Business Finance Report: Cash Budgeting and Working Capital Management

This report delves into key aspects of business finance, beginning with an executive summary that defines business finance and its importance. Part A explores the concepts of profit and cash flow, differentiating between them, and explaining the components of working capital, trade receivables, payables, and inventory. It also examines how changes in working capital affect cash flow and how company management can influence financial results, including profit, cash flow, payables, and working capital. Recommendations for effective working capital management are provided. Part B focuses on preparing a monthly cash budget for four months for Thorne Estates Limited and offers observations and recommendations for the company's cash management. The report includes a detailed cash budget table and working notes, with the goal of improving financial decision-making and overall financial health.

Business Finance

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................1
PART A...........................................................................................................................................1
1) A) Meaning of profit and cash flow and description of their difference................................1
B) Explanation of working capital, receivables, payables and inventory...................................2
C) Explanation of changes in working capital effect cash flow..................................................3
2) Company is being managed might affect its financial results................................................3
3) Recommendation related to effective working capital management......................................4
EXECUTIVE SUMMARY.............................................................................................................5
PART B............................................................................................................................................5
1. Prepare a monthly cash budget for four months.....................................................................5
2. Any observations or recommendations that you would make to the management of Thorne
Estates.........................................................................................................................................7
REFERENCES................................................................................................................................9

EXECUTIVE SUMMARY
Business Finance defined as external monetary assistance utilize whenever an
organization runs short of capital. The funds enable individual to manage routine operational
activities, expand market reach, obtain raw material, invest in infrastructure and many similar
necessities (Beekes and et.al., 2016). It provide funds for business working capital requirement,
capital requirement and also provide diversification of funds. In this report covers meaning of
profit and cash flow their difference, changes in working capital, meanings of receivables,
inventory and payables. Moreover, provide suggestions for the improvement of cash flow for
better working capital.
PART A
1) A) Meaning of profit and cash flow and description of their difference
Profit: The term of profit defined as financial benefit that realised when revenue
generated from business activity exceeds the expenditure, costs and taxes consist of in sustaining
the activity in question. It is mainly used by the business to present business activity and reward
to business owners for investing. In the other words, when incomes are greater than expenditure
so it is known as profit and it is essential part of any business that presents growth and strong
performance.
Cash flow: It is net amount of cash that an entity acquire and pay out in certain period of
time. A positive cash flow presents good management of cash and maintain liquidity in business
and a negative cash flow indicates higher cash out flow. Cash flow mainly represents the money
coming and going out of an entity in particular period time. It is providing relevant cash flow to
analysis the quality of income (Boschmans and Pissareva, 2018).
Difference between profit and cash flow
Particular Profit Cash flow
Meaning It is a overall amount in which
producers generate after deducting
the production costs.
It is defined as net amount of cash
and cash equivalents being
transferred into as well as out of
business.
Time For the calculation of profit not This statement is developed by the
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required particular time period. It
is calculating by the organisation
on monthly, weekly and yearly
basis.
business at the end of fiscal year that
present actual situation of cash flow
in business.
Calculation It is calculating by various
methods by using managerial and
accounting techniques. Along
with it is calculated by profit and
loss statement in which mention
all the income and expenses
(Cowling, Liu and Zhang, 2016).
It is calculated by record each item
in cash flow statement and
categorised different activities into
different functions like operation,
financial and investment. By this
statement manager recognise net
cash flow activity.
Purpose The main purpose of profit to
maintain sustainability in business
entity and present financial health
effectively.
The main reason to identify actual
financial performance of an entity
that supports to generate cash
appropriately.
B) Explanation of working capital, receivables, payables and inventory
Working Capital: It is the amount invested in short term asset of an entity that is
represented by stocks, short term receivables and cash balances in which deduct short term
liabilities. It is defined as differences of current assets and current liabilities. In current assets
consist of cash, stock of raw material, accounts receivables and in current liabilities, bills
payable, bank and many others. Working capital is a measurement tool which is utilised to
present liquidity of business and presents the differences between operating current assets and
current liabilities.
Trade receivables: These are amounts billed by a business its customers when its
delivers goods and services them in ordinary course of business. This is commonly used by
collections staff to collect overdue payment from customers. For an invoice to be added trade
receivables, full payment must be expected within one year. It is total amount owing by company
for goods or services it has sold, which are reflected in invoices that company has issued its
clients, but has not yet received payment (Heil, 2017).
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Inventory: Inventory is a term for goods available for sale and raw materials used
produce goods available for sale. It represents one of the primary sources of revenue generation
and subsequent earnings for company shareholders. It is an accounting term that refers goods
that are in various stages of being made ready for sale, including finished goods, raw material
and work in progress.
Trade payable: It is an obligations, to pay for goods or services that have been acquired
from suppliers in a ordinary course of business. These billed amounts, if paid on credit, are
entered in the account payable module of a company's accounting software, after which they
appear in a accounts payable aging report until they are paid.
C) Explanation of changes in working capital effect cash flow
Working capital represents the difference between a firms's current assets and current
liability. Working capital, also called net working capital, it the amount of money a company has
available to pay its short term expenses. Positive working capital is when a company has more
current assets than current liabiltity, then it means it has a positive impact on the cash flow
statements. When negative working capital is there then current liability is more than current
assets then it means it has a negative impact on the cash flow statements (Kennickell, Kwast and
Pogach, 2016). For ex. If a company purchased a fixed asset such as building, the company cash
flow would decreases and when the company selling the fixed assets then the there is a boost in
the cash flow statements.
2) Company is being managed might affect its financial results
Trends Ltd is manufacturing company that product different types of gym cloth and
footwear. Moreover it design for various organisation under their own brands. The overall
turnover of the business is excess of 300 Pound dollar. There are mentioning various changes in
financial results that can be managed by the business such as:
 Profit: Trend Ltd has been generated profitability of 60 Million Pound last year that
render the effective situation of an entity. On the basis of profit company liabile for the
tax liability and interest payable on borrowings accountable that supports the business
entity to achieve better profit in future.
 Cash flow: An organisation can produce their cash flow on basis of the new policies and
regulations like providing discount price to its clients and utilising efficient bill paying.
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An organisation clear out its debts quickly and manage the better cash flow activities to
present actual flow of cash in front of adminstration (Ketterer, 2017).
 Payable: An entity require to enahnce the value of current assets that consist of
expenditure of current liabilities and required to pay obligation on time. There are
analysed the position of company that time identified that debt of business enahnce by 95
million Pounds from 60 Million Pounds year before that presents organisation is more
accountable to pay its debt on time.
 Working capital: The working capital of company present changes in current assets as
well as current liabilities. These changes direct impact on the profitability and reduce
potential clients and less supply in raw material to its suppliers. The working cpaitla
managed by the Trend Ltd effectively and deliver products on time and payment to their
supplier on time that help in manage working capital (Kraemer-Eis and et.al., 2019).
3) Recommendation related to effective working capital management
Working capital management is effective tool which is mainly utilised by business to
present use of current assets and liabilities in proper manner. It is supporting organizations to
manage cash position in proper manner and meet with business objectives. For the cash flow
statement required to use this method for the analysis of cash activities. Trend Ltd can use
particular way to maintained cash flow are:
Predicting of cash flow: It is good method that helps in estimation of cash flows like
receiables as well as payables when an organization will faciliates in effective decision making
in the context of the investment and other activities.
Analysis of accounts receivable: It is useful act in which an organisation analysis all
accounts receiables properly and assure about the clients pay due payments on time. This
necessary to change the credit policies that will enahnce the early payment as well as effectively
analysis the financial health of business. Along with it will increase the cash flows of business
entity for proper management of cash position effectively.
Review of supply and stocks: It is recommended that analysis of the supply as well as
stock of the business to enahnce cash flow in proper way that enahnce the effectiveness of entity.
As a result it will assure about the Trend Ltd is effectively supply stock on time that he;ping to
manage working capital properly.
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EXECUTIVE SUMMARY
A budget is predication of revenues as well as expenditure in certain period of time and is
commonly compiled and re evaluated by accountant on a periodic basis. It is prepared by the
experts and professionals after analysis the company position. Different organisations are using
various kinds of budget to forecast future activities (Liesen and et.al., 2017). On the basis of
budget make financial and investment decision. In this report prepare cash budget for four
months to present cash position of company in different months. At the end provide appropriate
suggestions to management for effective cash management.
PART B
1. Prepare a monthly cash budget for four months
A budget is prepare by the business entity to predicted the financial results and actual
financial position of business in potential period of time. It is mainly utilised by the business for
planning and measure performance of business in which consist of spending for fixed assets,
provide training to new Joneses, setting up bonus plans and many others. Every business entity
prepare different types of budgets according to requirements. Thorne Estates Limited prepare of
cash budget to analysis the cash position of business. There is discussed about the cash budget in
broad manner (Rahman, Rozsa and Cepel, 2018).
Cash budget: It is defined as good example of internal information required to make
financial decision. In this budget mention all the cash receipts and payments in which business
expects to make in certified period of time. It is mainly prepare by the business on monthly basis
so that the owners can see their bank balance is likely to be at the end of each month. This
budget not only used for the financial information but also bank assess the short term financing
requirements of an entity like any short term loans and overdraft facilities which is required
(Rubanov and Marcantonio, 2017).
Cash budget of Thorne Estates Limited:
Particulars January February March April
(A) Receipts
Cash sales fees 18000 27000 45000 54000
Credit sales fees 36000 36000 54000 90000
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Disposal of vehicles 20000
Total receipts (A) 54000 63000 99000 164000
(B) Payments
Salary 26250 26250 26250 26250
Bonuses 6300 12600
Variable expenses 9000 13500 22500 27000
Rent/Rates - - - -
Fixed overheads 4300 4300 4300 4300
Tax liability 95800
Interest charges 3000
Total Payments (B) 39550 44050 62350 165950
Net cash flow (A-B) 14450 18950 36650 1950
Opening balance 40000 25550 6600 30050
Closing balance -25550 -6600 30050 28100
Working notes:
Month December January February March April
Units sold 10 10 15 25 30
Sales value 1800 1800 2700 4500 5400
Cash fee at 1% 18000 18000 27000 45000 54000
Cash fee at 2% 36000 36000 54000 90000 108000
Variable cost
at 0.5%
9000 13500 22500 27000
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Monthly salary cost= (35000*9)/12=26250
Bonus for March= (25*20)*140*9=6300
Bonus for April= (30*20)*140*9=12600
Interpretation: As per the above report it has been interpreted that Throne Estate limited
prepare cash budget from January to April to present actual cash situation in the business. It is
changing as per the situation and impact on the profitability in direct manner. At the starting of
the budget calculation presents total receipt of the company in which consist of cash fees, credit
fees which is 2% of sale and sale of assets. The company receive 15 cash sales in same month
and remaining 2% receive after 2 months. In the month of January to April total receipt were
54000, 63000, 99000 and 164000 respectively. From the total receipt of the company less
amount of payment in which consist of salary, bonus, expenses, taxation, interest and fixed
overhead. The average salary per employee is 35000 per year so accordingly divide by 12
months and multiply by 9 employees. The variable expenditure rate 0.5% apply on each property
that sale out by company. After all the calculation Cash outflow is 14450 after that it is increased
and reached on 18950 in the month of February. In the month of March identify growth in
outflow 36650 and again fall down in April 1950 that presents major changes in the amount of
net cash flow. The closing balance in January (-25550) because of company liquidity position is
not good and do not able to conduct business activities in proper manner. Same procedure follow
in other months and get negative closing balance in February due to less liquidity position but in
March company get positive balance because of able to maintain cash as per the requirement.
There are requirement of analysis of overall procedure are changes done by business entity to
enhance cash flow the lower down of expenditure. Moreover, increment in the expenditure
impact on the cash situation that concentrating on paying the expenditure amount that deduct the
cash position.
2. Any observations or recommendations that you would make to the management of Thorne
Estates
 As per the observation of cash budget it is analysed that Thorne Estate has not been able
to maintain effective cash balance at the end of each month. It is clearly presented that
internal management of company is not able to manage a decent policy in these months
because of less cash balances are changing in different months.
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 Finally, it is suggested that manager of Throne Estate is really designed once time in a
year that is depended on the business entity. It is set up as per the monthly, yearly and
quarterly level.
 Sales are the primary kind of funds of a firm that is based on the reliability of the
financial statement is also based on the accuration of outlook of revenues (Young and
Pagliari, 2017). It is suggested to Thorne to sell out product in the market in broad
manner and manage liquidity position in effective manner.
 Moreover, The administration will predict the volume of revenues in regard of cash and
also credits that depend on the past experience. It is advised that the manager should use
effective strategies for payment to the creditors on time and analysis all the accounts
receivables in the business entity.
 There are required to applied some modification of Thorne in various operational
activities and apply on different functions for collect fund for an entity. For this require to
proper planning and manage cash position effectively. The proper payment by the
supplier in supply right time will also supports business entity to enhance their cash
position and set up good relationship with them in order to accomplishing effective net
cash flow (Zherlitsyn and Kravchenko, 2016).
 It is advised to Thorne Estates limited that when the duration of credit is permitted by
borrowers in one month so amount will be paid in month of Feb for various payment
activities that has done in January. The manager try to maintain effective liquidity
position by the proper movement of cash inflow and out flow. It supports to conduct
business activities in proper manner.
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REFERENCES
Books and Journals
Beekes, W. and et.al., 2016. Corporate governance, companies’ disclosure practices and market
transparency: A cross country study. Journal of Business Finance & Accounting. 43(3-
4). pp.263-297.
Boschmans, K. and Pissareva, L., 2018. Fostering Markets for SME Finance: Matching Business
and Investor Needs.
Cowling, M., Liu, W. and Zhang, N., 2016. Access to bank finance for UK SMEs in the wake of
the recent financial crisis. International Journal of Entrepreneurial Behavior &
Research.
Heil, M., 2017. Finance and productivity: A literature review.
Kennickell, A. B., Kwast, M. L. and Pogach, J., 2016. Small businesses and small business
finance during the financial crisis and the great recession: New evidence from the
survey of consumer finances. In Measuring Entrepreneurial Businesses: Current
Knowledge and Challenges (pp. 291-349). University of Chicago Press.
Ketterer, J. A., 2017. Digital finance: New times, new challenges, new opportunities. IDB-Inter
American Development Bank.
Kraemer-Eis, H. and et.al., 2019. European Small Business Finance Outlook: June 2019 (No.
2019/57). EIF Working Paper.
Liesen, A. and et.al., 2017. Climate change and asset prices: are corporate carbon disclosure and
performance priced appropriately?. Journal of Business Finance & Accounting. 44(1-2).
pp.35-62.
Rahman, A., Rozsa, Z. and Cepel, M., 2018. Trade credit and bank finance–evidence from the
Visegrad Group. Journal of Competitiveness.
Rubanov, P. M. and Marcantonio, A., 2017. Alternative finance business-models: Online
platforms.
Young, K. and Pagliari, S., 2017. Capital united? Business unity in regulatory politics and the
special place of finance. Regulation & Governance. 11(1). pp.3-23.
Zherlitsyn, D. and Kravchenko, V., 2016. Supply Chain Resilience Through Operations and
Finance Management. Scientific Letters of Academic Society of Michal Baludansky.
4(1).
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