Business Finance: Profit, Cash Flow, Budgeting Analysis Report

This report provides a comprehensive analysis of business finance, covering key concepts such as profit, cash flow, and working capital. It explores the differences between profit and cash flow, examines how organizations manage financial results, and recommends steps to improve cash flow through better working capital management. The report also delves into the purpose of budgeting, discussing traditional and alternative budgeting methods like rolling budgets, zero-based budgets, and activity-based budgeting. It evaluates the advantages and disadvantages of each approach, offering insights into their application for cost management and strategic planning. The analysis includes practical examples and recommendations to enhance financial performance and decision-making within a business context.

Business
Finance

Table of Contents
EXECUTIVE SUMMARY ............................................................................................................1
MAIN BODY ..................................................................................................................................1
PART 1............................................................................................................................................1
1. Discuss the following terms.....................................................................................................1
2. Explain that how organizations managed which impact financial results...............................3
3. Recommend some steps to improve cash flow of the company with the help of better
working capital management.......................................................................................................4
PART 2............................................................................................................................................4
1. Purpose of preparing budget with alternative budgeting methods...........................................4
2. Application of these methods used to plan future cost management.......................................6
3. Analyse that weather traditional or alternative budget system beneficial for organization or
planned for future.........................................................................................................................7
CONCLUSION ...............................................................................................................................7
REFERENCES................................................................................................................................9

EXECUTIVE SUMMARY
This report summarised the information about finance for business which helps the
organization or make them capable to perform their task in order to achieve their goals &
objectives. In an organization to complete operational activities they required funds from various
sources to satisfy their working capital requirement. This report contain the information about
profit, cash flow, working capital and other terms which used at the time of preparing financial
statements. Along with this, it include the purpose of different budgets, its application for cost
management and analyse traditional or alternative budgetary system.
MAIN BODY
PART 1
1. Discuss the following terms
a. Evaluate profit or cash flow and how both are different from each other:
Profit: It is the financial benefits which motivate individual as well as organization to
perform in order to increase production as well as profitability. Profit will be generated from
business activities through exceeding expenses and other cost over the selling price of product
(Cash Flow vs Profit, 2019). After earning profit, it is owners action to take it in their pocket or
re-invest in the organization to maximise their production. In context of BrightLawns Ltd (BLL),
last year operation profit is about £5 million before interest & tax. It will indicate that company
earn this amount over their overall expenses or cost of production. There are various type of
profit term used in the organization which discussed below:
 Gross profit: It is related to the operational activities where fixed cost excluded and
variable cost subtracted from the overall sale of products.
Gross profit = Sales - Cost of Goods Sold (COGS)
 Operating profit: In this profit, variable or non variable cost such as fixed cost and it
called earning before interest and tax.
Operating profit = Gross profit – Operating expenses
 Net profit: It include the all type of cost and it represent the accurate figures that how
much revenue generated from the business activities.
Net profit = Sales – variable cost – fixed cost
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Cash flow: It is a financial statement which include the information regarding inflow or
outflow of cash. Company received money through ongoing operations and past investment
(Burns and Dewhurst eds., 2016). Similarly outflow of cash will include new investment,
purchase of new assets and pay for business activities. In context of organization, cash flow
generate from various activities which mentioned below:
 Operating activities: this activity include the flow of cash which used top complete daily
business activities such as expenses for business operations.
 Financial activities: It include the flow of cash through purchasing and selling assets for
the business which helps in completing their task and achieve organizational goals.
 Inventing activities: It include the investment and return from the previous one project.
Analyse flow of cash which indicate inflow as well as outflow from this activities and
impact overall profit of the organization.
After evaluating each type activities organization identify the actual flow of cash through
calculation. Net Cash Flow = Cash inflow – Cash outflow
Difference between profit or cash flow:
Basis Profit Cash Flow
A customer buy goods of
worth £50,000 on credit.
It is immediately recorded in
the sales account.
It will be recorded as cash
inflow when customer actually
pays.
Bought new machinery for
business purpose.
It is an expenses for the
business and recorded in the
purchase account.
It is recorded into financing
activity as outflow of cash.
Depreciation amount It will impact the profit of the
company.
There is no effect on cash flow
b. Working capital & meaning of receivable, Inventory and payable:
Working capital: It is the difference between current assets and current liability. Current
assets include cash, receivables, raw material or stock, finished goods etc. and current liability
include creditors, short term borrowings etc. With the help of working capital, organization able
to measure company's liquidity which required to perform daily basis operational activities in
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order to smoothly run their business (Esty, 2014)(Henttu-Aho, 2016). Working capital used to
evaluate for operational efficiency, requirement of finances and liquidity to complete business
activities.
Working capital = Current assets – Current liability
Receivable: Company receive money from their customers who purchase goods ion
credits and it be consider under current assets of the business.
Inventory: It is the stock or material which used to manufacture products in order to
satisfy customer needs (Lauth, 2014). Organization use raw material to converted into finished
goods for the final consumption of consumers and it is also a part of current assets.
Payable: It is an oblation of individual or organization to pay off pending amount to the
people from they acquire. Basically purchase raw material on credit will increase creditors for
the business and comes under current liability.
c. How change in working capital affect the cash flow:
Change in the working capital will impact the cash flow and it will be discussed with
some examples. If company receive cash from short term debt, so it increases in the cash flow
but no changes in the working capital (Lee, Sameen and Cowling, 2015). Change in the
operating cash flow will impact working capital because it included current assets & liability of
the company.
2. Explain that how organizations managed which impact financial results
Company manage all above mention points which impact the financial results of the
business. So it is very important for organization to record daily transaction in effective manner
and produce various financial reports such as income statement, cash flow and balance sheet.
Initially record each transaction of business through passing journal entries and further develop
ledger, trial balance, profit & loss account and in the end develop balance sheet which help in
getting actual position of the business. In context of BrightLawns Ltd, shareholders ask for their
accounts in order to review situations. So manager of the company have to represent accounts
which helps them to analyse financial results of the business (Lorain, García Domonte and Sastre
Peláez, 2015). Manager of BrightLawns Ltd have to focus on their operational activities and
make sure that all the process will be done as per the strategies which develop by manager to
reduce their product cost which increase selling margin.
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By using above information regarding working capital, profit, cash flow, receivable,
inventory etc. Business have to take necessary actions which affect financial results. For this,
manager have to develop strategies by using financial information of the company and make sure
that information is correct and accurate in nature. Otherwise it is not beneficial for the business
to achieve their goals & objectives.
3. Recommend some steps to improve cash flow of the company with the help of better working
capital management
There are various ways which helps the organization to improve cash flow through better
working capital management (Recommendation to improve working capital management, 2019).
Some of the recommendation discussed below:
 Additional discount for receivables: In order to improve working capital
management they have to give discount for those people who pay on time.
 Meet the debt obligation: It is important to meet all the debt obligation on time other
wise it disturb cash flow and impact the working capital management.
 Discount from vendors: Manger have to maintain good relation with their suppliers
because at the time of financial crush they are helping each other and receive some
leniency.
 Manage inventory: Business have to understand that overstock of inventory will
effect working capital as well as flow of cash because it reduce the liquidity of cash
(McLean and Zhao, 2014).
 Use updated financial information: At the time of developing strategy or in decision-
making process, manager have to use updated information otherwise it is not useful for
business operations.
 Resolve disputes with customer & suppliers: It us important to solve every dispute
as soon as possible because if it goes in the court then it will take longer time which
impact the business operations.
PART 2
1. Purpose of preparing budget with alternative budgeting methods
Purpose of preparing budget: Budget is important for every organization and it include
three aspects which satisfy the purpose of developing budget. Budget used to forecast income or
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expenses and help the organization to understand that individual have to perform, financially
speak or carry out each activity. Another purpose is to take effective decision in context of
organization and try to maximise productivity as well as profitability. It further helps in
monitoring business performance which beneficial for manager to identify the area which
required improvement.
Traditional budget approach: It is the method of preparing budget and previous year
budget will be taken as base for new budget (Traditional budgeting method, 2019). Under this
method, manager adjust last year budget with the help of inflation rate, consumer demand,
market situation etc. Budget include the estimation of expenses & revenue which is used by the
manager to formulate strategies and further decision making process.
 Advantage: It is simple for implementing budget and provide stability through
performing each activity accordingly. This budget is very easy to develop and take less
time to implement.
 Disadvantage: Traditional budgets are fixed as well as inflexible which can create
difficulty for managers at the time of performing their task to achieve goals & objectives.
It does not motivate individual to perform well or effectively because they have limited
resources.
Alternative budget methods: Other than traditional method of budget there are various
alternates available which followed by the organization to prepare their budget and perform
accordingly. Some of them discussed below:
Rolling budget: This is the budget which continuously updated and added to the activities
in the new period. Basically this budget involve incremental extension of existing budget and it
is possible when project will be extended due to some reasons. Manager of BoatWorld Plc can
follow this budget to increase their employees efficiency as well as effectiveness. Rolling budget
has some strength or weakness which mentioned below:
 Strength: In comparing to the traditional budget, rolling budget is beneficial because it
allow the business to add additional or future expenses which mistakenly avoided at the
time of preparing this budget.
 Weakness: Rolling budget is very expensive because it required additional time or
human efforts to update information (Réka, Ştefan and Daniel, 2014). It is an continuous
process of updating, so organizations try to avoid the use of this budgeting method.
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Zero based budget: This method of budgeting used to evaluate each expenses for every
period. Manager have to produce budget from the zero base which helps the organization to
analyse needs or cost of business operations. It can be followed by the BoatWorld Plc after
evaluating strength & weakness of this budget which discussed below:
 Strength: This budget is totally different from traditional budget because they justify
each item of budget. It provide complete information regarding expected revenue or
expenditure of the business operations.
 Weakness: It is start from the zero base which required lots of time and efforts. So this
process become costly for the organization which impact overall profitability. This
budgeting method also increase the complexity as well as paper work which is difficult to
understand.
Activity based budget: This budget based on the activities which included in the
production process. It is kind of similar to the zero based budgeting because they does not use
previous information which helps the mangers to identify problems related to each activity of
production process (Rogers and Makonnen, 2014). Manager of BoatWorld Plc can adopt this
budget for the evaluation of each activity and it further helps in decision making process. Its
advantage & disadvantage discussed below:
 Strength: This budget focus on reducing cost through evaluating each & every activity
related to the manufacturing process. It helps in allocating proper resources where
traditional method lack for it.
 Weakness: It is not beneficial for longer time because allocation of resources will be
done for shorter period. Activity based budget only provide additional information but
cannot used to formulate strategies for decision making process.
BoatWorld Plc always follow traditional budgeting method and at the time of opening
a new outlet in the Netherlander and two in Germany. So initially they to develop budget for
each activity. Manager of the company launch 30 new boats along with some supportive
activities. With the help of preparing budget, individual able to perform their task or manager
can spend money on each activity accordingly. Traditional budgeting method is simple which is
easy to understand and they make sure that every task completed under the budget otherwise it
impact the overall production of profitability of the company.
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2. Application of these methods used to plan future cost management
Above mention budgeting method helps the organization to categorise their activities
accordingly and specify their cost for each activity. BoatWorld Plc follow traditional method
where they develop new budget with the help of previous one and make sure that task will be
completed in the given time period or budget. BoatWorld Plc launch 30 new boats in the two
new outlets. So renting these boats to the holidays company they have to estimate their cost as
well as revenue from it. BoatWorld Plc can also follow zero base budgeting methods which
provide various benefits and helps in maximising productivity as well as profitability. Some of
the elements discussed below which helps the organization to select suitable budget for their
organization.
 Accuracy: By using zero base budgeting which helps the manager to estimate their
each product cost from the starting. It further provide accuracy in results and decision
making process.
 Safe & secure: It is safe & secure because it will be developed for each new period
and manager can generate revenue by using it.
 Cost effective: Budget should be cost effective because further process of
implementing budget already expensive.
BoatWorld Plc use these elements at the time of preparing budget because at the time of
launching new boats it will provide benefits to perform accordingly without any confusion.
3. Analyse that weather traditional or alternative budget system beneficial for organization or
planned for future
BoatWorld Plc always use traditional method for budgeting but it will be recommanded
that company should follow zero base budgeting method. Company launch product in the new
market so it is beneficial for them use this budget because it justify each and every element of
cost. Already manager have to develop estimate new expenses and revenue because there is nor
previous information so it is good to follow zero base budget. There are some reasons why this
budget will recommended to BoatWorld Plc:
 Effective allocation of resources will help the manager to perform their task
effectively and follow the budget in appropriate manner.
 Increase communication among the members will helps in sharing information and
any issues in the business operations will be communicated with the managers.
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 It helps in analysing waist activities so manager of the company can reduce its
impact because wasteful will increase the cost of product.
CONCLUSION
From the above discussion it has been concluded that finance for business essentially
required because all the operational activities depend on it. Different budgeting method used by
the different organizations and it has their own benefits or drawbacks which impact the
production as well as profitability. Along with this, there are various financial aspect which
impact the organization and their financial results. So manager of the company have to consider
these elements in effective manner and ensure that it will provide accurate information for their
shareholders.
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REFERENCES
Books & Journals
Burns, P. and Dewhurst, J. eds., 2016. Small business and entrepreneurship. Macmillan
International Higher Education.
Esty, B., 2014. An overview of project finance and infrastructure finance-2014 update. HBS
Case, (214083).
Henttu-Aho, T., 2016. Enabling characteristics of new budgeting practice and the role of
controller. Qualitative Research in Accounting & Management. 13(1). pp.31-56.
Lauth, T. P., 2014. Zero‐Base Budgeting Redux in Georgia: Efficiency or Ideology?. Public
Budgeting & Finance. 34(1). pp.1-17.
Lee, N., Sameen, H. and Cowling, M., 2015. Access to finance for innovative SMEs since the
financial crisis. Research policy. 44(2). pp.370-380.
Lorain, M. A., García Domonte, A. and Sastre Peláez, F., 2015. Traditional budgeting during
financial crisis.
McLean, R. D. and Zhao, M., 2014. The business cycle, investor sentiment, and costly external
finance. The Journal of Finance. 69(3). pp.1377-1409.
Réka, C. I., Ştefan, P. and Daniel, C. V., 2014. TRADITIONAL BUDGETING VERSUS
BEYOND BUDGETING: A LITERATURE REVIEW. Annals of the University of
Oradea, Economic Science Series. 23(1).
Rogers, S. and Makonnen, R., 2014. Entrepreneurial finance: Finance and business strategies for
the serious entrepreneur.
Online
Cash Flow vs Profit. 2019. [Online]. Available Through:
<https://www.fundera.com/blog/cash-flow-vs-profit>
Recommendation to improve working capital management. 2019. [Online]. Available Through:
https://www.invensis.net/blog/finance-and-accounting/11-best-ways-improve-working-
capital/>
Traditional budgeting method. 2019. [Online]. Available Through:
<https://efinancemanagement.com/budgeting/traditional-budgeting>
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