Business Accounting and Finance Report: Working Capital Analysis

This report provides a comprehensive analysis of business accounting and finance. It begins by differentiating between profit and cash flow, explaining working capital, receivables, inventory, and payables, and detailing the impact of working capital changes on cash flows. The report then explores the influence of management on financial results, highlighting the importance of effective working capital management strategies such as just-in-time inventory, cash flow forecasting, and credit analysis. Part 2 delves into the purpose of budgeting, comparing traditional and alternative budgeting methods, including rolling and zero-based budgeting, and assessing their respective advantages and disadvantages. The report concludes by recommending optimal approaches for financial management, emphasizing the significance of informed decision-making and strategic planning to improve a company's financial health.

BUSINESS ACCOUNTING AND FINANCE

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Part 1................................................................................................................................................1
(1)................................................................................................................................................1
(a)Meaning of profit and cash flow and ways in which they are different........................1
(b) Meaning of working capital, receivables, inventory and payables..............................1
© Impact of change in working capital on cash flows......................................................2
(2) Impact of management on financial results...........................................................................2
(3) Steps need to be taken to improve company cash flow through better working capital
management................................................................................................................................3
PART 2............................................................................................................................................4
(1) Purpose of preparing a budget...............................................................................................4
(2) Application of methods to plan future cost management for business..................................6
(3) Appropriateness of traditional or alternative budgeting method...........................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Financial and cost management are the one of the important fields that to great extent assist
business firm in making day to day business decisions. In the current report, working capital,
receivables, inventory and payables are discussed in detail. In second part of the report, budget
preparation purpose and varied budgeting approaches are disused at granular level. At end of the
report, one of the best approach which firm must follow is suggested and conclusion section is
prepared. In this way, entire research work is carried out.
Part 1
(1)
(a)Meaning of profit and cash flow and ways in which they are different
Profit and cash flow both are completely different from each other. Profit refers to the value
that is gained after subtracting expenses from revenue. On other hand, cash flows indicate
income earned and expenditures made in the business. So, both are different from each other and
it can be said that first cash flow originates in the business and then profit is earned. Existence of
amount of profit depend on the cash flows that are observed in the business (Renz and Herman,
R.D., 2016). Main focus of managers is always on cash flows and way in which from multiple
sources income is gained and expenditures made. Business firm prepare strategy in order to
control cost of production and service delivery in the business. By doing so to great extent cost is
controlled in the business and profit is increased. Thus, it can be said that both profit and cash
flows are different from each other.
(b) Meaning of working capital, receivables, inventory and payables
Working capital is calculated by subtracting current liability from current assets. This means
that working capital reflect the value of money that remain with the firm to meet its day to day
expenditures after paying current liability. Major components of the current assets are
inventories, trade receivables and cash in hand as well as bank. Current liability includes trade
payables and bank overdraft. On other receivables is another one of the most important term that
is used in respect to current assets in the business. Receivable is the instrument that is used to
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make credit sales in the business. Important point to note is that entire sales is not made on cash
basis. Some of portion of overall sales is made on credit basis. It is the receivable that act as
evidence of credit sale (Barr and McClellan, 2018). It forms large portion of the overall current
assets. Time to time managers keep checking receivables in order to ensure that cash is not
blocked in it. Apart from receivables there is another important term inventory. Term inventory
reflect raw items and final goods that are in the warehouse. Inventory manager like receivable
keep close eye on inventory and identify whether there is any unused inventory in the business.
Time to time as per production schedule inventory planning also changed and accordingly order
for product raw item is placed by the inventory manager with suppliers. Payables are inverse of
receivable and under this if firm take a goods on credit or take short term loan then front party
issue account payables under which on specific time period firm have to pay debt amount to the
lender (Karadag, 2015). If firm pay payable on time then in that it gets discount on the amount
and if company make delay in payment then in that case it has to pay interest to the front party.
© Impact of change in working capital on cash flows
Working capital refers the amount that remain after paying all current liabilities by using
current assets on time. Cash flows refers to the inflow and outflow of cash in the business.
Through working capital day to day business operations are financed. Important point to note is
that cash and receivables form major portion of current assets. During business many time
moderate investment is required. In that case either firm take bank loan or use cash available in
the business to finance its requirements. If there will be shortage of the working capital in the
business then in that case there will be less cash outflow or it will take residual amount from
bank loan (Waxman, K.T., 2017). Ultimately, it can be said that if firm rely completely on its
own resources then in that case with decline in working capital cash outflow will also reduce. On
other hand, if there is sufficient working capital then in that case firm can make investment in
securities which ultimately lead to generation of income from alternative sources and cash flow
get increase in the business. Thus, it can be said that change in working capital heavily affect
cash flows.
(2) Impact of management on financial results
Management of business activities can to great extent can improve financial results at the
workplace. Facts revealed that BLL is earning operating profit of £5 million last year and debt
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burden on it get increased from 16 million to 18 million. This is matter of concern for the firm
because with increase in debt interest burden also get increase in the company. If in future time
period same thing remain continue and sales declined then in that case firm may entangled in a
big problem (Burns and Dewhurst, 2016). Interesting fact is that debt burden is already high on
the firm and on other hand, amount yet to be received is also high equal to 3.5 million. So entire
scenario is that debt burden gets increase and large amount of cash is also blocked on
receivables. All these things collectively heavily affect business firm. If all these things will be
managed then results in financial statements can be improved. Firm must instead of taking debt
must focus on cost cutting in the business. If cost will be reduced then in that case profitability
will increase and saved amount can be used to finance business requirements. On other hand, in
case of receivable manager must before selling goods on credit basis must check payment history
of debtor and must give less time to make payment. If payment get delayed then in that case also
to great extent it can be assumed that on time when firm require cash payment will be received
(Antara, Musa and Hassan, 2016). By doing so less amount of cash will remain block on
receivables and because of generation of economies of scale in the business firm will need to
take less debt from the market. All these things ultimately will lead to strong financial position of
the firm.
(3) Steps need to be taken to improve company cash flow through better working capital
management
Some of the approaches that can be followed by the firm for better working capital
management are given below. Just in time: Just in time is the approach that is used to determine time when order for
purchase of raw material must be placed (Bruton and et.al., 2015). By placing order on
right time warehousing cost is reduced in the business and saved amount is used
elsewhere in the business. Forecasting cash flow: On basis of forecast of cash flow business firm can identify areas
where serious work must be done so that on time corrective action can be taken to obtain
better results (Olamide, Uwalomwa. and Ranti, 2015). Budget: Under the budget standards are determined and it seems that performance is not
going as per standard then actions are taken to solve the problem. Hence, if positive
results are obtaining more working capital remain in the business.
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 Managing receivables: Firm managers must be preparing credit management policy and
under this they must take in to account current and desired cash position (Barr. and
McClellan, 2018). According to position amount up to which receivable can be given and
to whom must be determined. By doing working capital can be managed in the business. Credit analysis system: Before giving loan, firm must access front entity financial
position and accordingly must give debt to it. Hence, cash will not be blocked in
payables.
PART 2
(1) Purpose of preparing a budget
Budget is the one of the important tool that is used to control cost in the business. There are
wide variety of budgets that are used by the business firms. Purpose of the budget is explained
below. Forecast of income and expenditure: It is one of the main purpose of budget and under
this income and expenses are predicted and accordingly in a year’s expenses are made in
the business. This ensure that cost will remain in control in the business. Making business decisions: Many time actual expenses increased at fast rate in the
business and managers expect that if same rate remain continue then in that case in future
time period actual may cross threshold limit (Dudin and et.al., 2015). Thus, budget give
signal to manager about time when decisions must be made in the business. Monitoring of business performance: It is very important to monitor business
performance. By using budget mangers keep performance tracking and on time take
action. Thus, it can be said that there is huge significance of the budget for the mangers.
Traditional budgeting approaches
It is the budgeting approach under which expenses actually made in the previous year are
taken in to account or determined as standard in the present year budget. In earlier years this
method was commonly used by the business firms. advantage and disadvantage of the traditional
budgeting are as follows.
Advantage
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 Main merit of the traditional budget is that already there is reference point around which
departments have to perform. Hence, employees already things that they need to do at
workplace (Jia and et.al., 2016).
 Effort of management become decentralized and top management does not need to play
any role in preparing budget.
Disadvantage
 Demerit is that with change in situation business operations get affected in different
manner. Hence, carrying forward previous year expenses as current year budget can not
be considered wise decision.
Alternative budget methods
 Rolling budget: In this approach when time period for which budget was prepare comes to
end further additions are made to the budget. Main advantage of the rolling budget is that time
to time budget is analysed and accordingly assumptions are revised. Thus, budget is prepared
in proper manner. Demerit of the rolling budget is that too much time managers have to spend
on it for making forecast.
 Zero based budget: Zero based budgeting is the approach under which past data is not taken
in to account and top manager ask their department heads to prepare budget from scratch
without considering previous year values. Unless budget does not get approved from senior
managers side no allocation is made to the department head (Maltritz and Wüste, 2015).
Thus, main advantage of using zero based budget is that each department head by considering
its department needs in light of upcoming time period propose draft for budget. Top managers
get most relevant input from the department heads. This ensure that budget will be prepared in
proper manner. Demerit of the zero-based budget is that manager does not take in to account
previous year budget values and due to this reason, it may make wrong judgement and wrong
amount can be determined for the budget.
 Activity based budget: It is the approach in which there is a system which record, analyse and
research the business activity which lead to development of cost in the business. Each and
every activity is analysed in proper manner in activity-based budgeting and on that basis,
budget is prepared. Main benefit of the activity-based budgeting is that by using this approach
in proper manner in accurate way values for the budget item can be prepared by the manager.
Chances of error in budget preparation is very low and on basis of activity-based budget one
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can make more prudent business decisions (Dudin and et.al., 2015). Demerit of the activity-
based budget is that it is time consuming and costly process. Analytics is the one of the
important part of activity-based budget and without it one can not prepare it. For analytics
there must be a separate team which make entire budget preparation process time consuming.
(2) Application of methods to plan future cost management for business
 Traditional budget: In the traditional budget approach manager can analyse previous
year budget related actual expenditure and can identify point where expenses increase at
fast rate and reason behind it. By working on relevant factor manger can plan for cost
management in the business under traditional budgeting approach.
 Rolling budget: In the rolling budget approach increment to previous budget values are
made. Assumptions are made while preparing budget. Manager try to manage cost within
these assumptions and take action to control them (The rolling budget., 2019). In this way
manager plan for cost management in the business.
 Zero based budget: In this approach each department head has to prepare a budget and
need to send it for approval to the senior manager. Each department head has interaction
with each other specially with production department. It is well known fact that
production department have manufacturing schedule and accordingly all departments
have to perform their business operations. Hence, after consulting with each other
department heads identify their estimated future expenditures. Thereafter, by taking in to
account varied factors that affect department operations managers plan cost management
approach that must be followed if cost start increases. In this way, under zero base budget
firm manage cost.
 Activity based budget: In this method deep analysis of costing is done and factors that
play crucial role in increase and decrease in cost are identified. Strategy is prepared to
control cost in case of emergence of such kind of factors. By doing so it is ensured that if
cost increase then in that case situation will remain in control.
(3) Appropriateness of traditional or alternative budgeting method
Alternative budgeting approach is most suitable method then traditional budget for the Boat
World plc because firm is planning to operate its business in Netherlands and Germany.
Economic conditions of both nations are different and different strategy need to be adopted in
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both nations. Hence, it will be appropriate to use activity-based costing so that both nations each
operation can be analysed separately. Such kind of practice will assist manager in preparing
budget in systematic manner and it will also increase its reliability.
CONCLUSION
On the basis of above discussion, it is concluded that firm must manage its current assets
and current liability so that sufficient amount of working capital can be obtained to manage day
to day business operations. It is also concluded that there are advantage and disadvantage of all
budgeting methods and firms according to their need must choose appropriate one for the
business.
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REFERENCES
Books and Journals
Antara, P.M., Musa, R. and Hassan, F., 2016. Bridging Islamic financial literacy and halal
literacy: the way forward in halal ecosystem. Procedia Economics and Finance. 37.
pp.196-202.
Barr, M.J. and McClellan, G.S., 2018. Budgets and financial management in higher education.
John Wiley & Sons.
Barr, M.J. and McClellan, G.S., 2018. Budgets and financial management in higher education.
John Wiley & Sons.
Bruton, G. and et.al., 2015. New financial alternatives in seeding entrepreneurship:
Microfinance, crowdfunding, and peer‐to‐peer innovations. Entrepreneurship Theory and
Practice. 39(1). pp.9-26.
Burns, P. and Dewhurst, J. eds., 2016. Small business and entrepreneurship. Macmillan
International Higher Education.
Dudin, M. and et.al., 2015. International Practice of Generation of the National Budget Income
on the Basis of the Generally Accepted Financial Reporting Standards (IFRS). Asian
Social Science. 11(8). pp.119-126.
Dudin, M. and et.all., 2015. The innovative business model canvas in the system of effective
budgeting. Asian Social Science. 11(7). pp.290-296.
Jia, A. and et.al., 2016. Balancing the budget: accounting for glucocorticoid bioactivity and fate
during water treatment. Environmental science & technology. 50(6). pp.2870-2880.
Karadag, H., 2015. Financial management challenges in small and medium-sized enterprises: A
strategic management approach. EMAJ: Emerging Markets Journal. 5(1). pp.26-40.
Maltritz, D. and Wüste, S., 2015. Determinants of budget deficits in Europe: The role and
relations of fiscal rules, fiscal councils, creative accounting and the Euro. Economic
Modelling. 48. pp.222-236.
Olamide, O., Uwalomwa, U. and Ranti, U.O., 2015. The Effect of Risk Management on Bank's
Financial Performance in Nigeria. Journal of Accounting and Auditing. 2015. p.1.
Renz, D.O. and Herman, R.D. eds., 2016. The Jossey-Bass handbook of nonprofit leadership and
management. John Wiley & Sons.
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Waxman, K.T. ed., 2017. Financial and business management for the doctor of nursing practice.
Springer Publishing Company.
Online
The rolling budget., 2019. [Online]. Available through:<
https://www.accountingtools.com/articles/what-is-a-rolling-budget.html>.
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