Understanding Cash Flow and Profitability in Business Finance

This document provides an in-depth understanding of cash flow and profitability in business finance. It explains the difference between cash flow and profitability, discusses working capital, account receivable, inventory, and payables. It also analyzes the impact of changing working capital on cash flow and provides recommendations for effective working capital management. The document includes a monthly cash budget for four months and recommendations for improving cash flow.

Business Finance

Table of Contents
Table of Contents.............................................................................................................................2
Executive Summary.........................................................................................................................1
1.a. Explaining the difference between cash flow and profitability............................................1
b. Explaining the working capital, account receivable, inventory and payables.........................2
c. Identification of changing working capital of cash flow.........................................................2
2. Analysed steps through which managed affect its financial results........................................3
3. Recommendation related to the effective working capital management.................................3
Executive summary.........................................................................................................................4
TASK 2............................................................................................................................................4
Preparing monthly cash budget for four months from 1st Jan to 30 April to 2021......................4
Recommendation.........................................................................................................................7

Executive Summary
Profit refers to extra revenue generated in the company for specific period time is rise in cash
flow of the company by the end of year and working capital is difference between the
current asset and current liability in the organisation. Changes in cash flow impact the
overall performance of the organisation (Ahlström, 2019).
1.a. Explaining the difference between cash flow and profitability
Profit- This termed as the financial benefits that is realized when revenue is also generated for
the long term growth of the company and helps in expands the business activities. In the
organisation earning the profit is very important to grow further in the future period of
time and gives better level of cash reserves and concerned with certain expanses. There
are types of profit such as Operating profit, Gross profit and net profit that exist in
income statement. This is important part of every company where it need to be identify
and determined to compared with other enterprises. This helps in determined the
effectiveness and overall performance through their profit margin (Anderson, Chandy
and Zia, 2018).
Cash flow- This is net amount of cash which refer to the flow of cash in the business and
it is important for the organisation to generate sufficient cash flow to ensure maximisation
of free cash flow. They tend to produce enough cash inflow to manage cash outflow from
the company and it also ensure cash reserve to pay the money to the shareholder and
investor. There three types of activities such as operating activities, Investing activities and
Financing. This usually measure and interpret by the analyst and then identify the
profitability for the organisation and helps in operating the capital assets.
Difference between Profit and Cash flows
Basis Cash flow Profit
Meaning This concern that money is
flowing out of the business
during the period.
Purpose The objectives is to
liquidity status of the
company and cash flow of
To analyse the financial
position of company and
productivity in future
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day to day activities. period of time and leads to
certain profitability.
Calculation Cash flow is define the cash
inflow and cash outflow
statements.
The difference between
selling and cost of
production.
b. Explaining the working capital, account receivable, inventory and payables
Working capital – This measure the liquidity, operational efficiency of financial health of the
company and if an organisation has positive working capital than this reflects the
potential to grow to invest. High in the working is also not good and this has overstock
of too much inventory and not investing the cash (Anglemark and John, 2018).
Account receivables- This is the balance of cash that is due to company for goods and
services was not paid by customer. This used to treat as current asset in balance sheet that
depicts the money is due to organisation in short-term.
Inventory- These are important part of the organisation and part of turnover of inventory
represent primary sources of the profit and that facilitates to give income to the
shareholder.
Account payable- This account that refers to obligation of company to pay off short-
term debt to its creditors or suppliers (Bendell and Doyle, 2017). This is the sum of all
outstanding amounts that owe by supplier reflects as amounts payable balance on the
balance sheet of the organisation. Management want to increase its cash reserve for
period and they can expand business to pay all outstanding accounts.
c. Identification of changing working capital of cash flow
Working capital concern with difference between current asset and current asset is called as net
working capital of company. The impact on cash flow from working capital that if there
is increase in transaction in current asset and current liability by same and then no
changes in working capital. If an organisation received cash from short-term debt in 60
days than there is increase in cash flow statement. If an organisation purchases fixed
asset such as machinery, building than cash in company will decrease (Boschmans and
Pissareva, 2018). If there is any purchase of fixed asset such as machinery, building
than cash in company will decrease. In organisation, if purchase inventory with cash,
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there will be no change in working capital because inventory with cash, then no change
in working capital because inventory and cash come under current asset.
2. Analysed steps through which managed affect its financial results
Trend ltd deals in producing gym cloth and footwear and supplies many design to the
organisation and after they design to the company and market cloths and shoes under own
brands. Firm has turnover in excess of 300 pound dollar. Following are the way through
they can managed financial results-
 Profit- In the company, Trend ltd has earn profit of 60-million-pound last year that
reflects better financial position of company (Garvey and et.al., 2017). To attain
objective, reduce tax liability will help the organisation to get maximum profit of
time.
 Cash flow- Company use the new policies such offering discount price to its
customer and using effective bill paying. Organisation must clear out its debt as
soon as possible to maintain better cash flow statement as this keep proper cash
inflow in management of the company.
 Payable- Organisation need to improve the value of current asset to reduce the
expenses of current liability to payback the amount to pay the obligation.
Company’s debt increases the 95 million pounds from 60-million-pound year
before, that indicate that company is more liable to pay its debt more than earlier
(Gopal and Schnabl, 2020). Therefore, organisation manager looking for
shareholder investment that reduce the debt in the company.
 Working capital- This reflects that day-to-day liquidity of the deals with
profitability of the company. Ratio in working capital decrease due to losing the
customer and less supply in raw material to its suppliers. The amount of working
capital will be managed through proper delivery of supply and timely payment
from supplier ensure effective balance working capital (Heil, 2017). To enhance
current asset in company needs that done by organisation needs to be keep the
balance of cash.
3. Recommendation related to the effective working capital management
Working capital management is helpful tool that helps companies to make efficient use of
current asset helping organisation to maintain proper cash flows to meet the requirement.
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This is necessary to use the effective method to increase cash flow in the management of
the firm. Trend ltd use many ways to regulate the cash flows are-
 Forecasting of cash flow- Prediction of future cash flow such as payables and
receivables in firm will help in facilitates to take better decisions regarding
investment and other activities and functions (Klopotan, Zoroja and Meško, 2018).
 Creating the cash budget- This direct method helps in taking insight into cash
flow of the organisation. This reflect proper position of cash outflow and inflow
will support management to take measurable steps in future period of time. This
used to be manged and support by the managers to make appropriate policies and
rules.
 Analysing account receivable- Company this need to be use effectively by
manager increase early payment and carefully analyse financial health (Robyn and
et.al., 2019). This will increase cash flow of the company to enhance overall cash
position in management of the company.
 Reviewing supply and inventory- This also use by company to increase the cash
flow as proper supply of inventory to the supplier will increase effectiveness in the
management (Kraemer-Eis and et.al., 2019). This enable worthiness of company
that reduces chances of conflict with loyal supplier that happens Trend ltd and
assure that firm is properly supplying its inventory on time to increase the cash
inflow in the company.
Executive summary
Cash budget refers to the estimation of cash receipts and payment in specific period of time
and determine the exact cash position of the organisation. This include bills paid, account
receivables for loans. The analysis of cash budget in the context of the organisation and
recommendation has been done to maximise the cash position and improve cash position.
TASK 2
Preparing monthly cash budget for four months from 1st Jan to 30 April to 2021
Cash budget- This refers to the estimation of cash flows of company over specified period
of time and it is analysed accordingly to the weekly, quarterly or annual budget. This is
useful in providing necessary information of cash requirement that whether they are
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sufficient cash to continue period in future period of time. Companies generally use sales
and production forecasting to implement cash budget (Laktionova, Tereshchenko and
Desyatskii, 2017). This is important to assess they require sufficient cash reserve or not.
This include all expected inflows of cash that include income and non income sources such
as receipts from sale and bonds. This is necessary to understand that principle of cash
budget as it facilitates cash position in future period and useful in forecasting the cash
surplus to permit the financial planning in advance. This assure proper allocation of
resources in the requirement of company and using idle cash properly and this extremely
important tool that available for manager to plan fund needs and control cash position in
the firm. The act to planning the devise of certain rules and regulation it is appropriate the
financial process and effective financial structure to manage the operational activities.
Apart from that this helps the manager to decide which need to be done and profitable and
sound policies and function. To manage the cash budget is conducive to implement good
dividend policy of the organisation and adequate amount od cash is essential for making
sound dividend policy of the company for various payments (Li, 2019). This is improve
the successful method to measuring the actions of current control of the cash period ally
and quarterly. This supports to compare the actual receipts and expenditure with estimated
figures and taking measurable actions and decision regarding the future investment policies
to reflect to done in the context of cash expenditure. This is also useful in forecasting the
future needs and identify the most useful resources and managing them needs lots of
knowledge to maximise the result in the firm. Evaluating and regulating of the firm is
necessary for the organisation to perform effectively and that leads to certain benefits to
the management as it make sure that cash flow is make essential part of the company to
take important need of the operational activities (Rahman, Rozsa and Cepel, 2018). It plans
the sound dividend policy, consistent with liquid position that will strengthen the choices
of the company to make better option for the organisation. This develop the overview of
the long-term planning and coordination in the different strategy and to integrate the other
departments of the company. This become important form of planning the cash level to
check the unforeseen cash flow (Nesvetailova and Palan, 2020). In the company, this is
necessary to develop the necessity the cash planning for the management to estimate the
future plan and its availability. If large cash balance reflects that financing budget where
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suitable investment is required to make the balance the position of cash as if there negative
cash balance then it indicate the lack in sufficient cash amount in debt and equity that need
to be balance. Some useful and proper evaluation of the cash budget and than able to take
further steps to avoid the future circumstances and has to be assess accordingly thoroughly
to make appropriate decision and make essential strategy to deal with uncertain
circumstances of future.
Cash budget of Thorne Estates Limited:
Particulars January February March April
Cash receipts
Fee charges 54000 63000 99000
14400
0
Dispose of surplus
vehicles 0 0 0 20000
cash balance 40000 0 0 0
Total of cash receipts 94000 63000 99000
16400
0
Cash expenses 0 0 0 0
Salary of employee 26250 26250 26250 26250
Bonus 0 0 700 1400
Variable expense 0 0 0 0
Fixed over heads 4300 4300 4300 4300
Interest on loan 0 0 12000 0
outstanding tax liability 0 0 0 95800
Total of cash payments 30550 30550 43250
12775
0
Analysis- From the above calculation it is analysed that Throne Estates Limited has cash
flow from the January to the April is fluctuating and continuously changing accordingly
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(Parle and Laing, 2017). In the month of outflow is 63450 and then it lower down to 32450
in the month of February and gives rise to the amount of 55750 in the March. Later, in the
fourth month the amount goes down to the 36250 that indicate the major changes in the
amount of Net cash flow in the period of four month. These indications reflect that cash
budget has to enhance the short-term expenses and increasing the cash receipts that can be
attain through overall sales during these months. The requirement of analyse the whole
process is to change the different policies regarding the cash flow and lower the cash
expenses to decrease the loss in the organisation. Increasing the expenses has reduces the
cash position and management is focusing on paying the expenses amount that reduces the
position of cash.
Recommendation
In the following organisation, cash outflow has been reducing the cash position in first two
month and increase in third month and reduce in fourth month of the year. It is being
observed that organisation is not fulfilling the obligation to pay adequate cash improper
cash management and it is important to maintain the effective cash position by
implementing proper policies the payment to creditors and proper evaluation of all kinds
account receivables in the company (Paltrinieri and Kutan, 2019). This leads to certain
benefits to the management and must formulate the funds to the firm so that they could get
the positive result and organisation must have the sufficient cash to pay the obligation to
creditors and suppliers. This required proper evaluation of the overall working the
company and this will give the essential requirements to go through the revenue and
expenditure of the company. This become necessary for the company to carefully look into
the cash outflow and cash inflow of the management and this will give the accurate way of
solving the issue of inefficient cash position. In view of balancing the shareholder and
encourage them to do more work and investing into the company will enhance the cash
inflow and ensure regular funding to the company. The proper payment by the supplier in
right time will help the organisation to increase the cash position and maintaining the better
relationship with them will help them to achieve the efficient cash flow and credit policy of
the organisation (Prince, 2017). Having the proper cash flow will help the company to
properly execute the supply the creditors and suppliers. At, last proper flow of cash will
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help the organisation to cover up the unforeseen activities and function for the future
period of time.
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