Understanding Profit, Cash Flow, and Working Capital in Business Finance

BUSINESS FINANCE

TABLE OF CONTENTS
TASK 1............................................................................................................................................3
1...................................................................................................................................................3
2. Representing TL company financial position being affected by its business operations........4
3 Recommendation strategies to improve cash flow for better management of WC..................5
TASK 2............................................................................................................................................6
1.Calculation of Cash Budget (CB) from 1st Jan to 31st April..................................................6
2. Recommendation to Thorne Estates Limited management....................................................8
REFERENCES..............................................................................................................................10

TASK 1
1 Describing following terms:
a) Explaining profit & cash flow and differentiation between both terms
The term profit refers to the income that organization has earned by making operational
activities. In addition to this, it is the amount that is difference between money earned and spend.
In context of Trend limited profit refers to earnings which organization has made after incurring
various expenditures for making products or services. Trend Ltd. Has £60 million operating
profit EBIT for last year. It is calculated after deducting various operating, administrating, and
selling expenses (Kline, P., Petkova, Williams and Zidar, 2019). Cash flow is real sense of
money movement which is basically payment. Trend Ltd can optimize these cash flow for
purpose of carrying out business activities.
Profit Cash flow (CF)
It is money that has been left after deducting
expenditures from sales
CF is obtaining income from several sources.
The process is concerned with generating cash It is exerted by company for attaining material
regarding generating profit (Harris and Roark,
2019).
This is exerted for purpose of knowing positive
outcome that can enhance liquidity of
organization
Cash flow is about the timing in turn can
maximize firm's profitability
If the profitability of business is positive can
service for long period (Foerster, Tsagarelis
and Wang, 2017)
Wind-up situation may arise in case of
negative CF.
Firm can though about it in terms of amount It can be assumed in form of time.
b) Describing working capital, receivable, inventory and payables
Working Capital (WC)
Amount of liquidity that organization has for continuing its business operations. It is
difference between current assets such as inventories of raw material and finished goods &

current liabilities. Trend limited (TL)'s working capital can be considered as negative if its ratio
of current assets to liability is less than one. WC in TL can be considered to be low as its debt
has increased for which system is requesting shareholder regarding invest more. Positive WC
shows strengthen position of company. Budgets techniques involves incremental, zero &activity
based, etc.
Receivables
This is debts owned to firm by buyers. There are several payment method that buyer uses
for making payment to business. Customers those who tend to pay money after receiving goods
or services for longer duration company record this in its balance sheet which is considered to be
current asset for structure (Yao and Deng, 2018). TL can convense its buyer to make payment on
time for ensuring proper liquidity in enterprise.
Inventory
It refers to stock of raw material or finished goods which is stored by business for
meeting market forces such as demand and supply (Crawford and et.al., 2018). To accomplish
market demand for footwear & gym cloth TL stores its raw material and finished products.
Payables
This is money owned by TL to its suppliers which recorded in liability side of balance
sheet. From the analysis of case of TL, can be interpreted that Sadidas has refuse for making
payments to suppliers who are taking any legal action against it.
c) analysing impact of changes in working capital on cash flow
WC is represented in CF statement of TL. It heavily impacts the liquidity position of
company. The increase realted to current assets and liability in same proposition does not affect
CF. Firm can generate cash from different sources so it CF statement is divided into three parts
operating, investing and financing. It makes convenient for TL to record it business transactions
in transparent manner. If TL purchases Fixed Assets (FA) which will decrease cash flow in
business as money has sent outside the boundaries of enterprises. In reverse case, while selling
FA enterprise will receive liquidate position that enhances its working capital. When current
assets are exchanged it will not affect the working capital. For example- TL is purchasing
inventory for production of Footwear will not impact its WC as cash and stock two CA are
exchanged. Changes in WC can both positive and negatively affect the cash flowing in