Difference between profit and cash flow with their concepts

This article explains the difference between profit and cash flow in a business context. It also defines inventory, working capital, receivables, and payables. The influence of cash flow on working capital is discussed, along with the application of financial accounting concepts to improve business administration. The article concludes with measures to improve cash flow and working capital management.

Business Finance

Contents
Contents...........................................................................................................................................2
Task 1...............................................................................................................................................1
Difference between profit and cash flow with their concepts.....................................................1
Definition of Inventory, working capital, Receivables and Payables..........................................1
Task 2...............................................................................................................................................5
Cash budget for Throne Estate....................................................................................................5
Recommendation:........................................................................................................................9
REFERENCES..............................................................................................................................10

Task 1
Difference between profit and cash flow with their concepts
In a business perspective, both cash flow and profit are considering to be the most
important elements as a proper cash flow will definitely lead to a specific profit at a certain point
of time. However, these two elements are totally different with one another, thus company must
be able to understand the difference between profit and cash flow in order to get success and
attain maximum revenues (Ady and et.al., 2020. The same difference is discussed below:
Profit: It is related to the remaining balance which is left behind after subtracting
expenses from revenue generated for a specific time. In every sort of firm, the main focus is to
generate a decent revenue through all its operation which will off sure cover the expenses made
on such activities that enables to maintain a good amount of profit that will increase company
performance in future.
Cash flow: In operating any business task company have to make an investment or it includes a
certain cash flow which will make its profitable after specific timeframe to generate cash
inflows. In case if company is either buying raw products or making any investment to add or
upgrade services there will a specific cash flow with the intention that product or service will
make cash inflow in future. Different exercises like paying of compensations, service charges,
upkeep charges, lease comprises of outflow of money whereas sales, commission are inflows
within business. Thus cash flow statement alludes to the net measure of money inflow and
outflow of a business in a particular period.
Definition of Inventory, working capital, Receivables and Payables
Inventory: Stock is the supply of products which the business holds or productions and trades
the equivalent with or without value expansion. Stock can be additionally characterized into 3
essential sorts; crude material, work in advancement and completed products. This is considered
as current resource for a company which can be converted into cash whenever required.
Working capital: Working capital alludes to the difference between total current assets or
resources and current liabilities (Beck and Levine eds., 2018). Current assets comprise;
inventories of crude material, money, debt holders, inventories of work in advancement and
completed products and so on. Current liabilities comprise of; temporary borrowings, AP,
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creditors, BODs and so on. With the assistance of working capital the administration can
compute the liquidness by utilizing CA and CL.
Receivables: This mainly relates to the personal holding which are controlled by the company
included in financial reports that display the total amount which is due from the customers with
exact due date. These are the individual which have purchased or made an order for the company
product and make a promise of same to pay the amount in advance on a respective date.
Accounts receivables make company to take any legal action in case if customer makes any
delay in payment or deny to fulfil the agreement requirements.
Payables: Payables allude to the individual records which are recorded in an association in its
fiscal summary. This shows the balance outstanding and due that business needs to pay
respective parties or an outsider external suppliers which have supplies any sort of raw material
or equivalent material. The business vows to pay such add up to the lenders later on and in case
if company fails to pay then supplier might file a legal action to recover their money. Payables
are recorded on the assets side under subheading of Current liability which marks an intimation
of total amount to be paid.
Influence of cash flow because of working capital.
In modern business, there can be uncertainties about business transaction such as
business deals can be instantly made in the cash which impacts the overall outflows and inflows
of cash. The constant movement of cash in and out of the business change the working capital
due to which entire cash flow through all activities gets impacted. The main reason is that while
calculation the working capital cash figures are consider to be the great significance.
For instance, in case if company is seeking to take a lengthy loan for working of activities
than this will change working capital because of specific inflow. As a consequence, the cash
inflows will also raise which reflects a positive sign for company. On the other side, if company
is planning to buy a machine or plant or equipment or building then they requires to pay a
respective amount. This will lead to cash outflow that will decrease the amount of current assets
and will also reflect in the working capital. The expenses on buying will definitely increase the
cash outflow which is consider to be a negative sign in the perspective if company (Cumming
and Groh, 2018).
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Application of financial accounting concepts that help to increase the administration of
business.
Trends company (TL) is producer of gym attire and footwear. The administration has
fundamental information about the above enrolled and explained elements of financial
bookkeeping. As a result, this information is nor applied and undertakings are not executed with
productivity and viability. The organization has a positive income however a large portion of the
money inflow is due to financing exercises in a respective timeframe. From the case study it is
determined that company has acquired £35 million or even more as long period obligation. As a
results this loan has absolutely supported up the money inflow of the business.
TL has established on hardly any investing choices also which has positively expanded
the overall profit in respective accounting year. With new offices and different machines, the
organization will actually want to deliver a greater amount of the predetermined items and focus
on increment of the income. As a result, this will support to manage and control the business
operation of future in more advance and desire manner.
Borrowers of the organization additionally owes a sum of £10 million as well as £12.5
million, which imitates helpless and unorganised AR management framework and long term
money conversion period. This will lead to a serious problem in future as company will further
requires more money to support their business operation (Katz and Green, 2018).
Measure that are included to improve cash flow level with working capital management.
The framework of working capital helps the administration in keeping up sufficient
equilibrium of money with examining and modifying income of company at certain point. This
money balance is additionally used to conform to the brief monetary commitments and financial
requirements to support business operations. W.C administration needs the association to viably
utilize current resources so the business can be more beneficial which and has sufficient income
to operate business tasks continually. It keeps the business from utilizing outer borrowings which
helps in diminishing the monetary commitments and maintain certain preserves that directly can
be utilized in the development of the business.
Working capital is genuinely significant for each sort of company and business. Trends
Ltd needs to keep up sufficient money so it can cover costs which will emerge in upcoming time.
The organization should likewise utilize the accessible monetary resources with productivity so
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these assets can be distributed for the operations which are more important to generate income.
The entirety of this can be accomplished by overseeing receivables, payables, stocks and money
or cash equivalents.
There has been specific method and tools which are excised by framework of working
capital. The same is discussed below:
Inventory management: This is considering to be the most significant part of W.C
management as it supports the company to executes the business operation in effective manner
resulting to hold a higher working capital (Mosteanu, 2020). It would enable company to hold a
certain level of stock within their stock house in order to meet the emergency customer demand,
as a large holding of raw material impact both ways like it make working capital more rigid and
also hold cash for longer term. In case of Trends Ltd, the manager can make use of Inventory
management ratio that aids in preserving an equivalent level of stock. The proportion of
inventory management is computed by dividing the incomes by total cost of stock. This ratio
indicates the total time or how instantly the company is able to sale and replenished stock level.
If the ratio is higher than it shows low level and vice versa:
Cash flow forecasting: This strategy distinguishes and predicts the money inflow and
outgoing from business, which can happen in comping time. For instance, by surveying the
previous performance of the organization it very well may be recognized how much money will
be acquired from borrowers and how much money will be utilized to resolve the AP. By
surveying this the organization can design and foresee the money that it will require later on and
furthermore decide the shortage or abundance of money. The more precise the forecast, the better
will be the company\'s working capital choices.
Electronic invoicing: It is the way toward outfitting an electronic receipt for the clients.
This kind of movement can most likely profit Trends Ltd as electronic invoicing interaction will
lessen the threat of mistakes and error. This will systematise the receipt cycle as well as the
clients will get bills straightaway. This will additionally assist the organization with getting the
instalments rapidly and increment its income. This strategy is more helpful than the conventional
one use by trends Ltd as now internal manager can without much of a stretch record stock
bought, completed products created, work in advancement and furthermore completed
merchandise sold. The framework will produce bills without help from anyone else according to
the deal information given by the representative (Walker, Pekmezovic and Walker, 2019).
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Task 2
Cash budget for Throne Estate
The respective spending plan which is prepared by company to predict the upcoming
position of cash is known as cash budget. This budget includes the predicted cash incoming and
outgoing which includes revenue generated, expenses on utilities, salaries etc. for a certain time
period. Some of the main advantages of cash budgets are discussed below:
Control the spending of company: This budget can help organizations to deal with their
money balance which can further break the point of expenditures. Making sure that company
hold sufficient accounts accessible that will keep them from acquiring extra funds from the
market or some other moneylender. With the assistance of this expectation and prediction, the
administration will actually want to decide how much cash the business has accessible at end of
time. From this evaluation the executives can recognize and allot assets to various division and
exercises that are more profitable. This limits the company from spending money on immaterial
exercises so it tends to be utilized on different things and phases which are of a more profitable.
Empowers critical thinking: This budgeting plan refresh the association and its workers to
assess the fiscal reports and evaluate the monetary situation. Company can define systems which
helps in improving the monetary circumstance and position in respective time period. Workers
have restricted finance accessible with them, to finish different exercises in the given spending
they need to assign reserves cautiously to limit extra application of money on non-productive
exercises (Westland, 2018).
January 2021
Particulars January(£)
Cash Inflow:
Income (Fees charged) 54000
Receipts (sale of vehicle) -
________
Total Cash Inflow (A) 54000
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Cash Outflow
Employee Salaries 26250
Variable Expenditure 9000
Fixed Over-heads 4300
Loan interest -
Outstanding Liability for tax -
Total Cash Outflow (B) 39550
Net Cash Flow ( A - B) 14450
Add: Bank balance in beginning of month -40000
________
Bank balance in end of month −25550
February 2021
Particulars February(£)
Cash Inflow:
Income (Fees charged) 63000
Receipts (sale of vehicle) -
________
Total Cash Inflow (A) 63000
Cash Outflow
Employee Salaries 26250
Variable Expenditure 13500
Fixed Over-heads 4300
Loan interest -
Outstanding Liability for tax -
Total Cash Outflow (B) 44050
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Net Cash Flow ( A - B) 18950
Add: Bank balance in beginning of month −25550
________
Bank balance in end of month −6600
March 2021
Particulars March(£)
Cash Inflow:
Income (Fees charged) 99000
Receipts (sale of vehicle) -
________
Total Cash Inflow (A) 99000
Cash Outflow
Employee Salaries 32550
Variable Expenditure 22500
Fixed Over-heads 4300
Loan interest 3000
Outstanding Liability for tax -
Total Cash Outflow (B) 62350
Net Cash Flow ( A - B) 36650
Add: Bank balance in beginning of month −6600
________
Bank balance in end of month 30050
April 2021
Particulars April(£)
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Cash Inflow:
Income (Fees charged) 144000
Receipts (sale of vehicle) 20000
________
Total Cash Inflow (A) 164000
Cash Outflow
Employee Salaries 38850
Variable Expenditure 27000
Fixed Over-heads 4300
Loan interest -
Outstanding Liability for tax 95800
Total Cash Outflow (B) 165950
Net Cash Flow ( A - B) (1950)
Add: Bank balance in beginning of month 30050
________
Bank balance in end of month 28100
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Working note
Recommendation:
Thorne Homes have begun another business of publicizing and selling private property in the
interest of its clients. The organization is destined for success making benefits and covering
misfortunes even throughout the beginning days of business. Creating and allowing for cash
financial plan was a great choice as this can support them in overseeing inflow and outpouring of
the money.
According to the investigation and perception of the researcher there are few changes that can be
done in the methodology and the board of the organization to being much more productive,
create more income and increment money inflow. The organization can expand its commission
percentage from 3% to 4.5%. An ostensible change like will have an immense effect over the
money inflow and productivity of company. It can additionally make another effective policy of
accepting the whole commission in the long stretch of offer, with the goal that company might
have more assets to extra and complete all the important business tasks.
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REFERENCES
Books and Journals
Ady, S. U. and et.al., 2020. Role of short term finance for growing the business regarding
environmental activities. Journal of Environmental Treatment Techniques. 8(2). pp.621-
624.
Beck, T. and Levine, R. eds., 2018. Handbook of finance and development. Edward Elgar
Publishing
Cumming, D. and Groh, A. P., 2018. Entrepreneurial finance: Unifying themes and future
directions. Journal of Corporate Finance. 50. pp.538-555.
Katz, J. A. and Green, R. P., 2018. Entrepreneurial small business. McGraw-Hill Education
Mosteanu, N. R., 2020. Finance digitalization and its impact on labour market. Technium Soc.
Sci. J.. 8. p.598.
Walker, J., Pekmezovic, A. and Walker, G., 2019. Sustainable development goals: Harnessing
business to achieve the SDGs through finance, technology and law reform. John Wiley
& Sons.
Westland, J. C., 2018. Introduction to the special issue on Big Data in finance and
business. Electronic Commerce Research. 18(2). pp.201-201.
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