital influence cash flow of the company.
Working capital is referred to as the difference between current asset and current liability
of the company. Wille, Hoffer and Miller, (2017) sought to determine the fact that, any change in
the value of the items in working capital will in turn influence the cash flow of the business. For
instance, if the trade receivables of the company tends to increase by the end of financial year.
This in turn states that the company has not collected enough cash from its debtors. It has a
negative effect on the cash flow of the business. If the balance of an asset tends to increase, then
it will result in lower cash flow from operations and vice versa. If the balance of the liability
tends to increase, then it will result in increase in cash flow from operations and vice versa. The
positive cash flows of the business tends to determine that the current asset of the company are
increasing which in turn is useful in settling debts, reinvesting money into the business, paying
dividend to shareholders, buffering funds for future, paying expenses, etc. For instance, purchase
of fixed assets tends to decrease the cash flow and working capital of the company, but there will
be no change in the cur rent liabilities. On the contrary, selling of fixed assets tends to increase
the cash flow and working capital of the company (What changes in working capital impact cash

flow?, 2018). If the inventory has been purchased with cash, then there will be no change in the
working capital, but the cash flow of the company will be decreased.
2. Determining how the current management of the company affects financial results.
Bright Lawns Ltd. has owed around £1.5 million millions pound. This in turn adversely
affects the current financial results of the company. It also has an outstanding dispute of £2
consignment. This in turn has led to withhold of payment and in turn affects the financial
position of the business and results in lower profit. Debts results in reducing the net financial
gain and cash flows of the company. Paying off the debts of the business helps in improving the
financial position of the Bright Lawns Ltd. Debt financing leads to increase in the revenue of
business. Faulty workmanship by the contractors results in lower operational performance and
productivity of the business. This in turn results in financial limit to the company. This in turn
resulted in overstocking of the supplies and material at London site. Overstocking results in
excessive warehouse cost and tied money. This affects the income statement, balance sheet, cash
flow statements and results in lower profitability for the business (Reuben and Queen, 2015).
Overstocking of goods has led to lower turnover and sales which in turn affects the profitability
and financial results of the Bright Lawns Ltd.
3. Analysing and recommending ways to improve cash flow of the company.
Bright Lawns Ltd. must focus on improving the cash flows of the company with the help
of effective working capital management. It helps company in smooth operations of the business
by effectively improving the profitability and earnings of the company. Bright Lawns Ltd. must
focus on improving the level of inventory of the business. It helps in avoiding under-stocking
and overstocking of the inventory levels. Bright Lawns Ltd. must also focus on improving the
debt of the company . It helps in improving the reputation and financial liquidity of the company.
Higher working capital by effectively improving the debt position of the company. The company
should focus on improving the working capital management of the company by paying off the
debts and maintaining optimum level of inventory results in improving the operations and
profitability of the company (Cole and Sokolyk, 2016). The company should focus on
maintaining enough liquid cash for the business in order to meet the short term obligations on
time. Bright Lawns Ltd should focus on streamlining the accounts payable and receivable
process in order to achieve high level of working capital for the organization. Collecting cash for

the goods and services given on credit helps in generating cash inflows from the company and
also leads to better working capital management.
PART 2
1. Understanding on the various budgetary tools.
Budget is an effective financial plan which is useful in creating a spending plan in order
to balance the income and expenditure of the organization. The key role of budget is to forecast
the budget by effectively developing various strategies and analysing the trends. This in turn is
very useful in planning, communicating, co-ordinating and controlling the activities of the
business in a systematic and efficient manner by preventing imminent issues, compare cost and
actual performance.
Purpose of budget:
 It helps in doing planning about revenue and expenditure through the means of
forecasting.
 Budget assists in controlling financial performance by highlighting deviations take place
in monetary terms. Referring identified causes firm can take significant action or measure
for improvement purpose. Further, budget gives input or evaluating performance of each departments and thereby
helps in setting appropriate remuneration.
Process of setting budget:
 It is the very first step manager make focus on identifying activities that need to be
performed during specified time frame.
 Thereafter, manager allocates fund to the activities according to the needs &
requirements and input taken from each department.
 Once budget has been setting down thereafter the same is sent to higher management
team for approval.
 Hence, after getting approval budget is circulated at each level of an organization.
Thereafter, it is also used for assessing the extent to which budgeted figures are met by
each department.
Advantages of budgeting
 It is useful for company to have control over money.
 It is useful in funding planning and helps in complete cash flow analysis.

 It is very useful for the company to review profitability.
 It is beneficial in allocation of cash.
a.) Traditional budgeting approach: It is referred to as the preparation of the budget plan by
considering last year budget as a base (Cole, 2018). The current year budget plan is prepared by
strategically making adjustments in the expenses based on the current market situation, inflation
rate and consumer demand. Traditional budgeting in turn results in incremental change in the
past budgeted plan by effectively considering various external and internal factors of the
business. It is very easy to set the traditional budget plan and is less time consuming. It relies on
actual facts and figures and take into consideration past data.
b.) Alternative budgetary methods:
Rolling budgets: This budgetary tool is continuously updated and act as an incremental
extension of the present budgeted plan. This helps in continuously changing the existing
budgeted plan throughout the financial year.
Strengths of Rolling budgets
It is very useful in making adjustment to the budgeted pan due to unexpected changes
during the financial year. It helps in assessing the performance of the company against
rationalized and realistic target. It helps in adapting to changes in the market.
Weakness of Rolling budgets
Continuous changes in the budget plan leads to regular market forecast and constant
revision of the budget leads to distraction and misunderstanding among the employees and
management of the company. It is a very time consuming process to make changes in the budget
plan on continuous basis.
Zero based budget: It is an effective tool which helps in developing a budget plan from
the scratch. It means management do not take into consideration past historical data while
preparing budget (Mohamed, Kerosi and Tirimba, 2016).
Strengths of Zero based budget
This tool is useful is better utilization of the resources and ensure careful planning by
effectively preparing the budget plan from zero by considering the future market needs and
demand of the company.
Weakness of Zero based budget

Zero based budgeting is a time consuming process because the budget has to prepared
annually from the scratch. Assigning cost to each activity results in problematic task and in turn
results in training to employees. It is a very tedious task to effectively justify all the expenses of
the business.
Activity based budget: This budgetary tool is useful in analysing and assigning cost to
each activity of the business (Macinati, Nieddu and Rizzo, 2018). It helps company in reducing
cost of the business and generate higher profit from sales.
Strengths of Activity based budget
This method has more control over the process of budgeting and in turn helps in
complying with overall goals of the company. It is useful in identifying inefficient process for
improvements and also offers better justification and understanding of the cost.
Weakness of Activity based budget
It is a time consuming process and activity based budgetary control tool do no comply
with the accounted standards and generally accepted accounting principles.
2. Application of budgetary tools for planning future cost management.
Budgetary tool are useful in forecasting the budget for the future. It helps in evaluating
the actual from the budgeted plan in order to take necessary measure in case of any deviation.
Application of these budgetary tools are useful in planning future cash management. Budgetary
tool is useful in making funds available for the business and make strategic decision for long
term sustainable growth and development of the business.
Cash management is very useful in resource planning, cost estimation, cost budgeting and
cost control in order to attain higher operational growth and efficiency. Project benchmarking is
useful is setting budget and developing interactive reports. Budgetary tools are useful in
assigning cost to each activity of the business (Alzoubi, 2017). This in turn is useful in
managing the cash flow for the business. It is very useful in allocating the resources for the
company and results in optimum management of cash for the future.
For instance, the sales budget of the company is useful in tracking the sales of the
company. The traditional approach is used by effectively evaluating the last year sales of the
company. The zero based budgeting method does not take into consideration sales of the last
year and proper budgeted plan is prepared from the scratch.

3. Analysing traditional and alternative budgetary system.
Boat World plc focuses on traditional budgeting tool by strategically making adjustments
in the expenses based on the current market situation. Chen and Kieschnick, (2018) it has been
sought to analyse the fact that, alternative budgetary tool such as zero based budget, activity
based budget, rolling budget, fixed budget and flexible budget are appropriate for the Boat World
plc because it helps in effectively allocating resources, analyse market, saves cost, helps in
gaining competitive advantage, etc. it is more disciplined in execution of the budgetary tool in
order to attain higher operational standards and efficiency. It is very useful in effectively
allocating the funds by effectively attaining higher operational goals. Modern budgeting tool are
useful in managing all the activities which leads to long term sustainable growth and
development of the business. It helps in taking corrective actions in case of any deviation
between actual and budgeted plan. On the contrary, traditional budgetary tool leads to
preparation of the budget plan by considering last year budget as a base. This in turn results in
incremental change in the past budgeted plan by effectively evaluating the current market
situation.
RECOMMENDATION
Boat World plc must focus on using alternative budgetary control tool in order to remove
bugs from the current operations of the business in a systematic and efficient manner. It helps in
effectively allocating funds in order to systematically carry out the business without creating any
chaos. All the departments of the organization must be based on modern budgetary tools which
in turn improves the working of the business. It is very useful in projecting and foreseeing the
budget required to carry out the operation of the business in a systematic and appropriate
manner. Boat World plc must focus on using Zero based budget because it helps in developing a
budget plan from the scratch (Mohamed, Kerosi and Tirimba, 2016). It helps in ensuring careful
planning by effectively preparing the budget plan from zero by considering the future market
needs and demand of the company.
CONCLUSION
This study concludes that, business finance helps company to manage their funds
effectively within the business. This study highlights that, profit is referred to as the income
generated by the business after deducting total cost from the total revenue. On the contrary, cash

flow is considered to be one of the important metric to evaluate the long term and short term
borrowings of organization. It will further analyse working capital, inventory, receivables and
payables. This study conclude s that, change in working capital results in change in cash flow of
the company. Furthermore, this study focuses on developing an understanding on traditional
budget and various alternative budgetary tools. Lastly, it concludes that, budgetary tool helps in
planning future cost management.

REFERENCES
Books and journals
Aktas, N., Croci, E. and Petmezas, D., 2015. Is working capital management value-enhancing?
Evidence from firm performance and investments. Journal of Corporate Finance, 30,
pp.98-113.
Alzoubi, A., 2017. The Effect of Profit and Cash Indices and the Financial Increase on the
Distribution of Cash Profits in the Industrial Companies Listed in Amman Stock
Exchange. International Journal of Entrepreneurship. 21(3). pp.1-15.
Chen, C. and Kieschnick, R., 2018. Bank credit and corporate working capital
management. Journal of Corporate Finance.48. pp.579-596.
Cole, R. and Sokolyk, T., 2016. Who needs credit and who gets credit? Evidence from the
surveys of small business finances. Journal of Financial Stability.24.pp.40-60.
Cole, R.A., 2018. Bank credit, trade credit or no credit: Evidence from the Surveys of Small
Business Finances. Trade Credit or No Credit: Evidence from the Surveys of Small
Business Finances (July 31, 2018).
Macinati, M.S., Nieddu, L. and Rizzo, M.G., 2018. Examining the role of value congruence,
professional identity, and managerial job engagement in the budgetary participation-
performance link. Health care management review.
Mathuva, D., 2015. The Influence of working capital management components on corporate
profitability.
Mohamed, I.A., Kerosi, E. and Tirimba, O.I., 2016. Analysis of the Effectiveness of Budgetary
Control Techniques on Organizational Performance at DaraSalaam Bank Headquarters in
Hargeisa Somaliland.
Reuben, L.J. and Queen, P.E., 2015. Capital constraints and industry mix implications for
African-American business success. The Review of Black Political Economy. 42(4).
pp.355-378.
Wille, D., Hoffer, A. and Miller, S.M., 2017. Small-business financing after the financial crisis–
lessons from the literature. Journal of Entrepreneurship and Public Policy. 6(3).pp.315-
339.
Online

The Critical Difference Between Profit and Cash Flow. 2019. [ONLINE]. Available
through:<https://quickbooks.intuit.com/r/cash-flow/critical-difference-profit-cash-flow/>
What changes in working capital impact cash flow?. 2018. [ONLINE]. Available
through:<https://www.investopedia.com/ask/answers/071114/how-do-changes-working-
capital-affect-companys-cash-flow.asp>