Business Finance Analysis Report: Mediterranean Delights Ltd. Finance

This report presents a comprehensive business finance analysis, focusing on Mediterranean Delights Ltd. (MDL). It explores key concepts like working capital, profit, and cash flow, evaluating their impact on MDL's financial health. The analysis includes recommendations for improving cash flow through effective working capital management, such as optimizing accounts payable and receivables, inventory management, and leveraging tax incentives. The report also examines budgeting systems, comparing traditional, rolling, zero-based, and activity-based budgeting, with a focus on the suitability of each for Second Sight Plc, advocating for activity-based budgeting for its new project. The report emphasizes the importance of financial planning and control for sustainable business performance.

Running head: BUSINESS FINANCE ANALYSIS
BUSINESS FINANCE
Name of Student
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Author notes

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Executive Summary
The purpose of this study is to understand the concepts of working capital, profit, cash flow,
as well as to evaluate how working capital impacts the cash flow of the organization. This
study also discussed how Mediterranean Delights Ltd could improve their cash flow using
effective working capital management. It is found that MDL can slow down its accounts
payable and collect its receivables early to improve its cash flow. It can be perceived that the
working capital can be improved in other ways, which includes effective inventory
management, collecting outstanding invoices on time, and availing tax incentives. This report
also discusses the traditional budget system of Second Sight Plc and other alternatives budget
processes. The strengths and weaknesses of each budget process have been discussed in the
study. It has been found that from all of the budget processes, activity-based budgeting is
most effective yet costly. It has been found that the activity-based budget system is more
effective for Second Sight Plc over the traditional budget system that it was following.
Activity-based budgeting should be implemented in the company to budget for their new
project effectively.

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Table of Contents
PART 1.......................................................................................................................................4
Introduction................................................................................................................................4
i ) Definitions and concepts....................................................................................................4
a) Profit and cash flow...........................................................................................................4
b) Working capital, inventory, receivables and payables.......................................................5
ii) Application of concepts....................................................................................................6
iii) Analysis and recommendation.............................................................................................7
Part 2..........................................................................................................................................9
Introduction................................................................................................................................9
i) Budget system.................................................................................................................9
Traditional budget..............................................................................................................9
Rolling budgets................................................................................................................10
Zero based budgets...........................................................................................................10
Activity based budgeting..................................................................................................11
ii) Applications of different budget methods.................................................................11
iii) Analysis.....................................................................................................................12
References................................................................................................................................14

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PART 1
Introduction
This report will be based on Mediterranean Delights Ltd. Mediterranean Delights Ltd
operates 30 delicatessens through the part of South England. MDL supplies various chains of
restaurants with its imported products. This report will discuss the profit and cash flow as
well as working capital, receivable, and payable. The concepts of the same will be applied
throughout the report to assess the way the organisation is being managed. The company has
debt and other issues, which will be analyzed afterward. This report will review the situation
of MDL to understand their financial position.
i) Definitions and concepts
a) Profit and cash flow
Net income, also known as profit, is the amount of earnings that surpass over the
expenses for a certain period. Profit is the amount of income that exceeds the amount that is
left to the business after all of the necessary expenses are subtracted for the period. In the
corporate sector, the profit is paid in the form of dividends to the shareholders (Warren,
Jonick and Schneider 2020).
On the other hand, cash flow is the difference in the amount of cash accessible at the
beginning of a year and the amount of cash at the end of the year. Cash flow tends to be
positive if the closing balance of cash flow is greater than the opening balance; otherwise, it
becomes negative. Cash flows upsurge with the sale of more goods, sale of an asset, taking a
loan, and reducing the cost of products (Soboleva et.al 2018).
The primary difference between profit and cash flow is that the profit is the amount of
revenue earned by the business owner that may not increase cash immediately wherein cash

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flow is the inflows and outflows of cash of a particular business. Cash flow is the amount of
cash that is going in and out of business. Cash flows impact the amount of cash available at
any given time. On the other hand, profit is the amount of financial gain that the company is
making from their products and services. Cash flows can indicate the amount of actual cash
available in the business at any given time. Profit is the indicator of the success of the
business (Lu and Xi 2016).
b) Working capital, inventory, receivables, and payables
Working capital is the amount of capital that is used in the business in its day-to-day
operations. Net Working capital, also known as working capital, is the amount of difference
between companies' current assets and current liabilities. Positive working capital indicates a
good liquidity situation of the company wherein negative working capital indicates the poor
position of the company (Flannery and Öztekin 2019).
Inventory is the amount of stock of goods that the company holds to resale it in the
market at a higher price. Inventory is one of the most essential assets of the company as the
inventory turnover is the source of revenue generation of the business (Wild 2017).
Receivables are the debts owed to a company by its customers for goods and services that
have been delivered. Receivables are known as liquid assets as they aid the company to
secure a loan, which helps meet short-term obligations. Receivables are part of the company's
working capital (Ajanaku and Ekundayo 2017).
Account Payables is an account, which represents the responsibility of a company to pay
its short term debts to its creditors and suppliers. The company should pay off their accounts
payables within a given period of time to avoid default. Account payable management if
essential in managing the cash flow of the business (Johnson 2019).

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Any changes in working capital can be perceived from the cash flow statement of a firm.
A positive working capital (Current assets greater than current liability) means the inflow of
cash in the business for the period. Negative working capital indicates an outflow of cash of
the firm, indicating that the company is spending out cash that it brought to manage the
working capital (Lewellen and Lewellen 2016). Working capital decreases with the decrease
in the current asset, impacting the cash flow from operations negatively. If the liability of the
firm decreases with an increase in assets, the cash from operations will decrease.
ii) Application of concepts
The shareholders of MDL are concerned about the business as it can be perceived that
the debt of the company is increased, which is a burden for the company. To mitigate the
debt of the company, the budget can be altered and changed. The company also has large
stocks which might be needed by the company after their dispute has been solved out.
However, without a proper stock turnover, it will be impossible for them to improve their
financial condition in the business as stock turnover aids the company to generate more
revenue, which can be used to pay off their debts and payments. It is essential to note that an
increase in debt also increases the total current liabilities of the company, which will lead to
negative working capital. Negative working capital leads to the cash outflow of the business.
Negative working capital indicates the risk of the firm; therefore, MDL can default if they do
not improve their working capital by paying off their debts. Paying payment disputes late will
affect the cash flow of the firm negatively. The receivables of this company are also low as
they have various payment disputes with the other company. The amount of withheld
payment will lower the receivable of the company and will finally affect its cash flow
through the negative working capital. The company was profitable in the last year; however,
their debts and payment disputes will reduce their profits and revenue massively, and if the
current condition continues, it will be hard for MDL to earn revenue in the upcoming year.

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iii) Analysis and recommendation
Observing the current condition of the company, there are certain advice and
recommendation that the company can follow to improve their cash flow. To improve the
working capital of the company, the company can slow down its accounts payable and collect
receivables early with efficient working capital management (Boisjoly, Conine Jr and
McDonald IV 2020). Other than this, there are certain ways to improve the cash follow of the
company with efficient working capital management.
 The company should take advantage of tax incentives, which will aid them in saving
more cash with the payment of tax.
 MDL should ensure that they meet the entire debt obligation of the company on time.
Delayed payment of a debt can result in a penalty, affecting the working capital of the
company.
 MDL should check the credit score of its customers before taking order from them as
poor credit score would influence the financial condition of the company. Credit
limits should be limited to their new customers.
 It is recommended that MDL should collect outstanding invoices on time, mitigating
any payment issues of the customers.
 Inventory management should be done to improve the working capital of the company
(Louw, Hall and Brummer 2016). To maximize the cash flow of the company by
effective working capital management, it recommended that part of the huge
inventory of MDL should be converted into cash. This will help them to pay off their
debts from the cash of sale of inventory as well as will improve the cash flow of the
company.

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 To improve the cash position of the company, it is recommended that MDL should
limit any unnecessary expenses. In addition, they should restructure the debt structure,
which will help them to reduce debt in the upcoming year.
 In addition, it is suggested that MDL should reduce its debt to capital ratio, which will
help them to improve their revenue and profit in the upcoming year.

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Part 2
Introduction
Second Sight Plc. is an international company, which produces sunglasses and
prescription glasses for international brands. This company is going to open a new facility.
They used the traditional budget system, and the finance director of this company is thinking
of changing the budget facility of the company. This report will discuss the traditional budget
system and the alternative budget system later on.
i) Budget system
Budgeting can help organizations to achieve their business goals in an effective way. The
primary purpose of the budget is to plan different stages of business operation, co-ordinate
activities of different departments of the company, and ensures effective control over it (Zhu,
Wei and Xu 2019). The budget helps the organization to ensure there is cash available to
meet its unexpected shortfalls. The budget can provide a model of how the company should
operate and provides it with certain strategies and plans (Boyabatlı, Leng and Toktay 2016).
Traditional budget
In the traditional budget, previous year's budget is taken into consideration when
preparing the budget. The present year budget is made by making changes to the previous
year's budget. The company base the last year when preparing the current year. This budget
method is simple and easier than other budget methods (Asogwa and Etim 2017). Most of the
companies use this budget as this budget can be made easily without any implications. The
traditional budget method has several strengths and weakness, which are as follows
 The traditional budget method can be implemented easily as it is based on the
previous year's budget. This can save time for the management of the organization.

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 This method is more stable and simple than other budget processes. The traditional
budget brings stability in the function of the organization (Ouassini 2018).
 Traditional budgeting can help to promote decentralization in the organization.
 The traditional budget is elementary to prepare as it uses last year's budget.
Other than this, this budget process has several drawbacks, which are mentioned below.
 The traditional budget is a stable and fixed budget process; therefore, once prepared,
it is impossible to change any factors of the traditional budget.
 The traditional budget is extremely reliable in the last year's budget, which can create
inaccuracy in the budget.
Rolling budgets
Rolling budget adds new extensions to the existing budget model. In the rolling
budget, the business usually carries their cumulative balances to the next year's budget and so
on. By using rolling based budgeting, the organization always has a budget which prolongs
one year into the future use.
Rolling budget aids in planning and controlling more effectively and efficiently. This
budget process can aid the management to revise their assumptions for the last incremental
period of the budget; however, this budget cannot achieve more profitability that the business
can achieve with the traditional budget approach (Bhimani, Sivabalan and Soonawalla 2018).
Zero-based budgets
Zero-based budgeting justifies expenses for each new period. This budget process
analyses every function of the organization for its needs and costs. Budgets are made after
analyzing the functions to evaluate the exact requirement of the organization in the upcoming
period (O'Shea 2018).

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Zero-based budgeting aids the managers of the organization to evaluate the cost in
every budget process. This process helps the organisation to validate operating expenses and
consider areas where the company can generate more revenue. Zero-based budgeting can
check the legal expenses of the organization, ensuring every department is protecting its
budget from any functional problems (Frank, A.H., 2018).
Other than these, this process has certain drawbacks that are noteworthy to mention.
Zero-based budgeting concentrates on short term thinking of the organization, focusing on
the smaller areas of the budget. This can make the organization fail to evaluate its long-term
investments (Emerling and Wojcik-Jurkiewicz 2018). In addition, this method is resource-
intensive; therefore, it takes a lot of effort and time to review and justify the budget elements;
as a result, organizations fail to justify its time cost. Managers of the organization can also
manipulate zero-based budgeting. The managers can bring more resources to their
departments, which can demotivate the workers.
Activity-based budgeting
Activity-based budgeting that analyses and records activity which leads cost for the
company. Every cost incurring activities are identified in this process, and budgets are
developed as per the results. This method is very impactful for new organizations, which are
undergoing material change (Shepherd 2017).
Activity-based budgeting permits more control over the budget process. Management
of the organization can precisely control the revenue and expenses by using this budget
process. This budget method can successfully provide useful details regarding the projection
of any new projects. Activity-based budgeting improves control of the managers; as a result,
management can align this budget to achieve its organizational goals (Cokins and Dybvig
2018).

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However, this method is very costly to implement in any organization. This process is
very time consuming compared to other budget processes. Without proper assumptions and
insights, this budget cannot provide accurate projections.
ii) Applications of different budget methods
Second Sight Plc uses the traditional budget method, which evaluates the previous year's
budget; therefore, Second sight Plc can easily identify its future production for its new
projects. Last year's production cost and other expenses are evaluated in this process. For
example, if the company has produced 30000 units of sunglasses and prescription glasses in
the previous year, the traditional budget can evaluate this to measure how much units will
Second sight Plc need in the upcoming year based on this year's result.
If the rolling budget is used in Second Sight Plc., it will add a new extension to the budget
of the previous year. For example, if Second Sight Plc. is trying to produce 4000 more
sunglasses and eyeglasses in the following year for the extension of their company, the
rolling budget will add these extensions with their existing budget, which is traditional
budget. Rolling budget adjusts the traditional budget during the year based on actual results
and then projects it forward.
If Second sight Plc uses zero-based budgeting, it will justify the expenses of the company
for each of the upcoming period. For example, if the company made 12$ million of total
expenses in the previous year, zero-based budgeting will justify the expenses only in its
budget process.
If Second Sight Plc. implement activity-based budgeting for their new project; this
process will analyze and record every activity that is made in the year and projects it in its
result. For example, if Second Sight Plc. Had 30 million production costs, 10$ million

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expenses cost, and $2 million other costs, then activity-based budgeting will analyze each
activity and will create a new budget based on this projection.
iii) Analysis
Based on the report, it can be found that the traditional method is a simple process;
however, it lacks flexibility. The traditional budget process is useful for old organizations.
The traditional budget is reliable for the previous year's budget. For the new project of
Second sight Plc, the traditional budget should not be followed as this process follows the
previous year's budget to evaluate the new budget. Each activity of the new project cannot be
evaluated by using this process; therefore, it is recommended that Second Sight Plc should
use activity-based budgeting over the traditional budgeting process. Control is important in
the new projects, ensuring that the project will get success in the upcoming year. The activity
budget ensures effective control of every activity; therefore, it is recommended Second Sight
Plc should use activity-based budgeting in the new project.

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References
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ORGANIZATION PERFORMANCE: THE RELATIONSHIP BETWEEN WORKING
CAPITAL MANAGEMENT AND ACCOUNT RECEIVABLE.
Amirkhani, T., Aghaz, A. and Sheikh, A., 2019. An implementation model of performance-
based budgeting. International Journal of Productivity and Performance Management.
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Bhimani, A., Sivabalan, P. and Soonawalla, K., 2018. A study of the linkages between rolling
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Cokins, G. and Dybvig, A., 2018. NEXT GENERATION BUDGETING: If you want more
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