In this assignment I will be explaining in detail the importance of cash flow, working capital, costs, budgets and breakeven in selected business and also why it is used in selected businesses.

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BTEC National Award in Personal and Business Finance

Autumn Term 2

Tunji Alli

Introduction

In this assignment I will be explaining in detail the importance of cash flow, working capital, costs, budgets and breakeven in selected business and also why it is used in selected businesses. In addition all of these factors will help my client make her final decision.

Task 1

Cash flow

Cash flow is the amount of money that is being spent or received by a business over a period of time. The extent of the cash flow can be used to measure several things such as:

Evaluating the performance of a business

Determine problems with liquidity

To generate projects Returns on the ratio of money gained or lost on an investment relative to the amount of money invested.

Examine the growth of a business.

Cash flow can be classified into different categories

Operational Cash flow – This is the cash received or cash outgoing as a result of the business activity.

Investment Cash flow – This is cash that has been received or spent due to investment.

Financing Cash flow – This is cash received or expended as a result of financial activities, such as receiving or paying loans, issuing or repurchasing stock, and paying dividends.

For Cadbury Schweppes cash acts as their lifeline, it is the one aspect that allows the business to survive. The amount of cash that Cadbury Schweppes throws away shows how healthy it is.

In order for Cadburys to have the best possible chance of survival they need to have sufficient control over the cash flow that is going into and out of the business. Cadburys will obviously want more cash going into the business than out but for them to ensure that is the case they will need to have a good grasp of the cash flow.

These are some examples of cash going into Cadbury Schweppes.

• The payment for goods/services from their customers
• any bank loans that they might have taken out
• the interest that they collect on savings and investments
• an increased bank overdraft or loan

Some examples of the cash that will be coming out of Cadbury Schweppes, which include the following:

• The purchase of any stock, raw materials or tools that Cadbury Schweppes needs
• Cadbury Schweppes staff wages, property rent and all of their daily operating expenses
• Any repayments of loans that Cadbury Schweppes may have
• Any dividend payments
• Income tax, corporation tax, VAT and other taxes
• Reduced overdraft facilities

If Cadbury Schweppes is to have a good cash flow they must ensure that their pattern of income and spending habits allows them to have cash available as well as being able to pay debtors on time. Good cash flow management depends on the timing and amounts of money flowing into and out of the business each week and month. Poor cash flow management can result in the business not being able to pay debts and going bust.

The cash flow statement, which is a statement that shows the income and outcome of money in a business, breaks the sources of cash generation into three sections: operational cash flows, investing, and financing. This breakdown allows the user of financial statements to determine where the company is deriving its cash for operations. For example, a company may be notionally profitable but generating little operational cash (as may be the case for a company that barters its products rather than selling for cash). In such a case, the company may be deriving additional operating cash by issuing shares, or raising additional debt finance.

Working Capital

Working capital is a financial metric which represents the amount of day-by-day operating liquidity available to a business. It shows the available resources the business has to meet its disposal in order to meet the obligations coming due in the short term. The ratio of the current assets divided by current liabilities is known as the current ratio. It represents a key liquidity measure of business solvency.

Costs

Direct / Variable cost

Variable cost are cost that change due to the volume of output. For example if twice as much cake is needed for a cake company it means that double flour will be needed as well because flour is a direct cost to cakes

Indirect/ Fixed costs

Indirect costs are costs that are not directly linked to the sales of a business. For example taxes, administration costs and bills.

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Fixed costs are costs that are that do not change over a long-term period.

Overheads

In business the overheads are the on going expenses of a business. They group all of the expenses that go to the operation of a business, and generally do not produce profits. Overhead costs appear on the income statement. They consist of accounting, advertising, depreciation, indirect labor, insurance, interest, legal fees, rent, repairs, supplies, taxes, telephone, travel and utilities.

Depreciation

Depreciation is term used in finance and accounting and is used to asses how much assets have gone down in ...

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