Business Finance Report: Event Planning Ltd. and Toddlers Ltd.

This report delves into key aspects of business finance through two case scenarios. The first scenario, involving Event Planners Ltd., explores the importance of cash flow management, differentiating between cash and profit, and identifying methods to address cash flow problems, such as budgeting and budgetary control. The second scenario, focusing on Toddlers Ltd., examines capital budgeting, defining its types and processes, and outlining its advantages and disadvantages. The report emphasizes the significance of liquidity and profitability, accounting principles, and the impact of financial decisions on business success. It concludes by highlighting how effective financial planning and investment appraisal tools can aid businesses in making informed decisions and achieving their financial goals. The report aims to provide a clear understanding of the practical application of financial concepts in real-world business situations, offering insights into managing financial challenges and making strategic investment choices.

Business Finance
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Table of Contents
INTRODUCTION ...............................................................................................................................3
SCENATRIO 1.....................................................................................................................................3
1. Stating the importance of cash as well as profit and identifying the methods which helps in
dealing with the cash flow problems...............................................................................................3
SCENATRIO 2.....................................................................................................................................6
2. Defining the types and process of capital budgeting along with the pros and cons....................6
CONCLUSION....................................................................................................................................9
References..........................................................................................................................................10
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INTRODUCTION
Business finance implies for the activities which are highly associated with the procurement
and utilization of fund. Company can carry out its business operations and functions in a smooth
manner when they effectively make use of fund which is available to it. Business finance places
more emphasis on debt management which helps organization in building effective image in the
mind of creditors and other stakeholders (Cole, 2013). Besides this, cash or profit is one of the main
factors which influences the growth and success of firm. This project report is based upon the case
scenarios which help in understating the significance of cash or profit in context of business
survival. It will also describe the ways through which business entity can effectively deal with the
cash flow problems. Further, report will also depict the extent to which investment appraisal
techniques help in making suitable business decisions.
SCENATRIO 1
According to the given case scenario, Event planners Ltd is a new established business
which have two shareholders. Firm has specialization in planning the events such as wedding,
christening, birthday etc. In the first year, firm had failed to get desired profit or outcome due to
condition of high overdraft. In addition to this, company is not in condition to make payment to the
creditors on time. In addition to this, Event Company is planning to purchase a new luxurious car
with an aim to show venues to the clients. Further, owner of Event organization is also planning to
make expenditure on entertainment aspect. All these expenses may result to the less profit and high
overdraft. Thus, business situation of Event Planning Ltd. is highly critical. Therefore, enterprise
needs to manage its cash flow in more effectual manner. Following mentioned aspects can help new
business in managing its profitability and liquidity in against the long standing business.
1. Stating the importance of cash as well as profit and identifying the methods which help in dealing
with the cash flow problems
Difference between the cash and profit
There is significant differences in between the cash and profit. Cash flow clearly reflects the
income which is received by the firm during the accounting year. Further, it also presents the
expenditure made by the business organization. Thus, cash reflects the balance of inflow and
outflow on the periodical basis such as monthly, quarterly or annually. With the help of this
measure, Event Planning Ltd. is able to evaluate their working or strategies to a significant level.
On contrary to this, profit includes the revenue which is generated by the firm through organizing or
planning the different events. By subtracting the expenses from the income, business entity can
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easily identify that whether they acquire profit or loss (Beery, 2016). On the basis of this aspect, it
can be stated that profit involves all the transactions including income which is received in cash or
not. For instance: company has accrued income of 20 million then business entity includes this
income in the profitability aspect. This aspect includes all the monetary and non-monetary
elements. In comparison to this, cash flow includes all the income and expenditures which are
highly related to the financial aspects. In addition to this, cash is one of the most significant factors
which is highly required to make payment to the creditors, staff etc.
Further, cash is also needed to meet out the daily business operations and functions. Event
Planning Ltd. also requires to make focus on enhancing the profitability aspect which helps them in
maintaining the faith or trust of existing or potential investors. Hence, on the basis of given
scenario, company needs to make balance in the cash flow. Thus, by managing the cash flow,
company is able to reduce the amount of overdraft to a significant level (Kraemer-Eis, Lang and
Gvetadze, 2013). Besides this, it also enables business organization to make payment to their
suppliers within the suitable time frame.
Liquidity and profitability characteristics:
 Liquidity is the measure which shows financial capability of the firm in relation to meet
their short term or current financial obligations. Thus, liquidity aspect is heavily influenced
by the cash which is available within the business organization. If firm has sufficient amount
of cash to meet the current financial obligations, then it is considered as highly liquid (Bank,
2014). On the basis of give case, Event Planning Ltd. is unable to make payment to their
creditors on time. Thus, liquidity aspect of the firm is sound. In against to this, profitability
is the measure which shows that revenue is generated by the firm by making sales over the
expenditure. If company has acquired high amount of profit then it shows that company can
survive in the strategic business arena for a long run.
 Liquidity and profitability aspect of the firm are influenced by the accounting principles and
conventions. On the basis of accounting principles, business entity records receipt and
payment that are occurred in monetary terms. On contrary to this, profitability measure
follows accounting conventions. Thus, on the basis of accrual concept, Event planners Ltd.
needs to record income and expenses at the time of their occurrence irrespective that they
are received in cash or not (Tocker and et.al., 2013). Further, cash flow includes all the investing, financing and operating activities. Therefore,
liquidity aspect of the firm is highly dependent on the activities which are performed by the
business unit during the accounting year. Whereas, profitability measure includes monetary
activities which are associated with the operational aspects.
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Causes of short of cash
Shortage of cash refers to the condition in which firm does not have sufficient money to
meet the daily operations of it. Given case scenario clearly reflects that there are several reasons due
to which firm may result into cash shortage. Less profitability in the first or initial year is one of the
main aspects due to which cash related problems are arisen. In addition to this, bank account of
Event Planning Ltd. shows the situation of overdraft. It also represents that expenditure of the firm
is high as compared to revenue generated by them. Cash related problems are arising due to over
expenditure which is made by the firm. Main cause behind the cash flow problem is that owner of
Event Planning Ltd. has purchased luxurious car for showing various party venues to the customers
or clients. For this purpose, company has invested huge amount which in turn resulted into cash
flow problems.
Further, business entity has made high expenses in relation to the entertainment aspect.
Hefty bill is also one of the main reasons behind the occurrence of cash flow problems. In addition
to it, with an aim to attract large number of customers, owner prefers to go with the clients in the
most expensive restaurant of town. Due to this, cash outflow of the restaurant is higher than its
inflow. It is the main cause due to which firm took overdraft from the bank to meet the financial
obligations. Thus, all the above mentioned aspects are accountable for the cash related problems
which are facing by the business organization.
Ways to deal with the condition of cash shortage
Business entity can deal with the cash related deficiencies by preparing appropriate budget
for the year. Budgeting is the most effectual method which helps Event Planning Ltd. in managing
cash in more effectual manner. Finance manager of the firm needs to prepare budget by forecasting
the income and expenditure. In this, manager requires to include various expenses which they need
to incur during the accounting year (Artikis and Papanastasopoulos, 2016). Through this, company
is able to cut down the unnecessary expenses such as car, restaurant etc. Besides this, manager
needs to strive efforts in relation to assess the alternative ways to perform the task which may result
into the less expenditure. By this, Event Planning Ltd. is able to make control over the expenses and
thereby, enhance the inflow.
Beside this, it also needs to undertake budgetary control method to manage cash in an
appropriate manner. In this, company can make control over the undesirable expenses by comparing
the actual expenses with budgeted amount on the periodical basis. Through this, one can easily
identify the deviation which occurs in the financial performance of firm. It enables firm to
undertake corrective measure or action within the suitable time frame. In addition to this, it also
helps in coordinating with the activities of different departments. Thus, budgetary control also
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provides assistance to the firm in overcoming the problem of cash (LIU and et.al., 2013.). In
addition to this, when budget is prepared and circulated within the firm then personnel are
encouraged to perform their work more efficiently by reducing the financial wastage.
On the basis of all the above mentioned aspects, it can be stated that cash and profit play a
vital role in the survival and growth of business organization. Thus, by following all the above
aspects, company is able to improve and maintain high level of cash flow which proves to be more
profitable for the firm.
SCENATRIO 2
This task is based upon the case scenario of Toddlers ltd. which manufactures children's
furniture, toys and accessories. Company has been growing continuously by offering the unique and
attractive product to the customers. Now, latest product of business organization is child's car seat
which is converted into buggy. Thus, corporation makes focus on the quick and easy conversion of
car seat into buggy which will be more durable and light weighted. In this, Toddler's can make use
of several capital budgeting tools for the selection of investment project.
2. Defining the types and process of capital budgeting along with the pros and cons
Investment appraisal: It may be defined as a long term planning or financial tool which helps
finance manager in evaluating the attractiveness of project in terms of profitability. Moreover,
business entity makes investment with the purpose of getting high return. In the dynamic business
environment, organization is required to make assessment of the risk and return before making
selection of the project (Bierman Jr and Smidt, 2012). Toddler's ltd. can make use of the most
suitable or profitable business decision by taking into account the investment appraisal or other
tools and techniques. With the help of such tools and techniques, business can effectively make the
use of money and thereby, it can make contribution in the attainment of organizational goals and
objectives.
Process of capital budgeting: Toddler's ltd. can evaluate or appraise the project by taking into
consideration the following steps which are as under: Planning: In the very first step of capital budgeting, manager of the firm makes effort to
assess the potential investment opportunities which are available to them. Thereafter,
finance manager evaluates the extent to which potential investments have influence on the
growth and success of firm. Besides this, finance personnel also makes evaluation of his or
her potential or competencies in relation to exploitation of opportunities. On the basis of this
aspect, manager rejects the less profitable proposal and accepts the attractive one. Evaluation: Once planning of the project is done thereafter inflow and outflow of the
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project are evaluated by the manager. For this purpose, manager of Toddler's undertakes
different tools such as payback period, internal and average rate of return as well as net
present value method (Dellavigna and Pollet, 2013). With the help of all these methods,
business entity is able to identify the return which he will earn after the predetermined time
period. Selection of the project: After making evaluation of the proposal investment, manager takes
decision in relation to the selection of it. In this, manager considers risk, return and cost of
capital with an aim to maximize the shareholder’s wealth. Thus, Toddler's needs to select the
project whose net present value and internal rate of return are high. Moreover, maximization
of profit is one of the main objectives of business enterprise behind making investment in
the project. Besides this, Toddler's should select the project which helps in getting the
amount of initial investment in less span of time. Thus, financial or investment manager
needs to consider all these aspects during the selection of potential proposal. Implementation: Once selection of decision has been taken by the manager thereafter
manager of Todler's needs to acquire the funds which they require for the accomplishment of
project. In this phase, manager implements or starts the project which he has selected. Project control: In this stage, project manager exerts control on unnecessary expenditures
on the basis of feedback report. Besides this, manager also makes comparison of the actual
performance with the standard one. This aspect helps the organization in assessing
deviations which take place in the financial performance. Through this, finance personnel is
able to undertake corrective measures or actions within the suitable time frame. Review: Last phase of capital budgeting is highly important which reflects the outcome of
planning and evaluation process. Thus, in this project, manager makes evaluation of the
success or failure of the entire project in context of profit or loss (Capital Budgeting
Processes, 2016). Outcomes of the project review will also provide assistance to the
manager in making decision for near future.
Types of investment appraisal: There are mainly four types of capital budgeting which help the
manager in making suitable investment decision. Such financial appraisal tools aid in enhancing the
growth and profitability of firm. These tools are enumerated below:
Payback period: This tool of capital budgeting defines the time period within which business
entity is able to recover the amount that is invested by them at an initial level. Payback period
provides deeper insight to Toddler's about the time after that company will be able to earn profit. It
helps business organization in employing the cost effectual strategies and policies which help in
getting the desired level of outcome or profit. Toddler's needs to select the project which has lower
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pay back period. On the basis this, company is able to generate high level of cash flow during the
short period of time.
Advantages
 Easiness of computation is one of the main benefits which attracts investors to take
investment decision on the basis of such method (Brunzell, Liljeblom and Vaihekoski,
2013). By calculating the cumulative cash flow, manager can easily assess the period within
which Toddler's will generate initial cash outflow. Further, it places high level of emphasis on the liquidity aspect. Thus, by identifying the
time which will be taken by the firm to recoup the initial investment, manager is able to
make planning for the future.
Disadvantages
 Main drawback of such method is that it does not provide information about the cash flow
which will be generated by Toddler's Ltd. after payback period.
 It completely ignores the concept of time value of money which has high level of
importance in the present business environment.
Net present value (NPV): This is also known as discounted cash flow method in which investment
manager discounts the future cash flow. Moreover, manager assumes that money which will be
received later has less value as compared to present time (Mbabazize and Daniel, 2014). It is the
main cause due to which Toddler's needs to undertake suitable discounting factor which helps them
in identifying the return which will be earned by them in the near future. In this, manager of the
firm should select the project which offers high level of positive NPV.
Advantages
 This method offers highly realistic results on the basis of discounting factor.
 Further, it considers time value of money concept which provides assistance to Toddler's in
making effectual investment decision.
 This method also considers cash flow in the calculation which will be acquired by the firm
in the entire life of project.
Disadvantages
 It is quite difficult for the manager to identify appropriate discounting rate for computation.
If manager fails to employ suitable factor then it may result into inappropriate selection and
heavy loss.
 Usually, manager may face difficulty in using this tool which also limits the significance of
it.
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Internal rate of return (IRR): This method equates present value of the cash inflow with the
outflow. This method helps in determining the rate of return which business entity will earn during
the lifetime of project (Hu, Homem-de-Mello and Mehrotra, 2014).
Advantages
This method will offer high level of benefit to the company by providing assistance in the
selection of appropriate project. Moreover, it considers time value of money concept and cash flow
of the entire project (Pozzi and et.al., 2015).
Disadvantages
Complicated calculation is one of the main drawbacks which affects the importance of this
method.
Average or accounting rate of return (ARR): This method provides assistance to the finance
manager in evaluating the profit ability of proposal (Bierman Jr and Smidt, 2012). By dividing
average return from the average investment, Toddler's can easily identify the mean return which
will be earned by business entity during the specified period of time.
Advantages
 Easily understandable and simple to calculate. This method makes use of streams of income while calculating the accounting rate.
Disadvantages
 It does not take into account the length of project.
 It ignores time value of money concept in the calculation.
CONCLUSION
By summing up this report, it has been concluded that company needs to make control over
the expenses which help them in enhancing the cash and profit margin. Besides this, it can be
articulated that Event planning Ltd. needs to undertake budgetary control method to deal with the
cash related issues. From this report, it can be concluded that Toddler's can invest its money in the
best possible manner with the help of capital budgeting tools or techniques. It can be seen in the
report that net present value is the best method which helps manager in making effective decisions.
Further, it can be inferred that payback period, ARR and IRR also help the investment manager in
evaluating the profitability aspect of proposal to a large extent.
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REFERENCES
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