Analyzing Financial Management Strategies

Part one: Mediterranean Delights Ltd (“MDL”)

Profit and cash flow

Profit determines the financial gain, determined by subtracting the total cost of production from the total benefit of the organisation. It is generally the income formation by the organisation, where the companies try to generate profitability by improving their sales volume in the market. In this regard, the activities of the organisations including production, operations and other key activities of the business. It is the major interest of the organisation and other stakeholders of the business, where the objective of the multinational corporate firms is to maximise the profitability and expand the business through financial gain (Olafsson and Pagel, 2018). On the other hand, the cash flow is the movement of the money in the organisations where the companies are engaged with the capital flows including finance, operational activities, plant and equipment, capitalised software expense etc.

Apart from that, there are other business activities which are also recognised as cash flow operations which are cash paid to the merger and acquisition, purchase of marketable securities and proceed to the sales of assets (Gârleanu and Pedersen, 2018). There is difference between the cash flows and profitability, where the organisations try to calculate both of them, in order to develop the budget and balance sheet. Profit is determined by the net income, which is described through deducting expense from the revenue. On the other hand, the cash flow refers to the inflows and outflows of the cash in a particular business, where the earning revenue does not mean increasing cash flows immediately in the organisation. Cash flows management is important for day to day business, where the organisational leader must focus on the cash inflows and outflows to run the daily activities of the business. On the other hand, profit maximisation is the objective of the firm and in long run, it is mandatory to analyse profitability to sustain in the market and achieve future success.

Working capital

Woking capital determines the day to day business process and it is calculated by the current asset minus current liabilities. Operating liquidity of the organisation is determined by the working capital and the major components of the working capital are such as dash management, cash receivable, account payable management and inventory management. Cash management is important for asset management where it also helps to improve the cash flows of the organisation. In addition to this, the receivable management is also necessary, in which the organisation claim for money that owed to the firm from the customers, where the organisation sells their goods and services to the consumers in the market. In this regard, inventory management is the supervision of non-capitalised assets and the stock items. The inventory management is effective for the organisation to manage the stocks of the goods and services and maintain the flow of goods from the manufacturers to warehouses and enhance the facility of point of sale (Trigeorgis and Reuer, 2017). The inventory goods include the raw materials, work in process, finished goods and transit inventory. Account payable management is one of the important business processes which help to manage the payable amounts of the firms and it is determined by the amount that the entity has to pay to its suppliers, vendors and other stakeholders who are engaged with the business. Hereby, working capital management is necessary for the organisations to run their business operations efficiently.

Relationship between working capital and cash flow

The major difference between the working capital and cash flow is that the cash flow determines the amount of cash generated by the organisation over a period of time and on the other hand, the working capital is the measurement of the financial situation of the company. Hereby, there is major difference between the working capital and cash flows and in this regard, if the working capital of the organisation increases, the cash flows will decrease (Heisig et al., 2016). On the other hand, if the balance of asset decreases, cash flows of the organisation will increase. Hereby, the changes in the working capital will affect the cash flows of the business.

Applying the profit and cash flows in the organisational context

Mediterranean Delights Ltd (“MDL”) has 30 delicateness throughout the South of England and the company is efficient to manage the chains of restaurants with a range of products and services. The company is also efficient to manage their shareholders by providing the return on capital investment and in this regard MDL is efficient to acquire 40% of stakes and it also invested £10 million in the company to acquire more shares and it has agreed to pay an £8 million advance fee for excusive supply of products and services. As the debt level has been increased in the company from £16 million to £18 million, the company aims at investing more capital to repay the debt and run the organisational operational activities successfully. In this regard, the organisation aims at generating profitability through expanding their supply chain so that it is possible for the company to secure future sustainable development. The company is owed £15 million pound for a series of large orders by Delios, which is a main customer of the company. In this regard, the company faces problems in managing working capital, as the cash payable amount due to debt has been increased and it biomes difficult for the company MDL to repay the debt due to lack of payment receivable. The company did not payments due to supply of substandard material, which is one of the major issue in the recent situation and the level of stock is also reduced in the company, where the cash flows and working capital are deteriorating in the company which create problems in running the business efficiently (Bashir, 2016). The profitability and cash flow analysis is mandatory in this present situation, where the company needs to review the financial situation and repay the debt by investing more capital and reducing the working capital. The management of the cash flows and working capital need to be incorporated, so that the company can review the financial crisis and stabilise the organisational situation in long run.

Recommendations for improving cash flows through working capital management

It is mandatory for the company MDL to sustain in the market and manage the shareholders successfully in long run and in this regard through cash flows and working capital management, the company would be able to stabilize the situation. MDL needs to reduce the working capital which is effective to decrease the company’s labiality. The decrease in working capital further increases the cash flows of the business and in this regard, more capital investment in the company will be able to stabilise the financial situation. More cash flow sand reduction in the working capital further provides a scope to MDL to repay the debt and decrease the financial labiality in the market. It further helps to manage the financial crisis and improve the financial situation. The company also can manage the shareholders through investing more capital in the company and it further helps the firm to secure future sustainable development and strengthen their supply chain for generating profit volume in long run.

Part 2: Second Sight Plc

Traditional budgetary and new budgetary system

Traditional budgetary system is the process of preparing the budget for the previous year and the companies also create budget plan in the recent year by considering the changes in the budgetary method. Most of the companies use traditional budgetary system in order to review the expenses in the organisation to run their operations in the market. The major advantages of traditional; budgetary system, are it offers solid framework and encourage decentralization, where the organisations can reviews the preceding year’s spending and decide next year budget by considering the necessity of the organisation and the cost of the operations in running the business in the market (Musah, Gakpetor and Pomaa, 2018). Traditional budgeting system is the best way to develop the budgetary plan and it is effective to develop suitable organisational culture, where the leader and the managers can create proper list of the expenses in the organisation. However, there are some disadvantages which are high human errors, time consuming method, and lack of prediction about the organisational behaviour and no enlighten in spending and strategy. There is high chance of human error and it is a time consuming method to develop budget plan by considering the previous year’s budget and the expenditure of the companies.

On the other hand, there are other ways to calculate the budget and develop budgetary planning in the organisation, which are rolling budgets, zero based budget and activity based budget where in the rennet years, the multinational companies focus on unique ways to create the budgetary plan. Rolling budget is the method of updating the budget and expenditure on a daily basis after the previous year budget. The computerized data base system is efficient to manage the budget control and the daily updates of the budgetary system, where the company can reviews the budgetary system on the daily basis. There are some advantages and disadvantages of rolling budgetary system and he advantages are such as it increases motivation due to ownership of the budget, it also increases the manager’s understanding and commitment in the organisation as well as it provides a scope to the senior management team to review the budget and expenses in the organisation and develop effective strategic planning for future (Mostafa et al., 2019). In addition to this, the rolling budgetary system is good for better communication among the organisational departments and it enhances organisational culture of making effective decision, managing problem solving activities and concentrate on sharing the adequate information with the employees. On the other hand, the disadvantages of rolling budgetary system are such as the decisions can be made by inexperienced management team, there may raise the issue of loss of control where the senior management team lacks to manage the disputes in the budgetary plan.

Zero based budget in another new way to develop budgetary plan, where all the expenses are justified with the organisational process and in this regard the management team tries to start the budget plan from zero base and justify every functions in the budget plan on the basis of the organisational needs and preferences. The process of develop zero based budget is identifying the decision unit, making the decision package, ranging the decisions, reallocate the organisational resources and capabilities and lastly controlling and monitoring, which are effective steps to manage the budget of the organisation (Tourish, 2018). The advantages of zero based budgets are such as emphasising on decision making process, orientation of cost benefit analysis, improvement after controlling and monitoring, enhancing efficiency and the organisational resource allocation. In addition to this, the zero based budget is helpful or the organisational leader and the management team to manage change and tackle the obstacles to achieve the future organisational success. However, there are certain disadvantages of zero based budget which are conflicts in skills and management, rigidity, subjective in nature and detrimental; effects in long run.

In addition to this, activity based budget is effective for the organisations to consider all the activities in the organisational workplace. It is the method of preparing budgetary plan by using activity based costing after considering the overhead cost. Incurred cost in the organisational workplace are deeply analysed and researched well in order to develop appropriate budget plan. In this context, the major advantages of using the activity based budget are proper evaluation and analysis of the cost and cost benefit analysis, gaining competitive edge, conducting business activities as a unit, elimination of bottlenecks and improving relationship. The activity based budget is effective for the organisation to develop strong relationship with all the stakeholders where the leader and the managers of the organisation aim at developing effective budget plan by considering all the necessary activities at the workplace (Musah, Gakpetor and Pomaa, 2018). Proper evaluation of the costs and the overhead costs are manages and monitored to develop the budget and it also provides a scope to the organisation to gain high competitive advantage in near future, where the budget plan is mandatory to control and monitor organisational expenses and expand the business efficiently.

Applying the methods of budgetary system in the organisational context

Second Sight Plc is an international company, which produces the prescription glasses and sunglasses. The company is operating since last 25 years and the revenue of the company on the last year is £250 million. Headquarter of the company is in Manchester and the production site is situated in the UK. The aim of the company is to expand their business in India with 800 staff so that it is possible of the firm to secure future sustainable development and gain high competitive advantage over the other competitive firms in the market (Boskov and Drakulevski, 2017). The budgetary control systems are effective for the organisation to run their operations by utilising the organisational and capabilities. The traditional approach is effective of the organisation Second Sight Plc to develop the effective budget. In addition to this, for the company Second Sight Plc, the zero based budget and activity based budget are effective tools, to develop appropriate budget, the firm can consider the activities to expand the business in India and the activities are such as developing the plant, managing stock, strengthening distribution network in India, supply of raw materials, hiring labourer in the manufacturing site and managing other administrative work in the organisation. The activities are evaluated and it can be stated that the activities are mandatory for the organisation Second Sight Plc to operate in the market and establish the business efficiently, in this regard, the activity based budget is beneficial of the company Second Sight Plc to make effective decision of the brand to expand it in future and review the costs and expected expenditures to run the organisational activities.

Analysing the use of budgetary system to develop future planning

The budgetary control system including the zero based budget and activity based budget are effective for the organisations across the globe where the organisations consider their activities and create the budget after evaluating the necessary costs and other administrative expenditure to create budget plan. In addition to this, there are some firms which utilise the zero based budget, to start the budget from zero value and consider all the expenses in the organisation to run their business successfully. On the other hand, there are some companies who prefer rolling budgets, for automatic updates in the budgetary system where the leader and the managers can review the budget forecast on a daily basis (Kabuye et al., 2017). In this context, the activity based budget is good for the organisations across the globe even for the organisation Second Sight Plc to consider the activities in the firm and maximise their budget plan efficiently. It is also effective to develop future planning to expand their business and gain high competitive advantage. In this budgetary plan, the cost benefit analysis can also be conducted where the firm can reduce cost of the operations to generate high profit volume in near future.

Reference List

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