Report on Business Finance: Working Capital, Budgeting, and Cash Flow

This report, contributed to Desklib, provides a detailed analysis of key business finance concepts. Part 1 focuses on profit, cash flow, working capital, receivables, inventory, and payables, and examines their interrelation and impact on cash flow. It also covers steps to enhance a company's cash flow. Part 2 delves into budgeting, including traditional and alternative methods such as rolling budgets, zero-based budgeting, and activity-based budgeting, and their application. The report uses Bright Lawns Limited and Boat world Plc as examples to illustrate these concepts. It offers valuable insights into financial planning, control, and resource management, making it a comprehensive resource for understanding business finance.

BUSINESS FINANCE

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................3
Part 1............................................................................................................................................3
EXECUTIVE SUMMARY ............................................................................................................6
Part 2............................................................................................................................................6
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

EXECUTIVE SUMMARY
The part one of project report summarize about various kind of terms such as profit, cash
flows, inventories and many more. All these terms are useful to manage for companies. In
addition, impact of working capital change on cash flow is covered under the project report.
Part 1
(I) Explanation of followings :
(a) Meaning of profit and cash-flow.
Profit – The term profit can be defined as an excess of earnings over expenditures for a particular
time period. This is also known by net income and achieving higher amount of profit is the main
objective of all business entities (Hennessy, 2017). Basically, in the entire corporative world
each business entity exists for profits.
Cash flow – Cash flow is defined as virtual movement of cash or money from one party to
another party. In this mainly two terms are included which are in and out flow (Campbell,
2015). Inflow of cash includes those activities which are of cash generating. While outflow of
cash consists those activities that are related to outing of cash.
Comparison between cash flow and profit :
Cash flow Profit
This is essential for survival of companies. While it is not critical for firm's survival.
It is impacted from timing of payment in and out of
company.
This is calculated before arrival of money.
(b) Meaning of working capital, receivables, inventory and payables.
Working capital – It can be defined as a kind of capital which is being used by companies in
order to make payment of day to day operations. This is computed by a particular formula which
is as follows :
Working capital = Current assets – Current liabilities.
Receivables – The account receivables can be defined as amount of money which is due to a
business entity for delivering goods or services whose amount is not paid by customers
(Karadağ, 2018).

Payables- The payables are those by whom companies owe financial assistance or goods as a
credit. After making transaction on credit, business entities become liable for payment and
considered as debtors.
Inventory – The term inventory can be defined as goods available for selling or for production of
any product (Axsäter, 2015). Inventories are valued by various kind of techniques such as last in
first out method (LIFO) , first in first out method (FIFO) and weighted average method. There
are mainly, three kind of inventories such as :
 Raw material
 Work in progress (WIP)
 Finished goods
(c) Impact of change in working capital on cash flows.
Change in working capital can impact on cash flows of companies. This is so because any
increase or decrease in amount of working capital can lead to variation in cash flows
(Wasiuzzaman, 2015). The working capital is difference of current assets and liabilities. If
amount of current assets increase then the cash flow from operating activities will decrease. As
well as if balance of an asset decreases then cash flow from operating activities will increase.
(ii) Interrelation of above mentioned terms with Bright Lawns Limited company.
 Profit – The profit for above Bright Lawns Limited company is of 50 million pound in
last year. As well as operating profit was of 5 million pound.
 Cash flow – It can be defined as a movement of cash between two parties. Such as for
above Bright Lawns Limited company, their cash flow may be effected due to change in
current assets and liabilities. Like their short-term debts are increasing because of
advance receiving of payment from their customers.
 Account receivables – For Bright Lawns Limited company, the account receivables are
their stakeholders by whom they had taken advance amount for delivering goods. Like
they have owed 1.5 million pounds from C&P limited. As well as 2 million pound is of
Brico France.

 Account payables – In this aspect those entities are included who are liable to make
payment to any business because of credit transaction made in past (Gal, Singh and Best,
2016). For above respective Bright Lawns Limited company, their account payable can
be those who buy their products on credit and assure to pay in future.
 Inventory – In the above Bright Lawns Limited company, there are three types of
inventories including raw material, finished goods and work in progress. This is so
because they are involved in production of valves and fittings.
(iii) Steps in order to enhance company's cash flow.
This is important for companies to enhance their cash flows so that cash position can be
improve. Herein, below steps to improve cash flow is demonstrated that is as follows :
 Proper evaluation of stock on time – This is important for companies to keep an extra
sight of eye on stored material in warehouses. It is so because if the absence of proper
evaluation of quantity of stock, companies may over-purchase the materials which may
cause to outflow of cash. Such as for above Bright Lawns Limited company, it is
important for them to buy raw material for production as per the requirement.
 Controlling small expenditures – Another way to control cash flow is to control small
expenditure or debts which are owed by companies for less then one year (About steps to
improve cash flow, 2019). If business entities will control their small expenditures then
their cash flow from operating activities will be increase. Like for above Bright Lawns
Limited company, this is necessary to reduce their short-term debts in order to control
amount of cash flows.
 Payment of suppliers on time – In addition, paying to suppliers can also lead to
improvement in cash flow of companies. This is so because if payment will be given on
time to suppliers then business entities will not be liable to pay interest amount. It can be
helpful for companies in saving the additional amount of cash. Such as for above
company, this is important to pay their suppliers on time and due to this cash inflow can
be increase.

EXECUTIVE SUMMARY
The second part of project report summarise about different types of budgeting
approaches along with their importance for business entities. In addition, report abstracts about
critical evaluation of traditional and alternative budgetary system.
Part 2
(I) Role of budgets and different methods of traditional budgeting.
Budget – The term budget can be defined as a projection of future income and expenses for a
particular time period (Berman, 2015). Usually, budgets are prepared for time period of more
then one year. This is not essential that budgets are only used by business entities while budgets
are prepared by many individuals and families in order to manage financial resources. In the
aspect of companies, budgets are useful for making effective planning and controlling of
available financial resources. Herein, below some purpose of preparing budget are demonstrated
that are as follows such as :
 Role of budgets in planning - Budgets are important in the context of planning, this is so
because by help of budgets companies can make plan effectively about allocation of
financial resources into various business activities (Zapico-Goñi, 2017). Such as if a
company prepares budget for one year that consists future possible income and expenses.
On the basis of this estimation, that company will prepare strategic planning in order to
attain goals and objectives. Mainly, budgets play important role in financial planning
because these consist information about future expenditures and revenues.
 Role of budgets in controlling – Along with planning, the budgets are useful in
controlling too. This is so because by help of estimated income & expenses, companies
can compare their actual outcomes. Due to this, businesses can aware about those
activities whose expenditure amount is more then budgeted expenses. Thus, by help of
budgets, companies can make effective control over their expenditures.
(a) Traditional budgeting approach – This can be defined as a kind of budgeting approach in
which new budgets are prepared by making some changes in previous years' budgets. So mainly
in this approach, last years' budgets are taken as a basis of budget preparation.
(b) Alternative methods of budget :

Rolling budgets – This can be defined as a kind of budget which is prepared for next accounting
period in order to replace last years' budgets (Hill, 2016). The rolling budget is also known as
continuous budget or perpetual budget. This budget has some advantages and disadvantages
which are as follows :
Advantages -
 This budget helps in effective planning and control.
 In addition, the rolling budget guides companies to do their spendings wisely.
Disadvantages -
 Apart from the advantages, this budget has some disadvantages too such as it consumes
too much time and cost.
 In some case, uneven update can cause to wrong planning and control.
Zero based budget – It is a type of budget in that last years' budgeted information is ignored in
order to prepare the budget (Adah, 2016). Under this budget, financial activities are included
after justifying. Below, its drawbacks and importance are mentioned that are as follows:
Advantages -
 This budget helps in providing information accurate estimation of income and expenses
because of justifying each activity.
 In this budget, employees of each level are involved in order to prepare the budget
because of large aspect of informations.
Disadvantages -
 Preparation of this budget is a time consuming process.
 Due to involvement of more staff members, it becomes complex process.
Activity based budget – It is a kind of budget that is produced without considering previous
years' budgeted activities (Hazzan, Lapidot and Ragonis, 2015). In this budget is prepared by
using activity based costing after considering overhead cost. Below, its drawbacks and
importance are mentioned that are as follows:
Advantages -
 This budget mainly focuses on overheads which help in controlling overall expenditure.

 As well as it is helpful for companies in better decision making because in this
information regards to cost is provided.
Disadvantages -
 In takes additional time period because of preparing activity based costing system.
 This budget is not easy to understand for all users because of linking ABC system.
(ii) Application of above mentioned budgets for Boat world Plc.
In the aspect of businesses both kind of budgeting approaches including traditional and
alternative are useful. This is so because budget of each approach has some specific functions
which guides companies in effective management of future costs. Such as in the aspect of above
Boat world Plc these budgeting approaches can be helpful for better management of financial
resources.
Traditional budgeting approach – In this approach previous years' budgets are used for
preparation of new budgets. The boat world plc is using this budgeting approach from a long
time in order to manage their financial activities. Now they are planning to open a new outlet in
Netherlands and Germany. In this aspect, traditional budgeting approach can be helpful for them
in future cost management. Their business operations are related to providing boats on rent to
customers and they are successful for last many years. Such as their last year's revenue was of
£250 million which shows that traditional budgeting approach is beneficial for them in managing
their financial resources. In the context of new business openings at new locations, this
budgeting approach can be useful for them because by help of previous years budgets they will
be able to know which activities can be revenue generating and which ones will not.
Alternative method of budgeting:
 Rolling budget- This budget is prepared by companies in order to replace last years'
budget. It can not be suitable for boat world plc because they are going to start their
business at new location and this budget is preferred for exist companies.
 ZBB – In this, budgets are prepared from a new edge and for above boat world plc it can
be perfect budget. It is so because this budget can guide them in starting new branch at

new location. In addition, the accuracy of this budget can help them in making proper
allocation of their financial resources in order to buy new boats and hiring of new staffs.
 ABB- Under this budget activities are included as per the analysis of activity based
system. In the context of boat world plc, if they will apply this budget in their activities
and operations then overall expenditures will be under control. It is so because starting a
new business venture at other location, key concern is management of cost that can be
sort out by help of this budget.
(iii) Analysing whether a traditional or alternative budgetary system is appropriate to all or any
parts of the business in its planned future form.
The traditional and alternative both budgetary approaches are useful for companies. It
depends on their finance department that how well they use information from these budgets.
Traditional budgetary approach- This budgetary approach can be suitable for those business
entities which are exist in market from long time period (Wildavsky, 2017). Like in the above
boat world plc, they are using this budgetary approach from many years and successful too. It
indicates that this budgetary approach can be used for all operations of business. Herein, it is
important to know that this budget can not be succeed for new business ventures. It is so because
in this approach budgets are prepared as per the previous year's budget and for a new business
entity there will not be any last years' budget. Thus, for boat world plc this budgeting approach
can not be suitable as they are planning to open new branch at new locations.
Alternative budgetary approach – In this budgetary approach various kind of budgets are
included such as:
 Rolling budget- This budget can be used for entire business operations and activities
because it replaces previous year's budget (Jasuta, 2016). Same as the traditional
budgetary approach, it can not be implemented in boat world limited company because it
is suitable for existing business entities. Though above company exists since 25 years but
for their new opening branched it can not be applicable because this budget requires last
accounting period's budget.
 ZBB- The zero based budget can also be applied for all business operations because of its
accuracy. As well as it is perfectly suitable for new business entities. Like for boat world

limited this budget can be helpful as they are planning to open new branch at different
locations.
 ABB – This budget can be used for some part of business operations, specially for cost
regarding activities. Like in boat world limited plc, they may use this budget for
controlling cost regarding activities and operations.
CONCLUSION
On the basis of above project report, this has been concluded that finance is key for all
business entities. It is so because in the absence of enough financial resources companies can not
be able to operate their business operations and activities. The project report is divided into two
parts in which first part concludes about issue regards to cash flow and possible alternatives to
solve by help of working capital management. In addition, second part of project report
concludes about various budgeting approach including traditional and alternative approaches. As
well as their suitability in the aspect of given case study.

REFERENCES
Books and journals:
Hennessy, R., 2017.Profit and pleasure: Sexual identities in late capitalism. Routledge.
Campbell, J. L., 2015. The fair value of cash flow hedges, future profitability, and stock
returns. Contemporary Accounting Research. 32(1). pp.243-279.
Karadağ, H., 2018. Cash, receivables and inventory management practices in small enterprises:
their associations with financial performance and competitiveness. Small Enterprise
Research. 25(1). pp.69-89.
Axsäter, S., 2015. Inventory control (Vol. 225). Springer.
Wasiuzzaman, S., 2015. Working capital and firm value in an emerging market. International
Journal of Managerial Finance. 11(1). pp.60-79.
Gal, G., Singh, K. and Best, P., 2016. Interactive visual analysis of anomalous accounts payable
transactions in SAP enterprise systems. Managerial Auditing Journal.
Berman, L., 2015. The Office of Management and Budget and the presidency, 1921-1979. (Vol.
1438). Princeton University Press.
Zapico-Goñi, E., 2017. Performance monitoring for budget management: A new role of the
budget center. In Monitoring performance in the public sector. (pp. 67-100). Routledge.
Hill, L .E., 2016. Pioneering a rolling forecast: a North Carolina health system that switched
from a traditional to a rolling budget process found the conversion offered a unique
perspective of its financial picture. Healthcare Financial Management. 70(11). pp.58-
63.
Adah, A., 2016. Zero-based Budgeting System: Is Budgeting System the Determinant of Budget
Implementation in Nigeria?. International Journal of Economics and Financial
Research. 2(11). pp.192-198.
Hazzan, O., Lapidot, T. and Ragonis, N., 2015. Guide to teaching computer science: An activity-
based approach. Springer.
Wildavsky, A., 2017. Budgeting and governing. Routledge.
Jasuta, L., 2016. Rolling capital: managing investments in a value-based care world: a rolling
approach to capital planning offers healthcare providers flexibility and efficiency, which
ultimately improves patient satisfaction and helps control costs. Healthcare Financial
Management. 70(6). pp.82-90.
Online :
About steps to improve cash flow. 2019. [Online] available through:
<https://www.allbusiness.com/9-ways-to-better-manage-working-capital-cash-flow-24558-
1.html>