Accounting and Finance Report: Cash Flow and Budgets

This report provides a comprehensive analysis of key accounting and finance concepts. It begins by explaining the advantages of budgets for business entities, highlighting their role in identifying fraud and errors, increasing profits, and aiding in planning. The report then uses ratio analysis to evaluate a company's financial performance, assessing its liquidity, efficiency, and overall financial health. Furthermore, it explains the importance of cash flow statements in cash management, detailing how they assist in tracking overdue payments and assessing a company's solvency and creditworthiness. The report concludes by suggesting strategies to reduce the duration of cash conversion cycles, such as faster invoice processing and optimizing credit terms. The report draws on various financial resources to support its findings.

Running Head: ACCOUNTING 1
ACCOUNTING

ACCOUNTING
Contents
Question 2...................................................................................................................................................3
2.3 Explain three advantages of budgets to business entities...................................................................3
Question 4...................................................................................................................................................4
Question 5...................................................................................................................................................5
Explain how the preparation of a statement of cash flows could assist in cash management...................5
Suggest FIVE (5) strategies that may be used to reduce the duration of cash conversion cycles.............6
References...................................................................................................................................................8

ACCOUNTING
Question 2
2.3 Explain three advantages of budgets to business entities
Identification if fraud and errors
Budgeting is a very important tool that helps in identifying the frauds and errors that could take
place while preparation of the financial statements. It is the duty of an accountant to vouch the
transactions while recording. The budgeting process also helps in keeping a check on the minima
transactions that can have maximum effect. The budget acts as a mirror that gives the
comparison between the fiscal reports and the budgeted reports1.
Increases the profits
The business cost of the services and the product shall be careful of any extra expenses in so that
the profits can be redeemed through it.in case the events are increasing the profits or decreasing,
one can surely devise a strategy through budget, and in this manner the company can find a way
to mitigate unwanted costs. For instance, firms can change the price of stock to meet the current
as well as needs of the future, contract or lay off representatives, increment or reduction
promoting, or even pick another element that could entertain the problems of the business. If it is
necessary to bring down the selling price, at that point one can alter spending in different classes
of budget to reflect lower incomes.
1SIDDIQUI, F. The Benefits of Budgeting in a Business – Business and finance Blog
https://businessandfinance.expertscolumn.com/benefits-budgeting-business (accessed Apr 14, 2020).

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Part of planning
Budget is also helpful in planning the policies of the organization; Budget gives estimation to the
company about the future performance of the business. The transactions give an idea of how
much revenue the company shall generate in order to cover the expenses. With the help of
appropriate planning, the company can achieve the greater market share. The budget therefore
acts as a proactive key driver, which is useful in
Question 4
Ratio analysis technique can fairly define that CAHT enterprises was able to secure the margins
fairly at 63.93%. The return on assets is also 21.15% which depicts that the company is able to
use the assets wisely to generate more sales and revenue. Overall the liquidity position of the
company is also smooth and sound as the current ratio is 2.4 times and the quick ratio is 1.92
times. This also implies that the company is working smoothly and must work with same
consistency. The efficiency of the company has also been analyzed that could define, how well
the company is able to realize cash from inventory within 6 days. However, the company will
need to work upon 89.75 days as too much cash piled up with debtors will result in bad debts.
Hence, overall the company is performing well and must reduce the credit period to work more
efficiently2. Overall the company is working fine, but if the company can improve two or three
elements of its business, it can take a new shape and this will also help the customers watch the
2Accounting Principles II: Ratio Analysis
https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-ii/financial-
statement-analysis/ratio-analysis (accessed Apr 14, 2020).

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business through different lens. This would also give the advantage to the business in longer
duration.
Question 5
Explain how the preparation of a statement of cash flows could assist in cash management.
 The preparation of the cash flow statements acts a mirror that could help in devising the
strategy towards the management of the inflow and outflow of the cash. By doing several
activities, the cash flow statement can help in following ways and such has been listed
below3.
 The cash flow statement can help in tracking the overdue payments which might alert the
business about the time period the money will be kept intact. If the overdue payments are
taken seriously and taken care of, half of the problems of the business can be solved
automatically.
 The cash flow statement is useful in most organizations; it's uncommon to see
overabundance money stashed away. In any case, utilizing extra money for reinvestment
in new markets, or for the reimbursement of credits, can be basic to keeping above
water4.
3Nagar, N.; Sen, K. Classification Shifting In the Cash Flow Statement: Evidence From
India. SSRN Electronic Journal 2014.
4Understanding the Importance of Cash Flow Management in Business
https://www.thebalancesmb.com/cash-flow-management-2947138 (accessed Apr 14, 2020).

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 Knowing when the company will have surplus money tucked neatly away, and having the
option to see where and when the surplus will happen, implies that entrepreneurs are
better ready to get ready for how to manage the excess.
 Positive cash flow statement also reflects the solvency and the overall creditworthiness of
the company. A positive income implies the business appreciates consistent and
unsurprising incomes. Banks favor stretching out credit to such borrowers5.
Suggest FIVE (5) strategies that may be used to reduce the duration of cash conversion
cycles.
The Cash Conversion Cycle is a metric that shows the measure of time it takes an organization to
change over its interests in stock to money. The cash conversion cycle is basically a tracker that
could track the movement of the cash and its potential use in the business. It is important to now
where the cash of the business is being used. There are several strategies that are helpful in
reducing the cash conversion cycle and the same have been outlined below6.
5Cash Conversion Cycle (Operating Cycle)
https://www.readyratios.com/reference/asset/cash_conversion_cycle.html (accessed Apr 14,
2020).
6Cash Conversion Cycle - Overview, Example, Cash Conversion Cycle Formula
https://corporatefinanceinstitute.com/resources/knowledge/accounting/cash-conversion-cycle/
(accessed Apr 14, 2020).

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 Sales and the invoices are bloodlines of nay business, and if the company sends the
invoices in the quickest manner, the cash also enters in the business faster than expected.
Hence, the company must work on sending the invoices faster.
 Collection of cash from the customer by reducing the credit limit as it is also one of the
techniques that are used to bring the cash back into the business. If the credit lines are
reduced the customers shall be given discount as a medium to pay back the cash in the
faster manner so that the cash conversion cycle operates efficiently.
 If the above methodologies don't work or you need money immediately, another choice is
Invoice financing. Invoicing financing is one of the effective ways where the business
can borrow funds as it also helps in improvement of cash flows of the business. The
factoring organization takes a little cut of the cash you procure, however the result is that
you aren't stuck looking out for clients.
 There shall be a balance between the competitive prices and fairly compensating for the
hard work. If the prices off the company are too low than it will difficult for the company
to sustain in this competitive world7. If the prices are too high the customers would notp
purchase the product.
Overall it can be stated that the cash conversion cycle is definitely an interesting metric that
could help in determining the real position of the cash. Since the cash is the pillar for any
7 David, C. The Potency Of Cash Flow In Predicting Corporate Performance. Account and
Financial Management Journal 2018, 03.

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business an organization, it is very necessary to keep a track of the movements of the cash and its
involvement with the cash to pay back the expenses8.
8Cash conversion cycle https://financial-dictionary.thefreedictionary.com/cash+conversion+cycle
(accessed Apr 14, 2020).

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References
(1) Cash Conversion Cycle - Overview, Example, Cash Conversion Cycle Formula
https://corporatefinanceinstitute.com/resources/knowledge/accounting/cash-conversion-
cycle/ (accessed Apr 14, 2020).
(2) Accounting Principles II: Ratio Analysis
https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-ii/financial-
statement-analysis/ratio-analysis (accessed Apr 14, 2020).
(3) Understanding the Importance of Cash Flow Management in Business
https://www.thebalancesmb.com/cash-flow-management-2947138 (accessed Apr 14,
2020).
(4) Nagar, N.; Sen, K. Classification Shifting In the Cash Flow Statement: Evidence From
India. SSRN Electronic Journal 2014.
(5) David, C. The Potency Of Cash Flow In Predicting Corporate Performance. Account
and Financial Management Journal 2018, 03.
(6) Cash Conversion Cycle (Operating Cycle)
https://www.readyratios.com/reference/asset/cash_conversion_cycle.html (accessed Apr
14, 2020).
(7) Cash conversion cycle
https://financial-dictionary.thefreedictionary.com/cash+conversion+cycle (accessed Apr
14, 2020).
(8) SIDDIQUI, F. The Benefits of Budgeting in a Business – Business and finance Blog
https://businessandfinance.expertscolumn.com/benefits-budgeting-business (accessed
Apr 14, 2020).

ACCOUNTING