Importance of Cash Flow and Working Capital Management in Business Finance

This report discusses the significance of cash flow and working capital management in business finance and its impact on financial results. It provides recommendations to improve cash flows through better working capital management. The report also includes a cash budget for Throne Estate Limited for a 4-month period.

BUSINESS FINANCE

EXECUTIVE SUMMARY
This report presents that the management of cash flow and working capital are very
essential for the business as it shall help in the financial well-being and maintaining the liquidity
position of the company. Proper policies need to be designed so that effective management can
be ensured. It is found that cash is the life-blood of the business so the cash flows of the
company are to be maintained on priority to fulfil short term goals and obligations of the
company.

TABLE OF CONTENTS
TASK- 1...........................................................................................................................................1
i) Working Capital Management.................................................................................................1
ii) Impact of poor management of cash flow and working capital impacting the financial
results...........................................................................................................................................2
iii) Recommendations to improve cash flows through better working capital management.......3
TASK 2...........................................................................................................................................4
1. Preparing cash budget for Throne Estate Limited for the period of 4 months........................4
2. Suggestion and recommendation for Thorne estate limited -..................................................7
REFERENCES................................................................................................................................8

TASK- 1
i) Working Capital Management
a) Profit refers to the income of the company for the given period. It reflects the amount that is
remaining after deducting all the costs from the sales revenue earned by the company. It is a
financial metric which shows the health and well-being of the company as developed by
performing the business operations efficiently. It can be represented in the form of gross and net
profit where gross profit is after deducting all the expenses and costs that are directly associated
with the business operations (Michalski, Rutkowska-Podołowska and Sulich, 2018). On the other
hand the net profit can be ascertained after reducing the indirect costs like interest, tax, rent etc.
Cash flow depicts the flow or movement of money in and out of the business at a point of
time in Trend Limited. This financial metric represents the liquidity position of the company and
its capability to meet the short term and long term obligations. A cash flow statement shall be
prepared to show the cash inflows and outflows during the year which can be used in the
decision-making process by Trend Limited such that the cash management can be effectively
undertaken.
The profit and cash flow are two different financial parameters used by the company to
assess the financial health (Salas-Molina, Rodriguez-Aguilar and Pla-Santamaria, 2020). They
cannot be used interchangeably as irrespective of the profitability of the Trend Ltd it has poor
management of the cash flows in the business. Apart from that even though company is
managing healthy cash flows it is not an indicator of its profitability. So they both are separately
used where profit shows the financial position and the cash flows shoe the liquidity position of
the company.
Since the cash flows are the life blood of the business, so they are required to be managed
in the short term. It shall maintain the credibility of Trend company and help in the smooth
functioning of the business. Whereas the profits are goal which can be realized in the long term
by the company through surviving effectively in the market.
b) Working capital refers to the difference between the current assets and current liability of an
organization (Schroeder and Kacem, 2019). The current assets are one which are to be converted
into cash within a year and the current liabilities are one which shall be repaid or met within 1
year. It shall be measuring the liquidity and the operational efficiency of the Trend Limited
through assessing that whether the current assets of the company are sufficient to meet its short
1

term obligations and finance its current operations of the business. An optimal level of working
capital must be maintained by the company, neither too less which poses difficulty in meeting
liabilities nor too more which means that Trend Limited is maintaining excess inventory and
cash balance.
The receivables means the amount that is owed to the business from their customers to
whom goods are supplied or the services are rendered. They are the legally enforceable claims
that are considered to be the asset of the company. It can be in the form of invoices that are
raised by the company but are agreed to be paid at a later date.
Inventory is the stock that is maintained by the business either for further production or
for selling it to the customers. They are stored to facilitate the day to day operations of the
business smoothly and efficiently. It can exist in three forms one is the raw material, other is the
work-in-progress and the third is the finished goods.
Payables is the amount that is owed by the business to its suppliers who have supplied the
goods to the business. They are considered to be the liability of the business which exists in the
form of legal instrument that is to be repaid within a period of one year (Salas-Molina, 2020).
All these current assets and liabilities form part of the operating cycle of the business and
are to be maintained carefully such that functioning of the business can be undertaken smoothly.
c) Changes in the working capital of the company shall impact the cash flows of Trend Limited
either by increasing them or by decreasing the balance of cash. The transactions concerned with
change in the current assets and current liabilities will impact the working capital of the company
and simultaneously if it involves the movement of cash to and fro, then it can be case of change
in the working capital impacting the cash flows of the business. Also, there are certain events
which might impact the cash flows but may not change the working capital of Trend Limited.
These are the instances where both current assets and current liabilities are increased causing no
impact on the working capital like cash received from short term debt.
Also, sometimes both the working capital and the cash flows decrease in the business by
purchasing a fixed asset for cash (Le and et.al., 2018). On the contrary in the selling of fixed
assets both the working capital and the cash flows shall be boosted.
ii) Impact of poor management of cash flow and working capital impacting the financial results
Trend Limited has been suffering with the challenge pertaining to the poor management
in respect of cash flows and the working capital of the company. The first major issue is that the
2

company has involved to much debt in its capital structure, posing it with a fixed liability that is
to be met irrespective of the profits earned by the company. This impacts the cash flows of the
company and leads to mismanagement of funds (Dhole, Mishra and Pal, 2019). Apart from that
working capital of the company must be positive but over a long period states that the funds are
used inefficiently. Since Trend Ltd is maintaining excess inventory in its storage it is
unnecessarily blocking the funds which could be otherwise used for financing growth prospects
of the company. Such maintenance of the positive working capital shall be disadvantageous for
the company.
Also, there are certain amounts that stay outstanding due to the disputes and an ongoing
legal action. These cash flows are owed to the business since long time which is mismanaging
the working capital and the operating cycle of the business. Such amount which is due from
Sadidas is causing problem in the company meeting its debt obligation which are due to its
suppliers. This affects the credibility and brand of Trend Limited negatively.
The policy of Trend Limited is improper in terms of inventory management, cash flow
management, working capital management and managing proper capital structure, which is
ultimately causing inefficiencies in the derived financial results and the liquidity position of the
company (NGUYEN, PHAM and NGUYEN, 2020). Proper models must be applied so that
efficient management can be undertaken in the organization ensuring profitability and future
growth prospects of the business.
iii) Recommendations to improve cash flows through better working capital management
There can be some major steps that can be recommended to Trend Limited in order to
manage the working capital in a better way such that cash flows can be appropriately handled
within the organization:- Inventory management:- The company is currently maintaining excess stock in its
warehouse expecting that post the solution for the legal complaints there shall be high
demand for its products in the market. But to store excess stock is an inefficiency of the
company due to which mismanagement is taking place. It can cause wastages, abnormal
losses, increased holding cost and blockage of the funds (Jones Osasuyi and Mwakipsile,
2017). So the company is advised to maintain its inventory at EOQ level which is optimal
in terms of cost.
3

 Reducing debt servicing cost:- The working capital of Trend Limited can be managed by
restructuring the financial structure of the company and maintaining a balance between
debt and equity. Currently the company has borrowed amounts and increased the debt
proportion which is imposing fixed financial costs in respect of interest cost. This
decreases the cash flow of the company irrespective of the profits that are earned by
Trend Ltd. Reduce the gap between accounts receivable and payable:- This is also a key strategy
that must be followed by the management of Trend Limited to ascertain that the operating
cycle is working smoothly and efficiently. The credit period that the company is
receiving from its suppliers should be equivalent to that of period that is allowed to its
debtors (6 hacks to improve your working capital management, 2019). So that the
availability of the cash shall be managed on time and business operations could be
undertaken.
 Resolving the disputes with the customers and the suppliers:- The company can ensure
smooth conduct of its business only by resolving the disputes that are with the customers
and the suppliers. It can solve the matters by coming to a solution with the help of mutual
understanding so that inefficiencies because of this due amount are not caused on the
operating cycle of the business. Apart from this additional cost in respect of legal charges
are also implied on the business. This shall also improve the credibility and reputation of
Trend Limited.
TASK 2.
1. Preparing cash budget for Throne Estate Limited for the period of 4 months.
Cash budgeting- budgeting of cash is tool where estimation of cash requirement in
future can be forecast to manage more effective cash management and flow of cash in the
organization (Schuster, Heinemann, and Cleary, 2021). Cash budgeting is become more
important when in comes on small or seasonal business, just to find out cash requirement and to
avoid deficit cash balance. Cash become more useful to evaluate performance in smaller
business.
Some benefits of cash budget-
4

Control over cash- in references to Throne estate that is come with short period and
want to make maximum profit (DeFranco, and Schmidgall, 2017). So they need not to focused
on preparation of cash flow, they simple prepare cash budget to get success for short period.
Planning- cash budget is prepared to estimate future, in seasonal business/short period
project they can avoid cash deficit and improve there chance of success (Ríos, and et.al. 2018).
Throne estate can avoid deficit by using cash budgeting and make more control over expenses.
Avail finance at time needed- company may get details from cash budget about their
sales position, expenses and cash balance. This all will server to predicted future cash inflow and
out flow, that in able company to finance if need.
Future goal setting- by cash budget we can get future cash flow, so we can plan about
increase in capacity of business and productivity. Throne limited come for short period but if
they find business opportunity by cash budget and decide to go for long term.
Reality check- some time it is necessary to analyse about reality check, means predicate
cash flow is actually achieved or not, So company can make comparison between actual data and
budgeted data. Company can also find out level of productivity that is increased due to providing
bonus on sales above target.
Cash budget of Throne Estate limited form 1 January to 30 April 2021.
Throne Estate Limited
Cash Budget
Particulars January February March April
Opening balance -40000 -25550.00 -6600.00 30050.00
Receipts:
Sales(fee charges) working note2. 54000 63000 99000 144000
sale of capital assets/fixed assets 20000
Total 14000 37450.00 92400.00 194050.00
Payments
Salaries of @ 9 employees 26250.00 26250.00 26250.00 26250.00
Bonus to employees on over 20 0.0 0 6300 12600
5

Variable expenses @0.5% on
sales 9000 13500 22500 27000
Fixed expenses 4300 4300 4300 4300
Payment of interest on loan @ 6% 3000
Tax liability 95800
Total 39550.00 44050.00 62350.00 165950.00
Closing balance -25550.00 -6600.00 30050.00 28100
Working note-
1.Average price of property is given as 1,80,000 euro dollar.
2.Fee charges received is calculated and write as 1% in month of property sold and 2% in
next month of sale.
3.Interest paid on loan of 2,00,000 euro dollar last it was paid in December so next due
will be in march.
4.Tax liabilities are to be paid in month of April. Rent 42000 is will due in month of may,
not the part of calculation for respective period.
5.Dispose of assets consider as sale in scrape and amount received in April.
Company has make cash budget first time and getting result, Throne estate limited has
deficit cash balance in staring in of January due to mismatch in cash receipt and payments. By
adaptation of cash budget company had achieved efficient cash management and increases sales
and cash receipts so cash balance will not be deficit. So company should apply cash budgeting
tool because it leads to rectified errors that may not be identified in journals and ledgers (Church,
Kuang, and Liu, 2019). It will make work easier for management and accountant, moreover they
have figures that can be analysis to forecast future cash requirement. It may lead to optimum use
of resources and reduces wastage, company can look into its real cash position by comparing
budget with real cash balance.
Throne limited may is had rent to be paid in month of may 42000 euro and their cash
balance is 131416 that if enough with any sales. So indicate that company is having sufficient
balance to meet future expenses, throne limited should look for expanding time period to achieve
more profit. However, their cash balance is deficit at starting of Jan. and in at the end of may he
6

will not be get deficit cash balance just because they have improve fee charges by improving
sales of property.
2. Suggestion and recommendation for Thorne estate limited -
Thorne estate limited should use cash budgetary tool for longer period because company
is getting impact of these tool and their deficit cash balance will become positive in just two
months. It can also be found out that company's more focused on sales rather to reducing cost, so
company may use another cost accountancy tool to reduce some cost part as well (Plaskova, and
et.al., 2020). Cash budget will help in vision of company and future goals can be achieved with
better efficiency. Throne estate limited identify when they need extra cash and avoid situation
where they may accrue deficit cash balance.
Company has business for short period, so they want to avoid deficit position in cash balance
because can be said that they are under seasonal business category where short term deficit can
cause more than losses. Cash budget provides self evaluation, so for company like throne estate
limited is made for short period they need to evaluation on self basis that their motive is fulfilled
or can't be achieved (Rombe, 2018). According to this budget, company can go for long term
period to achieve more stability and profitability because company has growing cash balance
company may look for going concern basis to improve productivity.
7

REFERENCES
Books and Journals
Church, B. K., Kuang, X. J. and Liu, Y.S., 2019. The effects of measurement basis and slack
benefits on honesty in budget reporting. Accounting, Organizations and Society. 72. pp.74-84.
DeFranco, A. L. and Schmidgall, R. S., 2017. Cash Budgets, Controls, and Management in
Clubs. The Journal of Hospitality Financial Management.25(2). pp.112-122
Dhole, S., Mishra, S. and Pal, A. M., 2019. Efficient working capital management, financial
constraints and firm value: A text-based analysis. Pacific-Basin Finance Journal. 58.
p.101212.
Jones Osasuyi, O. and Mwakipsile, G., 2017. Working capital management and managerial
performance in some selected manufacturing firms in Edo State Nigeria. Journal of
Accounting, Business and Finance Research. 1(1). pp.46-55.
Le, H. L. and et.al., 2018. Impact of working capital management on financial performance: The
case of Vietnam. International Journal of Applied Economics, Finance and
Accounting. 3(1). pp.15-20.
Michalski, G., Rutkowska-Podołowska, M. and Sulich, A., 2018. Remodeling of FLIEM: the
cash management in Polish small and medium firms with full operating cycle in various
business environments. In Efficiency in Business and Economics (pp. 119-132).
Springer, Cham.
NGUYEN, A. H., PHAM, H. T. and NGUYEN, H. T., 2020. Impact of working capital
management on firm's profitability: Empirical evidence from Vietnam. The Journal of
Asian Finance, Economics, and Business. 7(3). pp.115-125.
Plaskova, N.S., and et.al., 2020. Controlling in cash flow management of the company. EurAsian
Journal of BioSciences, 14(2), pp.3507-3512.
Ríos, and et.al., 2018. The influence of transparency on budget forecast deviations in municipal
governments. Journal of Forecasting. 37(4). pp.457-474.
Rombe, M.L.M., 2018. The impact of effective forecasting on business growth, a case of
business in juba market. International Journal of Economics, Business and
Management Research. 2(1). pp.196-212.
Salas-Molina, F., 2020. Risk-sensitive control of cash management systems. Operational
Research. 20(2). pp.1159-1176.
8

Salas-Molina, F., Rodriguez-Aguilar, J. A. and Pla-Santamaria, D., 2020. A stochastic goal
programming model to derive stable cash management policies. Journal of Global
Optimization. 76(2). pp.333-346.
Schroeder, P. and Kacem, I., 2019. Optimal cash management with uncertain, interrelated and
bounded demands. Computers & Industrial Engineering. 133. pp.195-206.
Schuster, P., Heinemann, M. and Cleary, P., 2021. Coordination, Budgeting and Incentives.
In Management Accounting (pp. 215-246). Springer, Cham.
Online
6 hacks to improve your working capital management. 2019. [Online] Available through:
<https://blog.apruve.com/6-hacks-to-improve-your-working-capital-management>
9