Business Finance Report: MDL's Working Capital and Budgeting

This business finance report examines the critical aspects of financial management within an organization. The report begins with an executive summary highlighting the importance of working capital management and budgeting methods, followed by a detailed exploration of profit versus cash flow, the components of working capital (receivables, payables, and inventory), and how changes in working capital affect cash flow. It then analyzes the impact of business management on financial results, using Mediterranean Delights Ltd. (MDL) as a case study, and recommends steps to improve cash flow through better working capital management. The second part of the report focuses on budgeting, discussing its purpose and applications, comparing traditional and alternative budgeting approaches (including zero-based and activity-based budgeting), and analyzing their strengths and weaknesses. The report aims to provide a comprehensive understanding of financial management principles and their practical application in a business context. The assignment is contributed by a student to be published on the website Desklib, a platform which provides all the necessary AI based study tools for students.

BUSINESS FINANCE

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
EXECUTIVE SUMMARY.............................................................................................................1
PART 1............................................................................................................................................1
i)Explanation of the flowing:.......................................................................................................1
ii) Effects of management of business over the financial results................................................2
iii) Recommended steps to improve cash flow with better working capital management..........3
PART 2............................................................................................................................................4
i) Purpose of preparing the budgets.............................................................................................4
ii) Application of the traditional plus alternative budgeting approach in business.....................6
iii) Analysing the more appropriate budgeting methods between traditional and alternative
budgeting method........................................................................................................................7
REFERENCES................................................................................................................................8

EXECUTIVE SUMMARY
Business finance is an essential requirement of the organisation. Finance is the life blood of
every organisation for running business operations smoothly. Report is based over the
importance of working capital management in the business organisation. This has also provided
about the budgeting approaches like traditional and alternative methods for management of
organisation. They help in increasing the productivity and efficiency of the business operations.
PART 1
i)Explanation of the flowing:
Profit and cashflow and their difference
The profit is defined as the financial gain which is enjoyed by the company by deducting
for all the losses and expenses. This is also referred to as the difference between the income and
the expenses. If the income is more than it is termed as profit and if the expenses are more than
the company is said to have suffered a loss (Ylhäinen, 2017). On the other hand, the cash flow is
referred to as the movement of money in and out of the business. The cash can have either a cash
inflow or the outflow. The inflow is defined as the cash coming to the business and outflowis
termed as the cash going out from the business. There needs to a balance between both the flows
of cash as if anyone will be more then it will not be profitable for the company. Also, it is very
necessary for the company to have immense amount of profit so that the company never faces
any problem.
The major difference between profit and cash flow is that the profit is of two types that
isgrossand net. The gross profit is the profit whichis earned after the direct cost is deducted and
the net profit is the one which is calculated after all theindirect expenses being deducted. On the
other hand, cash flow is the one which includes either cash inflow or outflow.
a. Working capital and meaning of receivables, payables and inventory
The working capital is defined as the capital which is applied within the business for
meeting their day to dayexpenses and cost. This working capital is calculated as current assetless
current liabilities. Working capital is very important for the business as it help the company in
managing the day to day activities. The working capital is defined as the ability of the company
to pay of the current liabilities with help of the current asset presentby the company (Adhikary
and Kutsuna, 2016). The working capital increased either by the increase in the current asset or
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decrease in the current liabilities. The four common mechanism involved in the management of
working capital are cash management, inventory management, debtors management and the
financing management.
Receivables- this is referred to as the amount of money which the company has to take
form other person. This is the amount of money which needs to be received by the company
from any other party. The receivable presents the debtorsof the company and is a significant
component of the working capital.
Payable- this is the system which present the data to which the amount id due by the
company to someother party. This amount the company has to pay to some other company or
any other party. The payable arethe creditors of the company which either provides money to the
company for managing the working of the company.
Inventory- this is referred to as the stock which is produced and manufactured by the
company and the inventory includes the raw material and the work in progress. Without the
inventory the company cannot run and operate and this is because of the reason that if the
inventory will not be managed in successful manner then the working will not take place in
effective manner. Thus, for this Mediterranean Delights Ltd uses the ABC analysis.
b. Changes in working capital affecting the cash flow
The working capital depicts the changes taking place within thecurrent asset and the
current liabilities. The changes within the working capital affectthe cash flowto a great
extent.This is majorly because of the fact that if the working capital will be positive then it
means that the current assets is more for MDL and they have more liquid cash with them
(Connolly and Jackman, 2017). This condition states that cash flow is notmuch with the
company and they are having current assets which can be converted anytime into cash. If the
working capital is negative then it means thatthe current liabilities are more for the company and
they have to arrange for the cash to pay these liabilities.
ii) Effects of management of business over the financial results.
Management of the company plays an important role in the business. The way in which
business is being managed has direct influence over the financial results of company. Businesses
are required to be managed efficiently by the company. MDL is operating in the industry
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successfully from years. Company has earned operating profits of 5 millions against the turnover
of 50 million. This is essential for the business enterprise to have have adequate working capital
for carrying out the business operations. Company has made advance payment of 8 million in the
Italian company for supply of exclusive products. It has made advances more than half of the
amounts, this blocks the funds of company into single order. In the case of contingencies whole
of the funds will be blocked. Debts of company has also raised by 2 million in 1 year. There is a
significant rise of the capital requirement in short term due to ineffective management of the
funds. It has blocked funds of 3.5 million in receivables from two of its major parties (Frankel,
Levy and Shalev, 2017). It should take steps for collection as the working capital cycle is
affected due to this. The profits will be affected if the management of the cash cycle and
investment are not adequate. Company without managing the operations appropriations will be
requiring more of the outside funds to carry out its operations. Company is able to manage its
profits but is facing problems in managing its cash flows and this is impacting the financial
position of company.
iii) Recommended steps to improve cash flow with better working capital management
For improving the cash flow it is very essential for the company to manage its working
capital in effective and efficientmanner. Hence, for managing the working capital within the
MDL it is advisable for the company to follow the following mentioned steps-
The first step is to manage the inventory in such a manner that the inventory is
availableto the country as and when it is required by the company. This is necessary because of
the fact that if the inventory will not be available on time then the working will not take place in
effective manner. Thus, this is the first recommendation for the effective management of
working capital.
Another major recommendation to MDL is to analyze all fixed and variable cost as this
will help the company in managing the cost which can be undertaken in the future working of the
company. This cost analysis will help the company in estimating all the possible cost and then to
ascertain that whether these cost will be bearable by the company or not.
One more major recommendation for the company is to automate all the accounts
whether be it receivable or payable.This is majorly because of the reason that this automation
and use of technology will help MDL in managing the dates when the payment is going to be
received and when the payment is to be made. This will help the company in keeping the record
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of all the payables and receivables as this will timely remind the company to either pay or
receive the payment from the client.
PART 2
i) Purpose of preparing the budgets
Budgets are prepared by the organisation to have a defined structure to follow by the
management. They are also referred as the spending plans of the company to be followed.
Budgeting is the process where the company makes forecasts about its income and expenditures.
Forecasting is made by the company analysing the different aspects of business and market
trends. By the time various budgeting techniques have evolved as per the need and requirement
of different business operations. Budgeting helps the company in making comparison between
the budgeted figures and the actual figures obtained after carrying out the operations (Le and
et.al., 2018). This helps the business in identifying the variations and on the basis of these
variances corrective steps are taken by the company to reduce the variance tyo the minimum.
Budgets helps in effective planning and keeping the cost and expenditures under control by
taking cost control measures on the basis of budgeting outcomes.
a) Traditional Budgeting
The budgeting process in tradition budgets involve preparing budgets taking the budget
of previous year as the foundation. Management identify the components and element of
previous budgets and prepares the current budget accordingly. Budget for current year is
prepared by the company after taking account all the changes and influences taking place in the
market that can affect the operations of business. This is the budgeting technique that makes
changes in the previous budget for preparing the budget for current year. Adjustments related to
market changes, demand and supply and other influential factors are also considered for making
the budgets accurate and flaw less. Budgeting method is used by organisation and is earning
sufficient profits using this approach. There are some defects with this approach also that are
overcome by the other budgeting approaches like zero based budgeting, activity based budgeting
and rolling budgets.
Strengths
Traditional budgeting is used by organisations with increased acceptance. The budgeting
method is the simplest method to implement and execute. Traditional budgets can be prepared
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vey easily and quickly as compared with other budgeting approaches (Talmon and Faliszewski,
2019). This saves time and cost of managers as the budgets involves making adjustments in the
previous budgets for preparing the budget for current year.
Weaknesses
Traditional budgeting method do not give accurate and reliable results. This budgeting is
based over previous and therefore there are more chances that the errors and mistakes are carried
forward to the budgets of next year. Exact issues cannot be identified using this budgeting
approach for variations
b) Alternative Budgeting Method
Zero Based Budgeting
The budgeting approach was developed mainly for overcoming the defaults of traditional
budgets. Zero based budget is highly used budgeting approach by the organisations in their
production processes. Zero based budget refers to the budgeting method that do not prepaqre the
budget for current year taking the budgets of previous years. This involves preparation of the
budget after analysing all the internal and external forces that affects the productivity and
efficiency of the business that is from zero.
Strengths
Zero based budgets are prepared from the beginning analysing various fact ors associated
with the budgets. It is prepared taking the base zero for increasing the productivity and reducing
the variances.
Weaknesses
This consumes lot of time for preparation as analysis of each and every factor from the
starting takes time. It involves high cost and is difficult to implement as it is expensive.
Activity Based Budget
This refers to the budgeting approach that was developed as the traditional budget was
not successful for process involving different operations. Activity based budgeting method refers
to the budget that is prepared by the business on information of activity based budgeting. This
method also don not take previous budgets for preparing the budgets
Strengths
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The budgeting techniques helps the business in identifying the actual cost and fund
requirement by the different activities. This helps the business to make more accurate allocation
of resources among the business activities.
Weaknesses
As the budget do not consider the previous budgets it is time consuming. The budgeting
approach is expensive and difficult to implement. This requires expert knowledge for preparation
of budgets.
Rolling Budgets
Rolling budget refers to the budgets that are prepared on the basis of previous budgets on
partial basis of previous budgets. In this budget present budgets are updated in the next years by
making required changes to the budget.
Strengths
Rolling budgets are used in organisations that do not have major changes (Cokins and
Dybvig, 2018). The budgeting methods is easy to prepare and implement.
Weakness
It does not make adequate allocation of the resources as this is just as an extension of
existing budgets in futures period without considering the other factors.
ii) Application of the traditional plus alternative budgeting approach in business.
Second Sight Plc is international company engaged in the production of prescription
glasses and the sunglasses for the international brands. Company is having efficient management
of the business operations and an adequate financial structure. It is having its production houses
both in UK & France. Company is now proposing to establish in Netherlands with joint venture.
Company is using the traditional budgeting approach from years and also successfully managing
its business. Traditional budgeting approach is used for planning the whole structure of business.
All the spending and incomes are analysed by the company using the traditional budgeting
approach. This approach is used for preparing master budgets as it saves time and money of
organisations. This is prepared by making necessary adjustments in the budgets for current year.
Zero based budgeting can be applied by the business in products and processes that are most
prone to market changes (Emerling and Wojcik-Jurkiewicz, 2018). This is prepared after
analysing the trends of the business operations from the start. Activity based budgets are applied
in the process for identifying the variation in different activities being carried out by the
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organisations for paying attention to the activities. Rolling budgets are used in the processes
where least changes are made and are not much prone to external forces.
iii) Analysing the more appropriate budgeting methods between traditional and alternative
budgeting method.
Traditional budget are prepared by organisation for keeping the business structures on right
direction. They are prepared by the business enterprise on the basis of last budget by making th
required changes to the existing budgets. Business was not able to identify the actual cause of
difference between the budgeted and actual figures. This involves only by top management with
least involvement of employees that actually carry out the operations. This does not promote the
motivation in the employees as they are not involved. Budgets involve decision making for
improving the performance of business. Traditional budgeting has been used by organisations
but has not been able to reduce the variances. This is prepared on the previous budgets and all
the factors may not be covered in the budget and this may affect the business structure. Budgets
are not flexible and are rigid in nature. They do not allow the management to make changes later
on once they are approved by the senior executives.
Alternative budgets were developed to eliminate the flaws of traditional budgets. This has
been able to help the organisation in identifying the causes of variations. These budgets are
prepared by the management including the lower level management who will be actually
performing the task. They have more accurate information about the activities and their
requirement. This helps in reducing the variances. Separate budgets could be prepared by the
organisation as per the process and the activities involved in operation. The budgeting
approaches like zero based budgeting eliminates all the possibilities of errors and mistakes in
previous budgets. Rolling and activity based budgets has helped the organisation to prepare
budgets for separate operational processes (Popesko, 2018). This helps in more accurate
allocation of resources between the business activities. Second Sight should adopt for the
alternative budgeting for improvements in performance and productivity.
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REFERENCES
Books and Journals
Frankel, R., Levy, H. and Shalev, R., 2017. Factors associated with the year-end decline in
working capital. Management Science. 63(2). pp.438-458.
Le, H.L., and et.al., 2018. Impact of working capital management on financial performance: The
case of Vietnam. International Journal of Applied Economics, Finance and
Accounting. 3(1). pp.15-20.
Talmon, N. and Faliszewski, P., 2019, July. A framework for approval-based budgeting methods.
In Proceedings of the AAAI Conference on Artificial Intelligence (Vol. 33, pp. 2181-
2188).
Cokins, G. and Dybvig, A., 2018. NEXT GENERATION BUDGETING: If you want more
accurate results from your budgeting process, it may be time to switch from traditional
budgeting to operational budgeting. Strategic Finance. 99(10). pp.38-46.
Emerling, I. and Wojcik-Jurkiewicz, M., 2018. The risk associated with the replacement of
traditional budget with performance budgeting in the public finance sector
management. Ekonomicko-manazerske spectrum. 12(1). pp.55-63.
Popesko, B., 2018. Transformations in Budgeting Practices: Evidence from the Czech
Republic. International Advances in Economic Research. 24(2). pp.203-204.
Adhikary, B. and Kutsuna, K., 2016. Small Business Finance in Bangladesh:
Can'Crowdfunding'Be an Alternative?. Review of Integrative Business and Economics
Research. 4. pp.1-21.
Connolly, E. and Jackman, B., 2017. The Availability of Business Finance. RBA Bulletin,
December, pp.55-66.
Ylhäinen, I., 2017. Life-cycle effects in small business finance. Journal of Banking &
Finance. 77. pp.176-196.
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