Business Finance Report: Working Capital, Budgeting Analysis

This report examines key aspects of business finance, focusing on working capital management and budgeting. Task 1 delves into the concepts of profit and cash flow, highlighting their differences and exploring the components of working capital, including receivables, payables, and inventory. It also analyzes the impact of changes in working capital on cash flow and provides recommendations for effective working capital management, using Mediterranean Delights Ltd as a case study. Task 2 explores the significance of budgeting approaches, differentiating between traditional and modern methods like rolling, activity-based, and zero-base budgeting. It evaluates the effects of these budgeting systems on an organization, Second Sight, and assesses the suitability of different budgetary systems for a business's future plans. The report provides an executive summary and conclusions, offering a comprehensive overview of financial management principles.

Business Finance

Table of Contents
EXECUTIVE SUMMERY..............................................................................................................2
TASK 1...................................................................................................................................3
1) A) Meaning of profit and cash flow and description of their difference...........................3
B) Explanation of working capital, receivables, payables and inventory..............................4
C) Explanation of changes in working capital effect cash flow.............................................4
2) Impact of changes in working capital on business organization........................................5
3) Recommendation related to effective working capital management.................................5
TASK2.............................................................................................................................................6
EXECUTIVE SUMMERY..............................................................................................................6
TASK2.............................................................................................................................................6
1) Explanation of importance of budgeting approaches and their advantages and
disadvantages..........................................................................................................................6
2)Effect of traditional and alternative budget approaches on Second Sight organization.....8
3) Analysing whether a traditional or alternative budgetary system is appropriate to all or any
parts of the business in its planned future form......................................................................8
REFERENCES................................................................................................................................9

EXECUTIVE SUMMERY
Business finance is related with managing financial resource to fulfil daily basis
requirement of the running organization. In other words it is a framework of collection of funds
and resource. Business organization uses this term to better utilization-and management of their
financial resource. Success of an entity depends on how effectively they will invest their capital
in various activity to run their business activities. Business finance is related with managing
current requirements of organization. In this report importance of working capital in decision
making process has been identified and how changes in cash flow and their relative term impact
on working capital has been analysis.
TASK 1
1) A) Meaning of profit and cash flow and description of their difference
Profit: The term profit define as net value of financial gain aeries by business
organizations through their operational activities. In accounting term it is excess of sales value
over cost vale of producing goods. Profit is important part of each business organization weather
it is financial or non financial. Profit shows growth and strong performance status of running
business organization (Ahmad, Hasan, and Haneef, 2016).
Cash-flow: It defines as net amount of gash generate from inflow and outflow activities.
Business organizations use cash flow statement to analysis activities which help in generation
cash from financing, investing, and operating activities. Cash flow help management to take
decision regarding their portfolio polices. Many individuals think the cash flow and profits are
similar terms but their will be some difference which mention below
Particular Profit Cash flow
Meaning Positive differences between
sales revenue and cost of
manufacturing and supplying
services.
Value of money that flows in
or out over a given period of
time.
Time There will be no specific time
for calculating profit.
Companies can be calculated
Cash flow statement is
prepared at the end of financial

there profit after a month or
weekly basis.
year.
calculation Profit can be calculated by
using various managerial
accounting techniques or .
Financial year profits
calculated by preparing profit
and loss statement.
To identify cash flow activities
, cash flow statement is
prepared through which
mangers identify their net cash
flow activity.
Purpose To maintain sustainability of
business organization within
the market economy.
To recognize financial
Performance of business
identify activities which help
in generating cash.
B) Explanation of working capital, receivables, payables and inventory
 Working capital: This term refers as availability of short term fund of finance to run
daily operational activities of the business. Working capital is divided into two
categories. Gross working capital refers as total amount of current asset and net working
capital differences. It will help in pay debt liability of business operational activity.
 Receivable: It defines as claims sue on customers for utilizing of products of business
organization. Receivable amount are shown is assets side of balance sheet as it will be the
expected amount may earns from their potential customers (Adu, 2018).
 Payable: This term defines as monetary value of amount payable to vendors by business
organization. This amount due due to purchasing of raw materials and others equipment
requires for manufacturing products. It creates liability on business organization, thus it
will be shown in current liability side of balance sheet.
 Stock: It also known as inventory of an entity. This term refers as net value of raw
materials, and goods hold by companies for the purpose of selling them in market.
Profitability rate of business entity depend on how they manage stock level of their
products.

C) Explanation of changes in working capital effect cash flow
Working capital is value of current assets to fulfil as short term liabilities of running
business organization. It will directly impact on cash flow activites. Cash flow is net amount of
operational activities. Increment in receivables values will be decrease cash inflow. Increment in
stock value also decreases cash inflow activities. If amount of creditors enhancing that it will be
increase in inflow activites of cash flow .Higher value of current assets show low rate of cash
inflow activities.
2) Impact of changes in working capital on business organization
Mediterranean Delights Ltd is situated in England, the organization run their supply chain
of restaurant and it will cover all the market area of south England. From their past year due to
their lack of effective working capital management policies, their profitability status have been
changed (Goyal, and Agarwal, 2017).
Profit: Company earn profit of 5 million last year, with their operating activities. Due to
lack information it has been assume, that company earn this profit after deduction of tax and
interest payable on borrowing liabilities.
Cash flow: Mediterranean delights ltd generates cash inflow activities by selling their
products. There debt liabilities also increase from 16 million to 18 million. In last year’s
companies cash outflow activities increase due to invest in Italian company. They also pay
penalties due to their conflicts
Payable: MDL s payable has been increase which negatively impact on company as they need
more current assets to paid the debt amount.
Working capital: Ratio of working capital decreases due to conflicts with their potential
customers and also their raw material suppliers. There ratio of payables increase due to various
reason. Even though changes in capital structure will negatively impact on the working capital
but with heavy turnover of past years. Mediterranean Delights Ltd can manger their operation
activities.
3) Recommendation related to effective working capital management
Mediterranean Delights Ltd is one of the biggest corporations of England. They maintain
strong position in market area. But due to lack of managerial skills growth rate of their
organization goes down. Managers of this organization need to formulate effective policies

regarding issues aeries within the company. They need to formulate effective policies regarding
their debtors so that they can easily recover sales amount from them. Managers need to execute
those policies which include their customers to pay their heavy amount within short period. They
need to solve their conflicts with Valetta it will help them to maintain their goodwill among
suppliers. Manager of this company needs to formulate effective cash management policy which
helps in generating more cash inflow activities rather then cash outflow. They also formulate
effective polices to their suppliers so that they can provides them good quality of raw materials.
TASK2
EXECUTIVE SUMMERY
Budget is numerical statement which is prepared by mangers to identify future financial gain
earn by business organizations by their business activity. It is used to formulate strategies
regarding decision making. Manager also uses budget for their performance evolution
process. In this report essential requirement of budgets for decision is making and effect of
various budgeting methods on success of an organization has been critically examined. Uses
of traditional and modern budgeting approaches on running busness organization have been
analysis (Hunjra, Bakari, and Batool, , 2018).
TASK2
1) Explanation of importance of budgeting approaches and their advantages and disadvantages
Budget:
Budget is a statement which is used by an entity to forecast future results and compare
them with actual results so that they can take strategic decisions regarding organizations better
performance. It is an important tool of strategic decision making process. A Budget is a plan of
how an organization wants to procure income and expend money on various processes/products
in order to make maximum profit. It can also be used as a performance evaluation measurement
tool to measure the efficiency of organizations employees. Budgets are essential tool of an
business entity. It will help in identify future position of organization. It also used to eliminate
future risk by taking neccceasry steps to overcome the situation of risk. The process of making a
budget is called budgeting. There are two methods to prepare budget known as traditional
approach and modern approach.
Traditional Approach:

This is the oldest approach to prepare a budget that is why it is known as traditional
approach. In this method, managers prepare current year’s budget taking previous year data as
base for budgeting. In this method current year budget is prepared by making essential changes
in previous year budget like inflation, market situation etc. This approach have some advantages
and disadvantages as well and these are as follows:
Advantages:
 This is the simplest method to prepare a budget.
 Traditional approach encourages decentralization since everyone in the organization have
knowledge about previous year budget.
 It is cost effective approach.
Disadvantages:
 Chances of human errors are higher.
 It can lead to inaccurate budget results.
Modern Approach:
Modern methods takes into account the time and market situations so it provides more
reliable and accurate results than traditional approach. Modern methods of budgeting are activity
based budgeting, zero base budgeting and rolling budgets (Artamonova, and Brusakova, 2016).
Rolling budget: Rolling means continuous. In this type of budgeting budgets are prepared for a
shorter than a normal budgeting period. Managers frequently improvise their policies according
to the short term budget results. It is flexible budgeting method as managers can change their
policies for pre-determined objective. Following are the advantages and disadvantages of this
method:
Advantages:
 It helps managers to spend wisely.
 Flexible/ Adaption of change.
Disadvantages:
 It is very costly and require skilled workforce to implement.
 It requires time and efforts to prepare.
Activity base budgeting: As the name denotes, this method takes the activities of the
organization as base for preparation of budgets. In other words, budgets are prepared on the basis

of cost allocated to various type of activities. Following are the advantages and disadvantages of
this method:
Advantages:
 It takes into account only those activities which are value adding hence minimize cost and
wastage.
Disadvantages:
 It is very complicated process and hard to implement.
Zero base budgeting: Zero base means starting from zero level. In this type of budgeting,
managers prepare budgets without taking any base i.e. they do all the research from scratch and
prepare budgets Following are the advantages and disadvantages of this method:
Advantages:
 It ensures the efficient allocation of the resources based on benefits.
 It eliminates outdated operations and minimize waste (Viswam, 2018).
Disadvantages:
 It is very time consuming and requires manpower with appropriate knowledge.
 The risk of compressing information is very high because all R&D is done from zero level.
2) Effect of traditional and alternative budget approaches on Second Sight organization
Second sight is situated in Manchester. It is one of the famous organization in United
Kingdom .Now they explore their sunglasses market in India and Netherland. To start a new
business manager of Second Sight Limited can be uses traditional as well as modern method of
budgeting. These me5hod will help them in identifying future performance status of their
business organization in Indian as well as Netherlands market. Budgeting method help them in
reducing their cost of manufacturing and supplying their products to potential customer by
making effective cost control strategies. Manager of Second Sight limited will be used traditional
method of budgeting it is very easy method and their employers will easily understand traditional
budget. They do not require to spend money on researching and hiring expertise. Second Sight
can also be used various approaches of modern budgeting method. That can adopt zero based
budgeting it will help in provides accurate result regarding future. Second Sight is well
established company at Manchester their last year revenue was 250 million, it represent strong
financial position thus they can also applied activity based budgeting and rolling method of
budgeting for their projects. Activity based budgeting method will help organization to allocate

activities regarding cost incurred on this activites. Manager of this company will also used
rolling based method as using this method will help in reducing cost of changing policies
according to the needs and want of economic environment.
3) Analysing whether a traditional or alternative budgetary system is appropriate to all or any
parts of the business in its planned future form
There will be various methods and technique are available for formulating budgets.
Business organizations prepared their budgets by using those techniques which are more
profitable to them and give accurate and reliable information regarding future income. Every
budgeting method have their own advantage and disadvantages it is totally demands on managers
which method they choose for their decision making process as success of any corporation is
also effected by their budgeting process. Second Sight will be used zero based budgeting and
rolling budgets for their Indian project as it will be provides more reliable information regarding
Indian market. Tradition budgeting method is not appropriate for Indian project as target market
of India is very complicated and they don’t have essential past data which help in preparation of
budget. Manager of Second Sight also cannot used activity based budget as it will be generate
more cost then compare to other alternatives and chances of success of implementation of this
budgeting process for Indian project is very low. For Netherland project Second Sight will
be(Lugmayr, and Grueblbauer, 2017) uses traditional based budgeting method as market
conditions of Nederland and Manchester are similar and target are also small then compare to
Indian project thus tradition budgeting will help them in cost saving by cutting activities which
help in cutting cost. They can also apply activity based budgeting it will help them in allocation
of essential activites regarding cost incurred on them. For Netherland project rolling based and
zero based budgeting is not useful as they will not

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