Financial Report: Cash Flow Analysis, Budgeting, and Recommendations

This report provides a comprehensive financial analysis of Victory Plc and Bemus Ltd, focusing on cash flow forecasting, budgeting, and strategic recommendations. For Victory Plc, it evaluates different financing options for raising £100 million, recommending debentures due to their lower interest rate and positive impact on profitability. The report also differentiates between profit and cash flow, explains the impact of working capital changes on cash flow, and suggests steps to improve Victory Plc's cash flow, such as offering discounts for early payments and controlling operating costs. A cash flow forecast for the next five years projects positive net cash inflows. For Bemus Ltd, the report prepares a monthly cash budget for March to June 2022 and provides an analytical document with recommendations for David Bemus, emphasizing the need to enhance cash sales, reduce operating expenses, and manage drawings to improve liquidity. Desklib offers a wide array of study resources, including past papers and solved assignments, to aid students in their academic pursuits.

Finance

Contents
INTRODUCTION...........................................................................................................................2
PART A:......................................................................................................................................2
1.Difference between profit and Cash Flow: -.............................................................................2
2.What is Working Capital and how change in working capital affects cash flow: -..................3
3.Steps to improve the cash flow of Victory Plc: -......................................................................4
PART B:......................................................................................................................................5
1. Prepare the monthly cash budget for Bemus Ltd. For the consecutive 4 months from March
2022.............................................................................................................................................5
2. Prepare an analytical document arising of recommendations based on the cash budget for
David Bemus...............................................................................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Finance is a broader term which includes multiple activates used by various entity’s
according to their industry and type of work they perform. It includes banking, capital markets,
investment, etc. to be performed by respective companies (Beladi, Deng, and Hu, 2021). In this
report forecasted cash flow statement and cash budgets has been prepared for Victory Plc and
Bemus Ltd and recommendation has been made with respect of source of finance to the board of
director of Victory Plc so that their liquidity ratio can be improved.
PART A:
Report to Board of Director: -
There is multiple source of finance from which the organisation cab raise funds that they
require in order to expand their business. Raising of funds from different sources directly
depends upon the need of organisation and the type of capital structure they follow in their
business. The entity can raise funds from issue of debentures or take loan from the bank or they
can issue right shares to their existing shareholders (Sarkar, and et.al., 2019. The best option
which must be obtained in order to raise £ 100 million is through debentures as the rate of
interest the company have to pay is 2.50 only. If the organization used right issue option, then
their equity will be diluted. The loan option will be given is not advisable to victory plc as the
tenure of loan is of 15 years which is not viable as the organization is already suffering liquidity
issues. The best option in the given circumstances for victory plc is to raise funds from debenture
holder because the cash flow forecast they evaluated below shoes the positive impact on the
organizations profitability if they earned as expected. The interest cost can be easily managing
by the entity is desired cash flows they achieved in the given period of 5 years.
1.Difference between profit and Cash Flow: -
The main difference between the profit and cash flow is that profit simply indicates the net
margin that organisation earns after deducting all the operating expenses. Whereas cash flows
indicate the flow of cash throughout the year within the organisation. Both profit and cash flows
are important for an enterprise as they both are critically important for them. For determining the
profit, the entity needs to prepare income statement which is prepared by following accounting
standards as these statement is prepared on accrual basis. Whereas cash flows of the entity are
depicted by preparation of cash flow statements (Rashid, and Hersi, 2021). In a business

enterprise cash flows are divided into three types of activity’s that is operating, investing and
financing activity.
2.What is Working Capital and how change in working capital affects cash flow: -
Working capital is the amount of funds required for operating the day to day activities of
the business. These funds helps to pay the short term debts, routine payments and used in
purchasing the raw materials required in the manufacturing of goods. There are several sources
to obtain the working capital such as short term, long term and spontaneous working capital. The
short term sources of working capital includes trade deposits, short term loans and commercial
paper. In long term loans, it consists retained profits, provision for depreciation, share capital and
debentures. Bill payable and note payable are few examples of the spontaneous working capital.
Working capital can be calculated by taking the difference of current assets and current
liabilities. There are different types of working capital such as permanent working capital,
variable working capital, reserve margin working capital, seasonal variable working capital,
regular working capital, special variable working capital and gross working capital. For
achieving the organisational efficiency, an enterprise should focus on working capital cycle. It is
defined as the time duration required to convert assets of the organisation into liquid assets. The
shorter working capital cycle indicates the accurate flow of liquidity in the organisation whereas
longer working capital indicates the block of funds somewhere.
Impact of liquidity on different activities of cash flow are as under: -
1.) Impact on operating activities: Cash flow from operating activities includes all the
routine tasks of the business such as producing and generating revenue. The level of
liquidity present in the business affects the operating activity such as if credit period
allowed by the organisation is higher than it negatively hampers the operating activity.
The period for collection of receivable should not be higher because it stuck the funds of
the organisation and reduces the working capital of the organisation (Utomo, and
Pamungkas, 2018).
2.) Impact on investing activities – In cash flow from investing activities it includes the
sale and purchase of fixed assets. For instance, if an organisation purchases plant and
machinery for conducting its operating activities, there will be increase in the fixed assets
of the organisation but there will be outflow of cash from the funds available in the

organisation. Therefore, an enterprise should focus on maintaining equilibrium between
inflows and outflows of the cash.
3.) Impact on financing activities – The cash flow from financing activity includes the
changes in share capital, issuing share and other securities and redemption of long term
loans (Choi, 2021). The level of liquidity is effected by the financing activity such as
redemption of debentures, decreases the liability of the business but on the other hand,
firm has to experience outflow of the cash which hinders the liquidity of the organisation.
3.Steps to improve the cash flow of Victory Plc: -
Victory limited can improve their cash flows by using the following steps: -
 They need to provide discount offers for their wholesalers and retailers for early payment
so that they cash cycle will gets improved.
 The organisation needs to higher in internal audit team in the accounts department so that
their provisions against the expenses cannot be over made which directly affects the
profitability of Victory Plc (Guenther, Njoroge, and Williams, 2020).
 They need to focus on their supplier payment mechanism and avoid disputes that affects
the working cycle of the organisation so that legal and court fees can be avoided.
 In order to increase the profitability and valuation the organisation must retain the profits
they earn in business itself so that such funds can be easily diversified into other sectors
to earn the profit.
 It is important for the organisation to control their operating cost to an acceptable level so
that gross and net margin can be improved for them and reduction in operating cost
enhance the liquidity ratio of Victory Plc also.
Cash Flow forecast of Next 5 Years( Figures in £ Million)
Particulars 31/12/22 31/12/2
3
31/12/2
4
31/12/2
5
31/12/2
6
Cash Inflow -
Sale with wholesaler 324 350 378 408 441
Sale with retail shops 35 35 175 175 175

Clothing Sale 5 6 7 8 9
Total Cash Inflow 364 391 560 591 625
Cash Outflow -
Payment of Tax Liability 4
Cost to Open Retail Outlets 26 26 156 156 156
Payment of Disputed claim 8
Total Cash Outflow 38 26 156 156 156
Net Cash Inflow Expected 326 365 404 435 469
On the basis of above forecast the conclusion can be drawn that Victory Plc is regularly
gaining the net cash inflows which is profitable for them too. However, they need to control their
operating cost so that their profitability can be improved. Liquidity ratio directly affected by the
working capital flow of the entity and if they not capable enough to pay to creditors them cash
inflows are affected during the operating period as a whole. They can generate cash only in they
enter into retail market and clothing market simultaneously (Persson, and Fafatas, 2018).
PART B:
1. Prepare the monthly cash budget for Bemus Ltd. For the consecutive 4 months from March
2022.
Cash Budget
Particulars
Marc
h April May June
Opening Cash balance 1380 5950 -98344 -47655
Cash Collection
Cash received from Sales 80100
11490
0 89250 89430
Total Cash inflows 80100
11490
0 89250 89430

Cash Outflow
Purchases for the resale of goods 35100 92000
10650
0 76200
Overheads 22000 17500 16000 19500
Rent 36000
Purchase of delivery vans 43400
Shop fittings 15000 7000
Drawings 0 6894 5355 5365.8
Outstanding tax Liability 58800
Annual Salary to Bemus Daughter 2050 2050 2050 2050
Total cash outflows 74150
21324
4
13690
5
14651
6
Net cash balance 5950 -98344 -47655 -57086
2. Prepare an analytical document arising of recommendations based on the cash budget for
David Bemus.
Analytical Document for the management of Bemus Ltd.
David Bemus has a business of operating the high store on Bern –on – Sea. For this, it is
recommended to the top management of David Bemus that according to the figures mention of
inflows and outflows of cash, also considering the sales is that all the revenue which was earned
by the company was on the credit basis. So, firstly, it should strategize to enhance its cash sales
by proving more discounts and attracting the customers is giving trade discount for the cash
payments made immediately during the sales. Also, the company is incurring so much of the
operating and direct expenses which can be lessened by focusing the maximizing the profit of the
entity (Karpac, and Sedlakova, 2021). The purchase could be done with the less expenditure by
asking the supplier to give trade discount and cash discount for immediately making the
payment. Although the net cash balance for the month of April, May and June is showing the
negative amount which clearly depicts that the expenses are more than the inflows of cash. The
previous months closing balance impact the next year amounts as it gets transferred as the
opening cash balance. So, it is very important to maintain the very month’s cash budget

appropriately. Moreover, the drawings that are incurred by the business could be withdrawn from
the business expenses, because these are in the name of personal expenditure for which the
business is not responsible to be paid. The overhead for the business entity is occurring a huge
amount considering the sales, which also should be lessened duly for having a profit in the cash
of the company. It will assist the organisation in maintaining a liquidity position of the company
by giving a concern that the cash balance for the m months are incurring losses. The foremost
thing the company should do is to make the cash payment and sales. So that it will not happen in
the next months and the company will able to determine the debt which has been borne by the
company irrespective of the sales and purchases. The outstanding tax liability should also be
fulfilled for the previous months, as it impacts the cash balance of the current and the
forthcoming months.
CONCLUSION
In the above report cash flow forecast have been prepared for Victory Plc and
recommendation has been made to board of director that what source of finance they should
consider to raise 100 Million pound from the market. There are three different sources mentioned
and selection will be made by considering the cash flow forecast of 5 years considering the facts
and figures given by Victory Plc. In this report Part B consist of preparation of cash flow budget
for Bemus Ltd and recommendation has been made on the basis of such budget.

REFERENCES
Books and Journals
Beladi, H., Deng, J. and Hu, M., 2021. Cash flow uncertainty, financial constraints and R&D
investment. International Review of Financial Analysis, 76, p.101785.
Choi, W., 2021. The Meeting of Several Earnings and Cash Flow Measures of Firm
Performance. Available at SSRN 3931205.
Guenther, D.A., Njoroge, K. and Williams, B.M., 2020. Allocation of internal cash flow when
firms pay less tax. The Accounting Review, 95(5), pp.185-210.
Karpac, D. and Sedlakova, I., 2021. The usage of economic profit and other forms of profit as a
part of prediction models to forecast the financial stability of business entities in the
context of globalization. In SHS Web of Conferences (Vol. 92). EDP Sciences.
Kouvelis, P., Wu, X. and Xiao, Y., 2019. Cash hedging in a supply chain. Management
Science, 65(8), pp.3928-3947.
Persson, M.E. and Fafatas, S., 2018. Accounting measurements, profit, and loss: a science fiction
play in one act by Harold C. Edey. Accounting History Review, 28(1-2), pp.31-60.
Prior, D., and et.al., 2019. Profit efficiency and earnings quality: Evidence from the Spanish
banking industry. Journal of Productivity Analysis, 51(2), pp.153-174.
Rashid, A. and Hersi, M.A., 2021. The firm growth-cash flow sensitivity: do financial constraints
matter? International Journal of Managerial Finance.
Sarkar, B., and et.al., 2019. How does an industry manage the optimum cash flow within a smart
production system with the carbon footprint and carbon emission under logistics
framework? International Journal of Production Economics, 213, pp.243-257.
Utomo, D. and Pamungkas, I.D., 2018. Cash flow activities and stock returns in manufacturing
of indonesia: a moderating role of earning management. Academy of Accounting and
Financial Studies Journal, 22(6), pp.1-10.