Understanding Finance: Cash Budget, Sources of Finance, Financial Ratios, and Flexible Budget

This report discusses the preparation of a cash budget, sources of finance, financial ratios, and flexible budget for Gaia Ltd. It includes recommendations and advantages and disadvantages of different sources of finance. The report also covers the calculation of financial ratios such as gross profit margin, operating profit margin, return on capital employed, and more.

UNDERSTANDING
FINANCE

Table of Contents
INTRODUCTION ..........................................................................................................................3
PART A...........................................................................................................................................3
1.Cash budget of Gaia Ltd..........................................................................................................3
2.Recommendation of cash budget.............................................................................................3
3.Sources of finance....................................................................................................................3
PART B............................................................................................................................................4
Calculated the financial ratios of Gaia Ltd.................................................................................4
Recommendation of different types of financial ratios..............................................................4
PART C............................................................................................................................................5
Preparation of flexible budget.....................................................................................................5
Recommendation of flexible budget...........................................................................................5
CONCLUSION ...............................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Finance is to define as value, currency and financial assets. It includes many investment
securities for the future cash flows. It can be divided into the three basic parts such as public,
corporate and personal finance (Burlacu and et.al, 2019). In this report to prepare a cash budget
of Gaia Ltd and also consider advantages and disadvantages of sources of finance. Further this
report analysing the financial ratio of Gaia Ltd and also prepare the Flexible budget.
PART A
1.Cash budget of Gaia Ltd
Cash budget is a detailed budget of cash receipts and cash payments incorporating both
revenue and capital items for the budget period. This budget is usually of two parts giving
detailed estimates of cash receipts and cash disbursements. Estimates of cash receipts are
prepared on monthly basis and depend upon estimated cash sales, collection from debtors and
anticipated receipts from other sources such as sales of assets and borrowings (Khan and et.al,
2021).
2.Recommendation of cash budget
The Gaia Ltd should maintain the optimum cash in every month because company spends
more money in marketing expenses so that in the last month company has not available cash. In
the month of July company has repay the loan but Gaia Ltd has not sufficient cash to repay the
loan, In the month of July is showing the negative balance of cash. If the company has limited
cash flow then it must to set up a line of credit. If they have spend the money then company can
receive the money in future. The company must need to offer the payment terms only one month
so that cash is received earlier. If the selling price of the products at low, it is negative impact on
the margin.
3.Sources of finance
It includes the equity, debentures, borrowings, venture capital and letter of credit. Theses
sources of funds are dependent on the business situations. They are based on the time interval,
ownership and control. It is very important term when the entrepreneurs start the business. There
are various chooses that the company adopt it. The sources of finance are classified into the long
term and short term. Gaia Ltd are listed in the London stock exchange and wanted to growth of

the business so that it raising the capital through issue of shares. The Gaia Ltd is available many
options to raising the money such as debt, long term loan and venture capital. But the best option
of Gaia Ltd is obtain the money through venture capital because it provides the lower risk of the
company and company does not liable to pay the interest at regular interval. It is the best option
to raising the fund to Gaia Ltd (Ngo and et.al, 2021).
Advantages :
 Big amount of capital can be finance through venture capital and shares.
 There is no need to make monthly payments.
 They help to raising publicity.
Disadvantages:
 The overall cost of financing is costly.
 Both of the sources are required the formal reporting structure and board of directors.
 Due diligence is necessary.
PART B
Calculated the financial ratios of Gaia Ltd
Gross profit margin- Gross profit *100/net sales
Operating profit margin- Operating profit*100/net sales
Return on capital employed- Earning before interest and tax*100/capital employed
Assets Turnover- Sales/ Total assets
Current Ratio- Current assets/ current liabilities
Acid Test Ratio- Current assets- inventory/ current liabilities
Inventory days- Average inventory*365 / Sales
Trade receivable days- Average account receivable*365 / sales
Trade Payable Days- Average account payable*365/ purchases
Working capital cycle period- Inventory days+ receivable days- Payable days
Gearing ratio- Long term loan*100/ Capital employed
Interest coverage ratio- Earning before interest taxes/ Interest
Recommendation of different types of financial ratios
In the year 2020the Gross profit ratio is better than in the year 2019. The positive G.P.
Ratio is a favourable sign of good management (Paltrinieri and et.al, 2020). The company should

reduced its marketing and administration expenses so that company can earn high net profit and
Gaia Ltd should borrow the money through issue of shares rather than debt because through debt
the company bears interest expenses. The optimum current ratio is always 2:1, but in the present
situation the current ratio is 1.43:1, company should reduced the current liabilities.
PART C
Preparation of flexible budget
It adjusts the volume levels of the Gaia Ltd. It always flexes with a business's variations
in costs. It offers the variable rates per unit but it does not offer the fixed cost.
Recommendation of flexible budget
The company sales its product at less than its production costs that the company bears net
loss on 25000 units. The company should reduced the overhead expenses. If the company
produced 35000 unit then earns higher profit as compare to 25000 unit. The company should not
sell the 25000 unit because company suffer high losses (Sharma and et.al, 2022).
CONCLUSION
In the above details discuss about the cash budget of Gaia Ltd. It gives the information about the
cash inflows and cash outflows over a specific period of time. The financial ratios tell about the
relationship between two accounting figures. It is not just comparing different numbers from the
financial statements but also comparing the figures of other companies to analysis the financial.
The Gaia Ltd obtains money through venture capital and issue of shares.

REFERENCES
Books and Journals
Burlacu and et.al, 2019. Impact of demography on the public finance of the European
Union. Quality-Access to Success, 20.
Khan and et.al, 2021. Artificial intelligence and NLP-based chatbot for islamic banking and
finance. International Journal of Information Retrieval Research (IJIRR), 11(3). pp.65-77.
Ngo and et.al, 2021. The impact of green finance and Covid-19 on economic development:
capital formation and educational expenditure of ASEAN economies. China Finance
Review International.
Paltrinieri and et.al, 2020. Islamic finance development and banking ESG scores: Evidence from
a cross-country analysis. Research in International Business and Finance, 51. p.101100.
Sharma and et.al, 2022. Revisiting conventional and green finance spillover in post-COVID
world: Evidence from robust econometric models. Global Finance Journal, 51. p.100691.