Basic Finance Terms and Working Capital Management

Business finance

TABLE OF CONTENTS
EXECUTIVE SUMMARY.............................................................................................................3
Part-1................................................................................................................................................4
a. Meaning of profit and cashflow...............................................................................................4
b. Working capital, receivables, inventory and payables.............................................................4
c. How changes in working capital affect the cashflow...............................................................5
How the MDL is managed which might affect its financial results............................................5
Steps to improve the company's cashflow through working capital management......................6
EXECUTIVE SUMMARY.............................................................................................................1
Part-2................................................................................................................................................2
Purpose of preparing the budget and its different types..............................................................2
Demonstrating the applicability of budgeting methods to pan future cost management.............4
Analysing which method is appropriate for Second Sight Plc....................................................5
REFERENCES................................................................................................................................6

EXECUTIVE SUMMARY
This report represents the introduction to basic finance terms like profits, cashflow,
working capital, account receivables, payables and inventory. It also presents the impact of
changes in working capital on the cash flow of the organization. After complete analysis, the key
steps that MDL should take in order to improve its cashflow are stated.

Part-1
I.
a. Meaning of profit and cashflow
Profit
Profit refers the amount left after meeting all the necessary cost and expenses are
deducted for the period. It includes cost such as material, labour, interest expenses on debt and
tax paid. It is calculated by subtracting all the expenses from the total revenue in the same
period. Moreover, a business can be profitable but still may not have sufficient cash resources.
For example- depreciation is a non-cash expense that results to reduce profits.
Cashflow
Cashflow refers to the amount of cash and cash equivalent have flown inward and
outward of the business. The cash flow come from three sources, which are operating,
investing and financing activities. The cash flow helps in determining the company's
liquidity. It helps in identifying the cash available to meet the current and short term
needs.
Profit Cashflow
It refers to the financial gain earned by the
company.
It is about cash inflow and outflow in the
business at a specific period.
It is derived by subtracting all the expenses
incurred from the total revenue for the
particular period.
It is calculated by combining the cash flow
from all the three activities, that is, operating,
investing and financing activities.
It is based on the accrual basis of accounting. It is computed by using cash basis of
accounting.
b. Working capital, receivables, inventory and payables
Working capital
It is the difference between current assets and current liabilities of the company. It is used
to measure the liquidity position and operational efficiency of the company. It is of two types
positive and negative (Aktas, Croci and Petmezas, 2015). Also, a balance is required to be
maintained because high working capital is not good for the business.