Improving Cashflow and Working Capital Management

This report discusses the importance of managing cashflow and working capital for financial stability and profitability. It provides recommendations on steps to improve cashflow and working capital management. It also explores different budgeting methods and their application in planning future cost management. The report focuses on two companies, Mediterranean Delight ltd and Second sight plc.

Report for the
shareholders

Executive summary
The present report is divided into two parts in which one report is based upon
Mediterranean Delight ltd which provide services to over 30 delicatessens throughout the South
of England. Beside this company have turnover of £ 50 million and it has increased the debt
which is the major concerned for the shareholders. As company must develop effective plan in
cash flow and maintain proper balance sheet to gain trust on shareholders. Whereas another
company is second sight plc which deals in sunglasses for the different companies. The company
must develop about the future cost management method which help in making effective decision
for their shareholders.

Table of content
Contents
INTRODUCTION...................................................................................................................................4
Main Body...............................................................................................................................................4
Part 1...........................................................................................................................................................4
How company can manage the financial effects......................................................................................6
Recommend what steps should be taken to improve cashflow and working capital management...........6
Part 2.......................................................................................................................................................7
Understanding the purpose of budget and different kind of budget:........................................................7
Demonstrate the application of these methods showing how they might be used to plan future cost
management for this specific business.....................................................................................................9
Analyzing whether a traditional or alternative budgetary system is appropriate......................................9
CONCLUSION.........................................................................................................................................10
REFERENCES..............................................................................................................................................11

INTRODUCTION
Shareholders are referred to those people who own some share within the organization or
the mutual funds to become the partial owner. The shareholders mainly receive the dividend if
the company does well and succeed. This report is carried forward in two parts where one
organization is Mediterranean Delight ltd and other is Second sight plc (AG, 2019). In the case
of Mediterranean have increased the debt which is concerned factor for the shareholders. As
company has told to there investors to invest more money in order to reduce debt. On the other
hand, second sight plc is considered which deals in prescription-based sunglasses for many big
companies. Beside this firm headquarter is in Manchester and having around 250 staff. This
report describe about the importance of budget and different method are used to develop such
budget for the ensuring the smooth functioning of the organization.
Main Body
Part 1
What is meant by Profit and cashflow?
Profit and cashflow are the two different things based on financial parameters and both of
them are essential for running the successful business effectively. For the organization like
Mediterranean Delight ltd financial department must measure and prepare the budget as per the
cashflow which tend to increase the profit and market share effectively for the longer time
period. Here are some main differences between the profit and cash flow which are explained
briefly below:
Profit: This is defined as the financial gain of the company by offering services and
product to the customer. In other words, this is also called the net income is what it remains the
sales revenue after each expense are eliminated. In the case of Mediterranean delight ltd
company must focus on there net profit so that can sustain in this competitive environment for
the longer time period. As business cannot survive unless it is profitable, so the company must
focus to implement new strategies to attract investors to invest more as to reduce debt in the
shorter time span.
Cashflow: This is the money which is flows in an out from the firm from the operation,
financing and investing activities. It is used to meet the near as well as current term obligation

which are essential for the Mediterranean delight ltd to operate the business activities in a
smooth manner. Apart from this with the assistance of cashflow company can pay the expense on
time and which consist of suppliers, employees and rent.
What is meant by Working Capital and, the meanings of Receivables, Inventory and Payables
Working capital
This is also known as the net working capital which have major differences between the
company current assets such as cash and account receivable. In the working capital the net
operating capital is measured by the company liquidity which refers to the difference between
the operating and current liabilities.
Receivables:
In financial terms the receivables are the legally enforceable claims for the payment
which is held by the business for goods and supplied the different service render to the customer
in the well define manner. These are generally made in forms of invoice which help in doing
payment within in the agreed time frame. In the context of Mediterranean delight ltd the finance
department must issue proper receivables for the purchase as this help in maintaining proper
records and able to attract investors.
Inventory:
Inventory refers to the goods or material that the business hold for the purpose of selling
of goods to earn profit constantly. In regards of Mediterranean delight ltd inventory management
can be useful which reduce debt which is generated by company. As the firm must set up at
different location which help in improving the supply chain network and earn more revenue in
the well define manner.
Payables:
The account payables are the money owned by the business to its suppliers shows in the
liability in the balance sheet which is prepared by the company. This differ from the notes
payables which are developed by the formal legal instrument documents. For the organization
like of Mediterranean delight ltd company must focus to develop effective strategies which help
preparing ledger account as conduct business activities effectively.

How changes in Working Capital affect Cashflow
If a transection increases in current assets as well as the current liabilities by the same
amount of cashflow hence there will be no changes in the working capital. For example, if the
Mediterranean delight ltd receive the cash from the short-term debt to be paid in the time frame
of 60 days as there will be increase in the cash flow statement (Chang, Zheng and Tan 2019).
Beside this there will be no increase in the working capital due to the process of loan would be
consider as the current assets and note payable would be describe as the current liabilities.
How company can manage the financial effects
For the company the working capital is the core part of funding for the daily operation.
As to manage the financial position of Mediterranean delight ltd the management must focus on
the working capital and cash flow of the company to determine whether the financial activities
are the short as well as long term activities (Lumsden, 2019). As company must track and
monitor the cashflow and make changes to reduce the debt through which company can repay
the loan in the effectively manner. Beside this company have to invest more in long term fixed
assets as this will assist in earning the longer term earning which help to manage and control the
financial activities for the longer time period.
Apart from this financial management ensure about the regular and adequate supply of
funds by identifying the different sources of funds by identifying the different source of money
and procure them at the lower cost. After the money is pooled the next aim is to invest in
different assets for profitability, liquidity as well as safety.
Recommend what steps should be taken to improve cashflow and working capital management
For operating successful business there must be constant growth is essential for gain
profit. Apart from this company must maintain the stock as thus it will tend to increase the cost
and reducer the profitability for the company. In the case of Mediterranean delight ltd must
implement new policies and structure which help in increasing their cashflow along with the
working capital management. Here are some steps which is used to improve the cashflow are
explained in detail manner:
Lease: Since company should lease the supplies, equipment and the real state as buy is
considered as the costly process. The is recommend to Mediterranean delight ltd is lease all their

raw material as this help in increasing the cashflow and enterprise can focus on other elements
effectively as to capture large market share.
Improve inventory: This is also recommended to the company to improve their
inventory management which to maintain the proper flow of cash in the well define manner. It is
suggested to Mediterranean delight ltd is to purchase the product as per the need and requirement
hence this will minimize the cost for the inventory present within the company.
Maintain proper invoice: The main objective of the company is to maintain the proper
invoice which aid organization to create better cashflow as well as working capital for the
company. However, there must be proper record of daily transection and invoice which use to
receive the receivables more effectively.
Part 2
Understanding the purpose of budget and different kind of budget:
By preparing the future financial statement is the helpful as well useful tool to manage
and utilize and manage the useful resources. Apart from this it also helps in anticipating the
future forecast in regards of financial result effectively. This are used to manage the financial
positioning and cash flow of the business at the different dates in future. It also provides the
business insight and help in managing the need and demand of the company in the well define
manner. The main objective for preparing the budget is to determine the profit and allocation of
resources for the company. Here is some method of preparing budget which are explained down
below:
Traditional budget: This is the budget used by the company for the particular time
period under the consideration where the budget of the previous year is considered as the base
year for the preparation of budget. For the organization like second sight plc the firm must
prepare the budget which depend upon the preceding year and the spending of the current year.
Strength: The major strength is to manage the financial activities of the organization which help
to manage and control the business activities effectively. Apart from this, it helps in increasing
the financial aspect as well as allow decentralization method to increase the method to achieve
the desire aims and objective effectively.

Weakness: In this case the chance of human error is higher as there are lots of spreadsheet and it
is natural to have error. So, this help in increasing the cost for the second sight to bear huge loss.
Beside this it also time-consuming process and its inflation will bring hue comprise for the
company.
Rolling budget:
This is continuous budget which is updated regularly when the earlier budget period
expires or we it can be derived as the extension of the present budget. Beside this it also known
as the budget rollover which help in managing and controlling all the business activities which
are useful to manage and control all the financial budget. As for the Second sight organization
company can use such method as this consider as flexible option for the company who operate at
the different level.
Strength: The major strength of this budget does not require more time as it provide extension
of the earlier as per the necessary changes. Beside this is useful for the Second sight to assess the
actual performance against the budget.
Weakness: For developing the rolling budget their company require robust system and the
skilled manpower which require loss of cost for the company. beside this also create the lost of
confusion and disturb the employees because of the constant change.
Zero based budget:
This is budgeting process where each expense under this item which is under
consideration which is evaluated from the scratch for the new period of time which starts from
the Zero and only taken when it only needs to be fully justified. Here are some strength and
weakness which are explained briefly down below:
Strength: This budget used to prioritize the profit over the expenses as for the company like
Second sight the department or the unit can create generate direct or indirect profit as per the
need and requirement.
Weakness: As since the cost center do not aid in creating immediate profit hence the budget
does not encourage funding them. Apart from this it is consider as the complex process which
reduce the efficiency and profitability.

Activity based budget:
This is the technique in which budget is prepared by using activity-based costing which is
consider as the overhead cost. In other words, it is considered as the management accounting tool
which do not allow the past year budget in the current year. For the firm like Second sight must
use such method as company use different kind of operational activities.
Strength: The main advantage for the company is to figure out each and every aspect of cost
driver hence this take all the activities into account to accomplish desire aims and objectives
effectively. Apart from this also improve the relationship for Second sight from the suppliers
hence it develops business for the company for the longer time period.
Weakness: This method requires resource consumption and to maintain this budget the Second
sight have to use larger amount of fund which create debt for company. however, this kind of
budgeting is considered as time consuming process and does not make sure for the better return.
Demonstrate the application of these methods showing how they might be used to plan future
cost management for this specific business
Cost management refers to the process of finding out the proper project and to carry
forward the business activities effectively. This consist of proper planning and estimating the
budget and financing every aspect of the firm (Cheffi and Abdennadher 2019). The company can
use such method by using different cost budgeting tools to reduce any kind of risk and
uncertainty present in while preparing such kind of budget. For cost estimating company can use
Zero based method as this easy way to estimate the cost and which control and make proper use
of resource effectively. Along with this, for managing the inventory company can use traditional
budgeting approach which reduce error and maintain the stock.
For example, second sight is company is opening new plant in manufacturing plant in
Netherland as enterprise can use rolling bases budget as this does not require more time because
as this is extension of the earlier based budget with require change effectively. As previously
company use traditional budgeting method which create human error. So, company can use this
budget firm can figure their pros and cons and make change as per the need and requirement.

Analyzing whether a traditional or alternative budgetary system is appropriate
As compare to the traditional budget other budgeting process the company can use
alternative budget as they are considered as less complex and they are easy to use and maintain
the record the of firm in the detail manner (Hansford and Hussey, 2019). Apart from this, it also
more flexible than the tradition method and also have less chance of human error. It also helps in
providing detail information regarding the inventory and provide proper insight to eliminate risk
and uncertainty present in the business.
CONCLUSION
This is having been concluded from the above stated report that, the shareholders are the
essential element for organization as they invest in the company. apart from this there are
different budget which are made to maintain the record effectively. It also has been concluded
that the firm must use alternative budget method as they more flexible and less time consuming
for traditional method. This is vital for the company to create cost management plan to ensure
about the proper use of resources effectively.

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