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BUSINESS FINANCE INTRODUCTION 1 PART 11

   

Added on  2020-10-05

11 Pages3217 Words146 Views
BUSINESS FINANCE
BUSINESS FINANCE INTRODUCTION 1 PART 11_1
Table of ContentsINTRODUCTION...........................................................................................................................1PART 1............................................................................................................................................11. Explaining what is meant by Profit and Cash flow and difference between them.................12. Explaining Working Capital and Receivables,Inventory and Payables..............................................................................................................23. How change in Working Capital affects Cash flow................................................................34. Applying concepts for showing how company is managed and could affect financial results.....................................................................................................................................................35. Analysing and recommending steps to be taken for improving cash flow of firm throughWorking Capital management.....................................................................................................4PART 2............................................................................................................................................41. Calculating ratios and applying the results.............................................................................42. Analysing and recommend how bank might assess the financial performance of company..7CONCLUSION................................................................................................................................8REFERENCES................................................................................................................................9
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INTRODUCTIONBusiness finance is crucial for meeting financing requirements of organisation. Presentreport deals with two companies, of which MGD Ltd will be taken and how working capital canbe improve will be discussed in report. Moreover, steps for improving company's cash flow willbe explained through better working capital. Meaning of Working Capital, Receivables,Inventory and Payables will be discussed along with difference between profit and cash flow.Another scenario will be of Glowsheets Ltd whose financial ratios for past three years will becomputed in a better manner. Overall performance will be analysed and recommendation wouldbe provided to bank for assessing financial performance of organisation quite effectually.PART 11. Explaining what is meant by Profit and Cash flow and difference between themThe profit is a residue left after deducting operating and non-operating expenses fromsales revenue for a particular year. It is clarified that business cannot function and survive unlessit earns profits and all expenses are then accounted for. On the other hand, cash flow is differentfrom profit as it is the money that flows in and out of the activities such as operating, investingand financing activities in effective manner (Burns and Dewhurst, 2016). It is used for meetingshort-term obligations and needs of Modern Garden Designs Ltd in effectual way. Differencebetween profit and cash flow are as follows-ProfitCash flowIt is the difference between gross income andits expenses.On the other hand, cash flow is differenceobtained in cash receipts and payments fromactivities.Business may be profitable but still does nothave adequate cash flow.It means that cash flow and profit are differentas despite of profitable business, its liquiditymay not be good.The transactions are not of income nature butremains either liability or equity transactions instatement of financial position (Kraemer-Eisand et.al., 2017).Firm can have positive cash flow while havingno profit if the cash comes from other sourcessuch as loan taken.It can be analysed that business may attainInsufficient balance of cash flow leads to1
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profits but due to poor liquidity, bankruptcysituation prevails.bankruptcy even if organisation is profitable.2. Explaining Working Capital and Receivables,Inventory and PayablesWorking Capital-The working capital is technically referred as subtracting current assets from currentliabilities. It is required that MGD Ltd should have proper working capital management in orderto attain efficiency in operational activities in the best manner possible. For accomplishing workin a better manner, firm requires to meet current or short-term liabilities which can be easilyfulfilled by having effective working capital (Jordà, Schularick and Taylor, 2016).Receivables-Customers are given credit option for buying goods today and pay for them later. This iscalled amount being owed to business in the best manner possible. MGD Ltd have tradereceivables and is legally enforceable for claim over the amount being held by debtors. They areallowed to repay amount within given credit period. Lesser the time for repayment, more fastermoney will be gained by business.Inventory-Inventory or stock which is held by business for the purpose of resale by making finishedproducts. MGD Ltd which is engaged in manufacturing luxury garden furniture requires rawmaterials in the form of inventory so that desired production may be achieved. Without havingappropriate inventory, business cannot meet production.Payables-MGD Ltd manufacture luxury garden furniture and requires raw materials from suppliers.The payment is made at a later date and as a result, credit period is allowed by suppliers. Theoutstanding amount which is to be repaid is termed as payables. For achieving discounts on bulkcredit purchases, firm should pay quickly or before credit term stipulated by suppliers (Barnes,2016).2
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