Business Finance: Financial Statement Analysis and Budgeting Report

This report delves into the core concepts of business finance, providing a comprehensive analysis of financial statements, including profit and loss statements and cash flow statements. It highlights the key differences between these statements and explores the significance of working capital management, covering aspects like receivables, payables, and inventory. The report further examines the impact of changes in working capital on the statement of cash flow and offers actionable steps to improve cash flow through effective working capital management. Additionally, the report provides an overview of various budgeting systems, such as traditional, rolling, activity-based, and zero-based budgeting, comparing their advantages and disadvantages to guide businesses in selecting the most suitable approach. The report analyzes the financial transactions of a company and suggests strategies to enhance financial performance and sustainability.

Running head: BUSINESS FINANCE
BUSINESS FINANCE
Name of Student
Name of University
Author’s Note

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Table of Contents
PROFIT AND LOSS STATEMENT:.................................................................................2
CASH FLOW STATEMENT:............................................................................................3
DIFFERENCES BETWEEN PROFIT AND LOSS STATEMENT AND CASH FLOW
STATEMENT:................................................................................................................................3
WORKING CAPITAL MANAGEMENT:.........................................................................4
RECEIVABLES:.................................................................................................................5
PAYABLES:........................................................................................................................5
INVENTORY:.....................................................................................................................5
IMPACT OF CHANGE IN WORKING CAPITAL ON STATEMENT OF CASH
FLOW:.............................................................................................................................................6
ANALYSIS:........................................................................................................................6
STEPS TO IMPROVE THE STATEMENT OF CASH FLOW THROUGH WORKING
CAPITAL MNAGEMENT:............................................................................................................7
TRADITIONAL BUDGET:................................................................................................8
ROLLING BUDGET:.........................................................................................................9
ACTIVITY BASED BUDGETING:...................................................................................9
ZERO BASED BUDGETING:.........................................................................................10
TRADITONAL BASED BUDGETING VS ACTIVITY BASED BUDGETING:..........11
REFERENCES:.................................................................................................................13

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EXECUTIVE SUMMARY:
This report provides complete insight about statement of operations and statement of cash flow.
The comparison between the two is also being explained in this report. The significance of
working capital management in business entity is also discussed in this report. The report also
provides how the impact of change in cash flow statement affects the working capital of any
company.
PROFIT AND LOSS STATEMENT:
The annual report of any business entity consists of profit or loss statement or income
statement. It assists any business entity to represent their revenues, expenses and net profit/loss
over period of time. The ability to generate sales from the market can be determined after
analysing the statement of operations (Profir 2017). The company’s ability to manage the
expenses can also be interpreted from profit and loss statement. The ability of creating profits
from the company can also be understood from the income statement. Statement of operations is
mainly prepared on the basis of principle of accounts that includes revenue recognition and
accruals. The main categories on which the profit and loss statement are being created are cost of
goods sold/cost of sales, general and administrative expenses, revenue/sales, selling, marketing
and advertising, technology, interest expenses, taxes and net income/loss. The companies publish
statements of operations mainly on monthly basis, quarterly basis or yearly basis. Thus, the
significance of the income statement for any stakeholders is immense.
CASH FLOW STATEMENT:
Statement of cash flow or cash flow statement is considered as one of the three key
financial statements of any business entity. This statement represents the cash generated or spent

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by the company or any other business over a specific time period. It is the cash flow statement
that associates with income statement and balance sheet of any business entity. Basically
statement of cash flow represents the movement of cash of an entity. It divided into three parts
(Kusuma 2014). They are “cash from operations”, “investing activates” and “financing
activities”. Operating activities of a business entity represents the revenue generating activities of
the company. Investing activities represents the cash movements from acquisition and disposal
of long-term assets and other investment related transactions that are not included in cash
equivalent. Financing activities represents the cash flow of the business entity that is composed
of equity capital or borrowings. Thus, it provides complete idea about the cash inflow and
outflow of any company to the stakeholders of that company.
DIFFERENCES BETWEEN PROFIT AND LOSS STATEMENT AND CASH FLOW
STATEMENT:
Both operation statement or profit or loss statement and statement of cash flow are the
key financial statements of any business entity, but there are several differences between the two.
These differences are highlighted below:
PROFIT AND LOSS STATEMENT CASH FLOW STATEMENT
1. Operation statement or income
statement reflects the ability of a
business entity to earn profit from the
market (Aggelopoulos and
Georgopoulos 2017).
2. In order to analyse the net income or
loss made by the company operation
1. Statement of cash flow states the cash
inflow and outflow of the business.
2. In order to analyse the ability of the
business entity to generate cash from
the market statement of cash flow are
being prepared.
3. On the basis of operating activities,

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statement are being prepared.
3. On the basis of nominal accounts of the
company income statement are being
prepared.
4. In order to create double entry system
income statement are being prepared.
investing activities and financing
activities statement of cash flow are
being prepared.
4. It is not necessary that statement of
cash flow needs to be prepared on the
basis of double-entry system (Ashton
2014).
WORKING CAPITAL MANAGEMENT:
The ability to manage the current assets and current liabilities with utmost accuracy is
known as working capital management. The comparison of current assets and current liabilities
of any business entity will provide the working capital of the company. In other words, working
capital represents the presence of the liquidity of the company that can mitigate the short-term
liabilities of the company. It also states the ability of the top executives of any business entity to
arrange the working capital at the lowest possible cost (Bhattacharya 2014). This also states the
management’s ability to utilize the cost effectively. Working Capital management of any
business entity states that the company can get high return from capital, solvency improvement,
increased profitability and also provides competitive advantage to the company.
RECEIVABLES:
The amount that the business entity is expecting to receive from the customers who have
purchased goods or utilised the services on credit is known as accounts receivables. Normally,
the credit period is within a year. Thus, accounts receivable is an integral part of current assets

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that appears in the balance sheet of any company (Ukaegbu 2014). This is also the reason due to
which the receivable is considered as an integral part in working capital calculation.
PAYABLES:
The payable obligation of any business entity is known as accounts payable. It is the
amount that the business owes to its vendors or suppliers for the goods purchased or services
used by the business. It considered as the liability of the business and mainly reflects the current
liabilities of the company. It has direct relation with the working capital management, as it
increases the value of the current liabilities of the business entity. In order to control the working
capital the managers of the business entity often try to check the accounts payable of the
company.
INVENTORY:
The asset that is intended to sell by the management of the company is known as
inventory. Inventory is typically broken into three types. They are raw materials, work-in-
progress and finished goods. It is considered as the current asset of the company. Thus, changes
in inventory affect the working capital of the company, as the current asset of the company vary.
IMPACT OF CHANGE IN WORKING CAPITAL ON STATEMENT OF CASH FLOW:
Current assets and current liabilities are two main key components that actually affect the
working capital of any business entity. Cash and cash equivalent is one of the major attributes of
the current assets of any business entity. In case; the receivables of the company increase or
decrease, there is considerable impact on cash and cash equivalents. The same occurs when there
is an alteration in the payables and inventory of the company. If cash value changes then the
working capital of the company also changes.

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ANALYSIS:
The transactions that are realized by Mediterranean Delights Ltd, in recent year states that
the ability of the business to earn profits from the market. This are directly reflected in the
statement of operations of the entity. It can be observed that the debt of the entity has increased
by considerable means. The debt amount increased from £16 million to £18 million. This
directly reflects on the entity’s working capital as the increase in debt assists the current
liabilities of the company. The receivables of the company also increases as the company owed
around £1.5 million from Delios. The company is also facing around £2 million dispute with San
Pedro (Kelly 2015). This increases the bad debt of the company. The debts that are rising for the
company directly affects the working capital of the company. In order to turn the situation in its
favour the management of the company requires implementing policies that can reduce the debt
of the company and increase the profits of the company, so that the sustainability of the company
rises.
STEPS TO IMPROVE THE STATEMENT OF CASH FLOW THROUGH WORKING
CAPITAL MNAGEMENT:
In order to ameliorate the cash flo w statement of the company, the business entity needs
to check the receivables and payables. The decrease in receivables will increase the cash in hand.
The increase in cash in hand will increase the cash inflow of the company. The company also
needs to reduce the payables of the company, so that the company needs not to face any kind of
defaulters. This will decrease the cash outflow of the company. Thus, the variation in cash inflow
and outflow affects the statement of cash flow of the company.

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EXECUTIVE SUMMARY:
This report will provide complete insight about different budgeting system and the advantages
and disadvantages that are associated with this budgeting system. The report also suggests which
budgeting system will be more feasible for any business entity. In order to showcase, which
budgeting system is more compatible the comparison being made between traditional based
budgeting system and activity based budgeting system.
TRADITIONAL BUDGET:
Traditional budget is the process of preparing the budget of any business entity after
considering the previous year budget. Traditional budgets consider the present year’s inflation
rate, expenses and the demand of the company. In order to calculate the budget under the
traditional budgeting system the previous year revenue and costs of the company are also
considered. The advantages of traditional budgeting that can be highlighted are as follows:
 In order to manage the activities of the business more fluent traditional budgeting
establishes a control framework.
 It helps the manager to run the company’s operations with stability because traditional
budgeting gives complete access of previous year cost to the company.
Traditional budgeting contains some disadvantages also. These are explained below:
 Under traditional budgeting system the manager requires lots of resources in order to
create the budget.
 The preparation of budget under traditional budgeting system takes certain assumptions,
which actually compromises the quality of the budget.

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ROLLING BUDGET:
It is another type of budgeting system, which does not consider any last year budget of
the entity. Rolling budget happens in continuum. It assists the manager to set future goals of the
company. There are several advantages of this system. They are as follows:
 While creating the budget under the rolling budget system the manager needs to consider
the present variations like changes in economic condition, condition of the industry and
the present competitors.
 The budget provides most factual data as it totally depends on the current market
condition.
Some of the disadvantages of rolling budgeting system are as follows:
 The management needs lots of resources which actually requires considerable period
of time.
 It is expensive.
ACTIVITY BASED BUDGETING:
The process of creating the budget using the activity based costing is known as activity
based budgeting. In this budget the management require to consider the overhead costs of the
company (Mahal and Hossain 2015). Before considering the costs in the system, the item are
thoroughly analysed by the management of the company. The advantages of using the activity
based costing are as follows:
 In order to prepare the activity based budget the management thoroughly analyses the
cost drivers, which in real life helps the manager to omit irrelevant cost activities.

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 It provides a competitive edge to the company because this budget system omits the cost
driver that is not required for the entity.
The disadvantages of the activity based budgeting are as follows:
 The search for cost drivers is not an easy task and hence it increases the complexity of
the budgeting system.
 It is time consuming.
 It is very expensive.
ZERO BASED BUDGETING:
The process of budgeting where all expenses are being justified for a specific period of
time is known as zero based budgeting system. The management needs to start the budgeting
process right from the scratch. This process requires analysing every activities of the entity. It
assists the management to focus on future year. It also assists to create more specific strategic
goals. The main advantages of zero based budgeting system are as follows:
 As zero based budgeting system provides complete picture about the cost that are
associated with the activities of the company.
 It assists the management to reduce the legacy costs of the business entity.
The disadvantages of zero based budgeting system are as follows:
 Zero based budgeting system requires lots of resources. In order to search the resources,
the management requires considerable amount of time.
 It is pretty expensive in comparison to other budgeting systems.

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TRADITONAL BASED BUDGETING VS ACTIVITY BASED BUDGETING:
Budgeting system is considered as the one of the mandatory curriculum of any business
irrespective of the size and types of business (Kowsari 2014). It is more than the income and
expenses. It is the road map that ensures the business’s success in future. There are several
budgeting systems among them; the most prominent ones are the activity based budgeting and
the traditional based budgeting.
The differences between the traditional budgeting system and activity based budgeting
system are as follows:
TRADITINAL BUDGET ACTIVITY BASED BUDGET
1. Under traditional based budgeting
system the entity’s revenue, expenses
and costs are being considered.
2. In order to create the budget under
traditional based budgeting system the
previous year economic condition like
inflation rate are being considered.
3. No need of allocating the activities or
any cost drivers under traditional
budgeting system.
4. In order to accomplish the traditional
budget, the management need not to
spent lots of amount.
1. Ativity based budgeting system, there
is no requirement of previous year data.
2. Under this system the management
need not to consider the previous year
economic data.
3. The importance of cost drivers is
immense in activity based budgeting
system.
4. Activity based budgeting system is
much more expensive in comparison to
traditional budgeting system.