Business Finance Assignment MOD003319 (GC01726)

Table of Contents

1.0 Introduction.

2.0 Part 1

2.1 Meaning of Profit and Cash flow and how they are different

2.2 Meaning of Working Capital and, the meanings of Receivables, Inventory and Payables.

2.3 Working Capital affects Cash flow.

2.4 Application of the concepts to show how the way the company is being managed might affect its financial results.

2.5 Analyse and recommendation to improve this company’s cash flow through better Working Capital management.

3.0 Part 2.

3.1Purposes of preparing a budget

3.2 Traditional budgeting approach.

3.3 Alternatives budgeting approaches like Rolling budgets, zero-based budgets and activity-based budgets and their strengths and weaknesses.

3.4 The application of these methods showing how they might be used to plan future cost management for the case scenario.

3.5 Analyzing whether a traditional or alternative budgetary system is appropriate to all or any parts of the business in its planned future form..

4.0 Conclusion.

References.

1.0 Introduction

This assignment contains two parts. The first part contains the meaning of Profit and Cashflow and their differences. Then, it describes the meaning of working capital and, the meanings of receivables, inventory and payables. After that, this report represents the explanation of changing working capital that affects cashflows. Then, this report applies the concepts in the Mediterranean Delights Ltd (“MDL”) to show the financial results. Finally, part 1 includes the recommendation to the company for improving the cashflows through better working capital management. In part 2, this report mentions the purposes of preparing a budget including traditional budgeting systems, rolling budgets, zero-based budgets and activity-based budgets with their strengths and weaknesses. Then, it comprises the application of the budgeting methods in the Second Sight Plc Company to make plan future cost management. Finally, this report recommends which budgeting approach is suitable for the company.

2.0 Part 1

2.1 Meaning of Profit and Cash flow and how they are different

Ken Boyd (2017) stated that Profit is considered as financial benefit from a transaction.  It is calculated by the earning amount from something minus the spent amount to buy or produce this thing. Profit is also determined in the business by subtracting the producing or buying amount from the selling amount. Shukla (2016) also stated that profit is determined as total revenue less total costs. On the contrary, Cash flow is considered as the movement of money. Cash flows can be categorized into two types including cash inflows and cash outflows. Cash inflows indicate the received amount by the business and cash outflows indicate the paid amount by the business to third parties.

Ken Boyd (2017) also stated that Profits and cash flows are not the same things because profit occurs when the cost is less than income. On the contrary, cash flows can be generated in both ways like maybe inflows or outflows. Profit is not always considered as increase cashflows and expense is not considered always decrease cash flows. The main objective of every business firm is to gain profits (Ken Boyd, 2017). But cash flows can’t be the main aim of a business organization. Business firms can fail due to negative profits but not due to cash outflows.

2.2 Meaning of Working Capital and, the meanings of Receivables, Inventory and Payables

According to Shukla (2016), Working capital is a special type of capital that needs to run the daily operating activities of the business. It is determined by the difference between current assets and current liabilities. It is also termed as operating liquidity of a business firm. In addition, the amount of working capital is considered as net working capital (NWC). The current assets include cash, accounts receivable, inventory and finished products (Nilsson, 2016).  On the contrary, current liabilities include accounts payable, accrued expenses, and other operating expenses. The difference between these current assets and liabilities is termed as working capital.

Harold Averkamp (2018) stated that accounts receivable is considered as income that can be collected through cash in the one-year period. It occurs when a company provides services or sells goods on account. Account receivable is considered a current asset of a company. Nilsson (2016) stated that inventory is the amount of property, goods, or products in the store. Inventory is also termed as goods in different stages like raw materials, work-in-progress and finished goods. On the contrary, Accounts payable is considered as an expense that can be paid through cash in the one-year period (Harold Averkamp, 2018). It occurs when a company takes services or purchases something on account. Accounts payable is considered the current liability of a company.

2.3 Working Capital affects Cash flow

Senthil Kumaran (2015) stated that Working capital change indicates that the changes in networking capital from one period to another period. It is determined by the difference between current assets and current liabilities. The current assets include cash, accounts receivable, inventory and finished products.  On the contrary, current liabilities include accounts payable, accrued expenses, and other operating expenses. On the other hand, Cash flow is considered as the movement of money. Hazim Hassan (2018) stated that the change in working capital amount influences the cash flows. If the balance of an asset increases, cash flow from operations will decrease. If the balance of an asset decreases, cash flow from operations will increase. Any increase in working capital is considered as cash outflows and any decrease in working capital is considered as cash inflows…………………………………….

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