Business Finance Report: Profit, Cash Flow, and Budgets

This report provides a comprehensive overview of business finance, encompassing essential concepts such as profit, cash flow, working capital, receivables, and inventory. It begins by defining these terms and explaining their significance, including the difference between profit and cash flow and how working capital impacts cash flows. The report then integrates these concepts with a case study, analyzing a company's profit, cash flow, working capital, and other financial aspects. It further suggests strategies to improve a company's cash flow, such as incentivizing receivables, meeting debt obligations, managing inventory, and resolving disputes. The second part of the report delves into budgeting, defining its purpose and exploring traditional and alternative budgeting approaches, including rolling budgets, zero-based budgeting (ZBB), and activity-based budgeting (ABC). It examines the advantages and disadvantages of each method and discusses their role in cost management, providing valuable insights for financial planning and decision-making in business.

BUSINESS FINANCE

Contents
EXECUTIVE SUMMARY (PART 1).........................................................................................................3
MAIN BODY..............................................................................................................................................3
Part 1.......................................................................................................................................................3
EXECUTIVE SUMMARY (2)....................................................................................................................7
Part 2.......................................................................................................................................................7
CONCLUSION.........................................................................................................................................10
REFERENCES..........................................................................................................................................11

EXECUTIVE SUMMARY (PART 1)
The term business finance can be defined as value of monetary resources which a
company has in order to complete their operations and activities. Eventually, companies acquire
finance from vital range of resources such as loan, investing own capital and many more. The
main aim of project report is to demonstrate understanding about term business finance for
companies. The project report is based on two case studies in which first case study consists
information about profit, cash flows, working capital and many more. As well as second case
study includes information regards to role of budgets in businesses as well as evaluation of
efficiency of traditional and alternative budget methods.
MAIN BODY
Part 1
(i) Explanation of followings:
(a)Profit- Profit defines the financial advantage gained when the income generated by the
commercial activity covers the costs and fees included in the management of the activity
(Anandarajan and Srinivasan, 2012). The profits made by filter down to business holders who
collect the money or invest it down to the business. Revenue is computed as overall revenue less
total expenditure.
Cash flow- Cash flow is the actual amount of cash and cash equivalents allocated to and from
a company. At the most basic level, the ability of a corporation to produce value for shareholders
is measured by its ability to produce profitable cash flows or, more precisely, to optimize long-
term cash flow.
Difference between cash flow and profit:
Basis Profit Cash flow
Mean It represents the value of money
that is earned from various sources.
It can be defined as amount of money
which is left from revenues after
deduction of cost.
Impact The cash flow can be affected due
to timing of payments in and out of
firm.
This is affected due to number of
business transaction done during a
particular time period.
Importance This is critical for survival of firm. While this is not so critical in order to
survive.

(a) Working capital- Working capital is generally an indication of the firm's quick-
term financial situation and also a reflection of its overall capacity. Working
capital is acquired by deducting the current liabilities from the current assets. That
ratio shows whether the business has adequate assets to pay its short-term
liabilities.
Receivables- The word receivable relates to the transaction that has not been made.
This means the business must have expanded the line of credit to its clients. Generally the
business sells its products and services in both money and on debt.
Inventory- The term stock can be defined value of material which is stored in
warehouses in order to complete activities regards to production or selling (Burns and
Dewhurst,2016). There are mainly three forms of inventories that are raw material,
prepared goods and finished goods. In order to evaluate value of products there are
different techniques such as LIFO, FIFO and weighted average cost methods.
Accounts payable- Accounts Payable is a debt owed to a specific lender when buying
products or services without withdrawing cash in advance, which indicates that
lender have bought products on credit. Accounts Payable as a term shall not be limited to
businesses.
(b) How working capital impact cash flows.
The change in working capital affect to cash flows. This is so because change in
value of current assets, current liabilities impact to cash flow. Such as if current
assets increase as compare to current liabilities then cash flow gets effected in a
positive manner. Apart from it, if current liabilities increases and current assets
decrease then cash flow gets affected in negative manner. It causes because when
cash goes out due to increase in current liabilities then cash flow affected
negatively. As well as if cash comes in to business then current assets increase
then cash flow becomes positive.
(ii) Integration of above terms with given case study.
(a) Profit- In the aspect of above Bright Lawns limited company, their profit was of £50
million in the last year. As well as their operating profit was of £5 million.
(b) Cash flow- As above stated, this is related within and out of cash during a particular
time period. In the context of above company of case study, their cash flow seems to
be negative as their debts are increasing by £2 million.
(c) Working capital- This is the difference between current assets and current liabilities
(Cumming, 2012). As above stated, that their cash flow is negative then working

capital can also be negative because excess of outing of cash leads to negative
working capital.
(d) Receivables- In the aspect of above Bright Lawn limited company, their receivables
are of £1.5 million pounds. As they owed this money from C&P company in last year
in order to provide goods.
(e) Inventory- the Company which is mentioned in case study is involved in process of
manufacturing of valves and fittings for hoses. This indicates that they may have a
wide number of inventories including raw material, work in progress goods and
finished products.
(iii) Steps in order to improve company’s cash flows in an effective manner.
This is important for business entities in order to keep their cash flows in a positive
manner. It can become possible only if working capital is better. Herein, below some key steps in
order to improve cash flows are as follows:
 Incentivize to receivables- By giving incentives to customers who pay on time
and identifying delinquency early and taking prompt action will prevent accounts
from aging too much. All these actions can help in order to enhance the total
value of cash flow in an effective manner.
 Meeting debt obligations- This is also another way to improve the cash flow of
companies. It is so because if business entities are able to meet their obligations
on time then it may lead to reduction in burden of higher interest expenses and as
a result outflow of cash will decrease.
o Better management of inventories- It becomes essential for business entities to
manage their stored inventories in an effective manner so that cost of storage can
be minimized and cash inflow may increase (Oakshott, 2012). In this aspect, this
is too critical for companies to track the quantity of stored material and take
decision accordingly. By doing these acts, the total cash flow of companies can
enhance in an effective manner.
 Resolving disputes with customers and vendors can also increase the cash inflow.
This is so because in the case of any disputes, a lot of cash can be go out due to
court case and legal charges. Hence, it is important for business entities to resolve
the disputes in less time period so that cash can be saved.
So, these are some common way in order to improve level of cash flow of business entities. Such
as in the context of above Bright Lawns company, they may apply, these alternatives in order to
sort out the issue of higher cash outflow.

EXECUTIVE SUMMARY (2)
The second part of project report summaries about different approaches of budgets and its
role for business entities. Basically, the term budget can be defined as estimation of possible
income and expenses during a particular time period. In broad manner, the report abstracts about
traditional budgeting approach and alternative approach as well as their importance for new
business entities in order to manage the costs.
Part 2
(i) Purpose of preparing budgets.
Budget- It can be defined as a plan to show about how much money a person or
organizational structure will earn and how much it will be needed in order to spend on various
activities during a particular time period (Ziemba and Vickson, 2014). Basically, the budgets are
prepared for a particular time period for one year. These budgets play a significant role for
companies and some of them are mentioned that are as follows:
 Helps in planning- Budgeting is essential to the cycle of financial planning. The business
owner has to determine whether the enterprise will be productive. Budgeting offers a
framework for the possible financial results of a company, provided that different
strategies and schedules are pursued. This offers an economic basis for important
decisions to be made.
 Helps in controlling- A detailed budget gives information on how much a company will
spend in each period. For fact, it helps the company owner know how much income to
make for order to cover all expenses. The effectiveness of the money management
depends on the quality of the information obtained. These all activities help companies in
keeping effective control.
So, these are some key purpose of budgets for business entities. There are different kinds of
approach for budgets and some of them are mentioned below such as:
Traditional budgeting approach- It can be defined as kinds of approach in that budgets are
planned on the basis of last years’ financial information that derives through wide range of used
budgets (Vasant, 2013). Under this approach, new activities are not researched in order t o
include in budgets. It has some advantages and disadvantages that are as follows such as:
Benefits- The traditional budget contributes to making choices. This is so because the budget
makes things easier to find problems, managers can choose to make any changes for company. If
a business exceeds budgeted expenses, then they may reduce the business costs which
are considered useless.

Drawback- Traditional budgeting may be an incorrect reflection of the objectives that a
company wants to accomplish. Some executives or even entrepreneurs can manipulate the
forecasts to make the actual outcomes more desirable. Although this may raise morale, but it's
not going to help for business in the longer term.
Alternative budgeting approach- Apart from the alternative budgeting approaches there are
some another way to create budgets. In this approach, financial plan is done by taking new
activities. Herein, below some budgets are mentioned below that are as follows:
 Rolling budget- Rolling is literally continuous. Rolling budget revised regularly with the
introduction of further financial period when the previous accounting period is finished.
There is a flexible framework to the rolling budget. This rolls forward by a half or a
quarter rather than a standard 12-month schedule.
Advantages- Rolling the budget lets to schedule and regulate more precisely. It thus helps
to reduce the complexity of the budgeting process. Rolling budget plans for the near-term
rather than the deep-term future. It helps the owner to know where the business moves in
terms of revenue and efficiency.
Disadvantage- The biggest drawback of rolling budgets for the entire duration is not
upgraded. It is modified for the gradual period only.
 ZBB- As the title assists "Zero-based budgeting" is a method to planning and preparing
the budget from bottom to top. Zero-based budgeting begins from zero, perhaps from a
classical budget that is based on past allocations.
Advantages- Zero-based budgeting helps businesses accurately (departmentally-wise)
allocate money, because it does not look at previous cost estimates, but rather focuses at
actual figures.
Disadvantage- It consumes too much time and cost which is a big drawback of this
budget.
 ABC budget- Activity-based budgeting can be defined as a management accounting
technique that does not find the last year's plan to be in line with the New Year’s budget
(Hamilton and Raj, 2013).
Advantages- This budget helps in providing practical production costs of particular
products.
Disadvantages- The main issue under this budget is that data provided by ABC can clash
with management standards established by conventional costing approaches.
(ii) Role of above budgets in cost management.
Traditional budgeting approach- This approach is beneficial in order to make better
planning of cost so that it can be minimized. In the aspect of above company
mentioned in case study, this can be find out that they are using this approach from
long time and it is successful for them. In the context of new business outlets, this
approach cannot be beneficial to them. It is so because, this approach is beneficial

only if a company has past data but in the case of new businesses, they do not have
enough amount of financial information to make planning of cost or expenses. Thus,
for above Boat world Plc Company, this budgeting approach cannot be suitable for
cost management.
Alternative budgeting approach:
 Rolling budget- The concept of this budget is based on traditional budget because it is
just roll out in a similar manner of past years budgets (Storey, 2016). In the context of
Boat world Plc, they cannot get suitable information to manage total cost for new outlets.
Though, they may apply this approach after some years when they will have past years’
financial information.
 ZBB- This is a budget which is completely suitable for above company’s new outlets at
different nations. It is so because if they will implement this budget in new businesses
then their accuracy of projection of expenses will increase because under ZBB, each
activity is included after a proper research.
 ABC budget- Same as the above budget, this approach can also be beneficial for above
company. It is so because under this funds are allocated as per the each activity. In the
context of new outlets of above company, it will be easier to find out those practices
which are leading to higher cost. Thus, they will be able to manage their cost in a better
manner.
(iii) Analyzing efficiency of both traditional and alternative budgeting approach for
businesses.
For business entities, both types of budgeting approaches are beneficial. It depends on
companies’ size, scope and objectives. In the context of above Boat world Plc, the
efficiency of these budgeting approaches is mentioned that is as follows:
Traditional budgeting approach- As above stated, this budgeting approach is suitable for those
businesses which are exist in market from many years (Bendell and Doyle, 2017). It is not
suitable for new businesses due to lack of past years financial information. For Boat world plc‘s
new outlets, this cannot be suitable as they will not have enough volume of monetary
information to make accurate projections.
Alternative budgeting approach:
 Rolling budget- In the context of above company’s new outlets, this budget can be
beneficial after spending some years in the market. It is so because, after some
years, there will be enough range of data in order to predict accurately.

 ZBB- It can be beneficial for new out lets of Boat World plc. This is so because,
they will be able to find out justification of each activity which can help in order
to eliminate complexity.
 ABC budget- From the perspective of costing, this budget can play a significant
role for new business locations of Boat world plc. It is so because under this each
activity is aligned cost individually (Cleary and Quinn, 2016).
So, as per the above analysis, this can be find out that alternative budgeting approach seems
better for making financial plans as compare to traditional budgeting approach.
CONCLUSION
On the basis of above project report, it has been concluded that working capital is a key
aspect for business that helps in better cash flow management. The report concludes about
different aspects such as profit, stock, receivable and many more. As well as way to improve
cash flows. The second part of project report concludes about different budgeting approach and
their role for businesses. Under alternative budgeting approach budgets like ABC, ZBB etc. are
mentioned. In the end, this can be concluded that alternative budgeting approach is better as
compare to traditional approach.

REFERENCES
Books and journals:
Anandarajan, M., Anandarajan, A. and Srinivasan, C. A. eds., 2012. Business intelligence
techniques: a perspective from accounting and finance. Springer Science & Business
Media.
Burns, P. and Dewhurst, J. eds., 2016. Small business and entrepreneurship. Macmillan
International Higher Education.
Cumming, D. ed., 2012. The oxford handbook of entrepreneurial finance. Oxford University
Press.
Oakshott, L., 2012. Essential quantitative methods: For business, management and finance.
Macmillan International Higher Education.
Ziemba, W .T. and Vickson, R. G. eds., 2014. Stochastic optimization models in finance.
Academic Press.
Vasant, P., 2013. Meta-heuristics optimization algorithms in engineering, business, economics,
and finance. Information Science Reference.
Hamilton, J. D. and Raj, B. eds., 2013. Advances in Markov-switching models: applications in
business cycle research and finance. Springer Science & Business Media.
Storey, D. J., 2016. Understanding the small business sector. Routledge.
Bendell, J. and Doyle, I., 2017. Healing capitalism: five years in the life of business, finance and
corporate responsibility. Routledge.
Cleary, P. and Quinn, M., 2016. Intellectual capital and business performance: An exploratory
study of the impact of cloud-based accounting and finance infrastructure. Journal of
Intellectual Capital. 17(2). pp.255-278.