Understanding Business Finance

Business Finance

TABLE OF CONTENTS
EXECUTIVE SUMMARY.............................................................................................................3
Part 1................................................................................................................................................4
(i)............................................................................................................................................4
a. Meaning of profits and cash flow.......................................................................................4
b. Understanding working capital, receivables, inventory and payables...............................4
c. Impact of changes in working capital affect cash flow......................................................5
(ii) Analysing how company managed will affect its financial results..................................5
(iii) Steps for improving the cash flow of company through working capital management..6
EXECUTIVE SUMMARY.............................................................................................................8
Part 2................................................................................................................................................9
(i) Purpose of preparing budget with their strength and weaknesses.....................................9
(ii) Application of different budgeting methods for meeting the future cost management..11
(iii) Analysing the appropriate method of budgeting...........................................................12
REFERENCES..............................................................................................................................13

EXECUTIVE SUMMARY
The part 1 of the report is about the understanding the basic financial terms and the
application of it in the organization name Fitt Ltd. It explains about the impact of working capital
over the cash flow of the business and steps that can be taken to manage the working capital and
cash flow of the business.

Part 1
(i)
a. Meaning of profits and cash flow
Profit: It refers to the financial benefit which is realized when the revenue from the
operation exceeds the business expenditures. There are different types of profits, which are, gross
profit, operating profit and the net profit. The profit is used by the analyst for gaining insights
about the performance of the business. For example, there can be situation when the company is
having profit but not enough cash. Also, depreciation which is non-cash expense tends to reduce
the profits.
Cash flow: It denotes the amount of cash and cash equivalent which has been transferred
into and from the business. The cash flow states about the ability of the business to create value
for shareholders by generating positive cash flow. The cash flow includes the cash derived from
various business activities.
Difference between profit and cash flow
Profit Cash flow
Profit refers to the financial gain that a
business experiences over a given period.
The cash flow states about how much money
the company is having at a given point of time.
It is derived by deducting total business
expenditure in a period from the revenue of
that period.
It is the sum up of all the cash flow from the
different business activities which can be
positive or negative.
It is derived based on the accrual basis of
accounting.
It is prepared on the cash basis of accounting.
b. Understanding working capital, receivables, inventory and payables
Working capital: It refers to the short term funds of the business after meeting the short
term obligations of the business (Watson and Head, 2010). Working capital is the difference
between current assets and current liabilities. It is favourable to have positive working capital. It
states about the liquidity position of the business in carrying out its daily business activities.
Also, used in cash operating cycle.