Finance Assignment: Business Management of Second Sight Plc & Mediterranean Delights Ltd
This finance assignment has two parts:
Part 1: Here, you are required to choose a company and project the concept of working capital and cash flow in the selected company.
Part 2: Here, you are required to choose
Mediterranean Delights Ltd
The main aim of the report on finance assignment is to project the concept of working capital and cash flow. To ensure this, Mediterranean Delights Ltd, a hypothetical company is selected and the entire report revolves around the concept of working capital and cash flows that are regarded as the major element for the functioning of the company. The difference between profit and cash flow is stated in the assignment. The report signifies that change in the working capital directly impacts the cash flow of the company.
a) Profit and Cashflow
The shareholders of the company are mainly concerned about the profit of the company which in terms are directly related to the wealth maximization but to run a company effectively the requirement of the working capital is required (Petmeza 2015). The liquidity of the company is known for its cash flow pattern. Thus, a company is required to have profits in the long run so that the investors should there return on capital but for day to running of the company proper liquidity and working capital management should be done. The cash flow shows the net inflow and outflow of cash during the period by the company. A company with high profitability and low cash flow mean it’s not properly managed or the trade cycle is high (Gerhard 2017).
Thus, both the concept is interlinked as a company needs to have high profits so that it can generate more surplus cash and positive cash flow should show good liquidity of the company and strength of the company to meet its liabilities as and when required (Vanderbeck 2013). Thus, this also improves the goodwill of the company and creditability. Thus, also improve the shareholder's confidence in the company. The shareholders would not like to invest in any company which is regularly defaulting its payables and thus this also impacts the profitability as it leads to additional charges and if proper cash inflows are not there than funds are to be financed from external sources which also generate a fixed charge on the profits of the company.
b) Working Capital and, the meanings of Receivables, Inventory and Payables
The working capital is the net current assets invested in the company. It is the difference between the current assets and liabilities of the company that is trade receivables, cash and cash equivalents, inventory fewer trade payables, etc. The working capital is kept on invested in the company regularly but keeps on rotating over the cash cycle of the company. For running any company two types of investments are necessary is Fixed Investment in the long-term assets like land and building, etc and others in the short-term capital being the working capital (Horngren 2011).
Receivables are generally the credit sales executed by the company that is the amount receivables from the customers of the company for the goods or services rendered to them. This is generally when there is credit sale to the customers (Drury 2011).
Inventory means the stock of goods kept by the company for trading in the ordinary course of the business. Inventory may be classified into 3 types that are Raw-Material, Work in progress and Finished Goods (Robinson & Last 2009).
Payables are the net amount payable by the company to its creditors from whom the company has taken goods or services on credit. This depends upon the credit term of the suppliers from whom goods and services are taken (Drury 2011).
c) Changes in Working Capital affect Cashflow
The change in the working capital directly impacts the cash flow of the company. The companies which do not manage their working capital properly often faces liquidity problem. The cash generated from the operating activities is blocked in the operational cycle of the company. The receivables should be properly monitored and unnecessary long credits should not be given as this involves the risk of bad debts and opportunity costs of the funds blocked are to be considered (Charles 2012). Thus, the reduction in the receivables will improve the company’s cash flow. Similarly, reduction of the inventory levels reduces the number of funds blocked in purchasing, storing and maintaining such inventory. This is the reason why the concept of Just in Time and Economic order quantity gained so much importance in the current scenario. The payables are also preferred as it is low-cost funding for the business and an increase in payables reduces the burden of cost on the cash requirements of the company. Thus, it is clearly seen that working capital has a direct impact on the cash flow of the company. As the burden of the working capital reduces the cash generated from operations can be used for other financing and investing purposes (Charles 2012). Thus, required of funds from external sources will reduce and the company will be able to meet its cash requirements from the internally generated cash reducing interest expenses of the company.
Charles, T.S 2012, Cost Accounting: A Managerial Emphasis, Pearson Education Drury, C 2011, Cost and management accounting. Andover, Hampshire, UK: South Western Cengage Learning.
Gerhard, S 2017, Creativity research in Management accounting: A Commentary. Journal of management accounting research, 29(3), 49-54. Doi: https://doi.org/10.2308/jmar-51754
Horngren, C 2011, Cost accounting, Finance assignment Frenchs Forest, N.S.W.: Pearson Australia.
Robinson, M., & Last, D 2009, Budgetary Control Model: The Process of Translation. Accounting, Organization and Society, NY Press
Vanderbeck, E J 2013, Principles of Cost Accounting, Oxford university press
Second Sight Plc
i) Application of concepts in the company
In the case of Mediterranean Delights Ltd, the working capital management can be improved as there are some measures that can be taken to reduce and optimize its working capital requirements. As per last year's records, we can say that approx 10% of the turnover is operating profit after which interest is charged. The company is expanding its activities by investing in its ancillary companies. The investment in the company is not that high but it has led to some expansion or increment in the borrowings of the company. The company needs further capital for paying fees for exclusive supply to the company. This will if not funded from the internal sources that will increase the borrowings of the company. In the last year already, there has been an increase in the borrowings by 2 million. The company is also having a huge amount as receivables due to 2 major debtors, out of which one is disputed. If the company manages to recover the amount of these debtors than 3.5 million cash can be generated. Thus, the company is required to resolve the matter with the debtors at the earliest. The company has also delayed payment to its creditors due to low-quality products supplied and thus there is a strong probability that legal proceedings will be held which if instigated will lead to additional cost to the company and thus reduce the profit available to the shareholders. The company is also having huge levels of stock in its warehouse which is also not a good sign of working capital management by the company.
The company is invested in a new company with exclusive supply rights thus this would boost the revenue of the company in the long run and increase the profitability of the company.
Thus, the above factors will have a huge impact on the financials of the company in the coming period.
ii) Evaluation and recommendation
The steps to be taken by the company to improve its working capital requirements are to control its receivables, inventory, and payables. In case of receivables, the company should press its customers for early payments; the company cannot press hard its key customers but should resolve the matter with the disputed debtors and can even go for factoring or bill discounting for short term funds (Atrill 2014). If this matter with the debtor is solved than the company has also had terms with the creditor Valetta and settle their payments so that no further dispute continues and the situation for a legal fight does not arise. This will save both time and money of the company.
The major improvement area with the company is its stock. The huge stock in the warehouse has various risks associated with it. The stock may become outdated and also the cost associated with maintaining huge staff and warehouse is also high. The funds are also blocked as costs of the stocks are required to be paid to the vendors.
Thus, this step will improve the cash flow of the company and meet the fund requirement of the company. The decision of the manager not to the extent the borrowings further and bring fresh investment from the existing shareholders is right as when return from the Italian company will generate than shareholders will get its share of the return. These little steps will help in the growth of the company in the coming years.
Second Sight Plc is an international company
Budgetary control and budget assume a high degree of importance in the organization. For this purpose, traditional budget and alternative budget are discussed in the report. The relative strength and weakness of the methods is described in the report. The application of the method is defined in the report and illustrated with the help of examples. The company traditional methods of budgeting will not be so much of useful and advanced level budgeting will help management to control cost by monitoring any excess expenditure being incurred any process over and above as per planning.
i) Purposes of preparing a budget
The budgets are prepared by the organizations from the very early period and with the passage of time, there have been many improvements in the process and methods of budgeting. The preparation of the budget has many advantages that are the reason why many organizations prepare it through investing its lot of time and money. It is a very time-consuming process and involves a cost with expert involvement (Barnat 2014). It helps in proper planning the future course of action, then coordinating the actions of different departments towards the attainment of organizational goals, communicating various heads and department their roles and responsibilities in the organization, it also helps in motivating the employees by measuring their work with the expected output and need to work harder to achieve the targets set in the budget and finally it helps in monitoring and controlling the actions of the departments and finding the loophole if any due which and variance is there from the standard working and evaluating the reason for such variance and lastly recommending the improvement measures that need to be taken. Thus, budgeting is the most important management tool in controlling its company activities and attaining and working towards the common goals of the company.
Traditionally the budget was prepared using the incremental approach that is based on past information some expected increment was done in the inputs of the budget and thus the new budget was ready. This is a very simple method of preparing the budget and thus avoids new factors affecting the budget in the current period. To overcome these various new alternatives budget forms are introduced. As per Weetman (2010) one of the forms is Rolling Budget where the budget is updated after every interval of time. Suppose a budget for a year has been prepared with quarterly breaks than after the completion of the 1st quarter the budgets for the remaining quarter are updated and accordingly a budget for the further new quarter of the next year is prepared. In this type of budgeting the let the companies have a ready budget in hand for the full year any given time and incorporates new changes as per the circumstances. With the computerization of the budgeting process, this method has become simple and used commonly. The new method that has become popular is the Zero-Based Budgeting where the previous year is not taken as a base and everything is started as zero (Drury 2016). This method helps management and develops a questioning mind. The heads who are responsible are estimating any part of the budget has to give a reason and justify each item irrespective of whether it was there in the previous budget or not. The justification of each item and its value in the budget is to be given, which makes it's more time consuming and costly. This type of budgeting is used in very complex and big organizations as at a lower level its cost-benefit would not be justified. The modern budgeting technique also includes activity-based budgeting where the budgets are divided into various activities and each activity is separately analyzed for justification. In this method also previous year figures do not hold much importance (Horngren & Foster 2008). As per the estimated sales and revenue targets, the budget is prepared and various activities involved in achieving the target are identified. The identified activities are then evaluated and accordingly used for the budget. This method is very effective but it also involves time and resources for budgeting as each activity is given importance and thorough analysis is done (Watson 2016).
Thus depending upon the use and volume of the budget the company should use the traditional or modern methods of budgeting which fits its cost-benefit system. The budget is required by every organization at every level of the industry and should be properly used to attain the organizational objective (Douma & Hein 2013).
ii) Application of the methods
The budget helps in the cost management of the company in the given period. If the budget is not prepared than the management would not be able to monitor when the expense in a particular head has exceeded the standard and till the time when it will be realized it may be too late to take any corrective actions (Brown et al 2017). In the given case the company Second Sight PLC is a manufacturer of prescription glasses and sunglasses for some international brands. The company needs to keep its cost under control otherwise it loses its comparative advantage and the other brands would shift to some other of its competitors. If the proper budget is not prepared than the company would not be in a position to estimate its cost and revenue and make its investment decision. The company is planning to expand its operation in Netherland and Chennai which involves huge investment and even the staff requirements of these units are going to be higher. The company needs to plan properly whether it will be able to cover its employee cost as it is a fixed burden and cannot be avoided or delayed.
The company shall use either zero-based budgeting or activity-based budgeting to get a clear insight into the business in these units. The expected expenses require to be incurred and the arrangement and cost of funds that will be employed. This will help management to monitor its cost incurred at various stages of implementation (Emmanuel 2014).
iii) Traditional or alternative budgetary system
In the given scenario the company has been using traditional budgets so long but keeping in mind its expansion plans over various other segments of the world now it would like to move to other alternative budgeting techniques. There are two ways of implementing any budget that bottom-up approach and top-down approach (Carlon 2019). In the earlier method, the persons involved in the implementation of the budget are involved and according to their recommendation, the budget is finalized (Dosch & Wilson 2010). In the top-down approach, the top management decides the budget and lower-level management are instructed to implement the budget. In the given case the company should use a bottom-up approach as this will lead to the involvement of the managers involved in the implementation. The budget will be required in the production unit in France and the UK as it will be of very vital importance to determine the future profitability of the company. The company should properly analyze the cost of materials involved in the production of glasses and its net cost of production so that better quality glasses can be produced at cheaper rates. The venture with the Indian company also involves huge cost and activity-based budgeting should be used by the company.
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