Difference between Profit and Cash Flow in Business Finance

Business Finance

TABLE OF CONTENTS
PART 1.......................................................................................................................................4
a. Difference between profit and cash flow...........................................................................4
b. Meaning of working capital, receivables, inventory and payables....................................4
c. Effect of change in working capital on cash flow of the business.....................................5
How company is managed that might affect its financial results...........................................5
Steps that can be taken to improve the cash flow by effective management of working
capital.....................................................................................................................................6
PART 2.......................................................................................................................................9
Different methods of preparing budget..................................................................................9
Application of budgeting methods on Second Sight Plc for future plan..............................11
Analysing the appropriate method of budgeting..................................................................12
REFERENCES.........................................................................................................................13

EXECUTIVE SUMMARY
In this report, an introduction to basic financial terms is given with respect to MDL
Ltd. It states about the impact of change in working capital on the cash flow of the business
along with the relevant steps that can be taken for improving the cash flow position of the
MDL Ltd.

PART 1
i.
a. Difference between profit and cash flow
Profit: Profit is the amount that is left after meeting all the cost and expenditure for a period.
There are three types of profits, which are, gross profit, operating profit and net profit. The
profit margin is sued to evaluate how well company is using its revenue. Increasing revenue
and reducing cost leads to increase in profits (Kenton, 2019). It is the amount of income that
is left after subtracting all the necessary expenses pertaining to the period. There are
situations like where businesses are profitable but may not be having enough cash.
Cash flow: it is the amount of money that flows through the business that can be inflow r
outflow (Lewellen and Lewellen, 2016). Cash inflow means receiving amount from the
customers who are buying the company’s products. Cash outflow refers to the making
payment for the purchases or expenses made by the business. Cash flow from operating
activity represents the cash generated from the main business of the company.
Profit Cashflow
Profit is the net income that is arrived after
deducting all the cost from the revenue for
specific period.
Cash flow is the actual amount of money
that is flowing in and out of the business.
It is based on the accrual basis of
accounting.
It is derived from cash basis of accounting.
Profit measures the ongoing sustainability
of the business.
Cash flow measures the ability of the
business to pay off its bills.
b. Meaning of working capital, receivables, inventory and payables
Working capital: It refers to the difference between current assets and current liabilities. It
helps in determining the financial health of the business in terms of liquidity (What Is
Working Capital? 2020). It can be both positive and negative but positive working capital
represents better operational efficiency of the business. The size and composition of working
capital defers from industry to industry. It represents short term asset investments.
Receivables: It can be defined as the amount of money that the customer owes to the
company by selling products and services of the company on credit. It recorded at the time of
commencement of sales and not when amount is received (Definition of 'Accounts