Meaning of profit and cash flow in business finance
Added on 2020-10-05
12 Pages3434 Words325 Views
Business Finance
Table of ContentsINTRODUCTION...........................................................................................................................1PART 1............................................................................................................................................1a. Meaning of profit and cash flow .............................................................................................1b. Meaning of working capital, receivable, inventory and payables...........................................1c. Changes in working capital that affect cash flow....................................................................22. Company may affect financial results .....................................................................................23. Improvement in cash flow through management of working capital......................................3PART 2............................................................................................................................................41. (a) Elements of financial performance ....................................................................................4b. Calculation of ratio for each year ............................................................................................5c. Result to consider why ratio may change information ...........................................................62. Analyse and recommendation that helps to assess the financial performance of business.....7CONCLUSION................................................................................................................................7REFERENCE...................................................................................................................................9
INTRODUCTIONFinance is first need of every organisation that helps to run a business effectively andmaintain profit margin. Business finance contains acquisition and utilization of funds so businessenterprise carry out their operation function efficiently. A businessman need to raise funds inorder to run growth of business (Belás and et.al., 2015). The main purpose of this report is tounderstand the importance of business finance and how to increase it. To understand the conceptof business finance Uber tools has been taken that is UK based company and manufacture powertools. This report will focus on different topics such as difference between profit and cash flow,working capital, meaning of receivable, inventory and payables that will helps to showprofitability situation of UTL. Moreover, this report will define how working capital affect cashflow if any changes arises, various ratio like sales growth, liquidity, gross profit, gearing, interestcoverage and return on equity that helps to describe financial performance of companies.PART 11. (a) Meaning of profit and cash flow Profit means net income that is calculate after ducting all expenses and taxes. Cash flowmeans net amount that includes cash and cash equivalents amount which is transferred in to andout of a business. In additional, cash flow is the gettable amount in a business at a certain periodof time as a result outflow and inflow of money that can be control by investing. Profit contains net income after deducting interest and tax amount where as cash flow isthe collection of operating, investing and financing activity. In any organisation availability offunds may make or break an enterprise and cash flow determines the viability. (b). Meaning of working capital, receivable, inventory and payablesWorking capital is required amount in any industry that is the difference betweencompany's current assets and current liabilities. Current assets means assets that can be convertedin cash within a year easily such as cash, debtor, bank, account receivable etc. and currentliabilities means need to pay within a year like as creditors or payables (Buckland and Davis,2016).Receivable is also known as account receivable, is balance of pending amount to a firmor company for delivering goods and services but not receive payment through customers. Said1
other way, account receivable are sum of money owned by consumer to another entity for sellinggoods and services on credit.Inventory is an accounting term that means goods or stock are being get ready for sellingon an enterprise such as finished goods. It involves raw material ( used to manufacture goods),work in progress (process being made) and finished good ( ready for sale).Payables refers money owned to employees, creditors, government or lenders representas a liability in financial statement. If these liability are pending within twelve months, it will beshown as short term liability. (c). Changes in working capital that affect cash flowEvery organisation prepare financial statement and cash flow statement which showscompany's financial position by including inflow and outflow. Any business is depend on itsworking capital that is variation between current assets and current liabilities which impact oncash flow statement. Changes in working capital affect cash flow such as if firm increase amountof current assets, cash flow from operation activity will decrease. If assets amount decrease orreduce, cash flow from operating activity will decrease. For instance, if UTL purchase fixedassets then current assets will increase and cash flow will also impact. If currents assets sold bymanager then currents assets will decrease but cash will increase and cash flow will be of sameamount (Cassar, Ittner and Cavalluzzo, 2015).2. Company may affect financial results Accounting concept are the important rules and regulation to that deals with monetaryvalue's items that can be attributed. In Uber tools manager follows accrual and full discloser,matching and accrual concept that helps to run a business such as : Accrual concept: This concept states expenses and revenues, that is not recorded yet incompany's balance sheet. According to accrual concept an enterprise should record all expensesand incomes at the time of incurred which is not mentioned in financial statement. Manager ofUTL company prepare financial statement and shows revenues and expenses, based on accrualaccounting such as interest expenses, payables and account receivables.Full discloser concept: This means a firm should disclose all information that relates tobusiness. UTL use this concept and prepare financial statements by disclosing all financialinformation that helps to increase profits. Such as the operating profit of UTL was £ 36 millionin last year before interest and tax by using accounting concepts.2
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