Understanding Business Finance: Profit, Cashflow, and Working Capital

Business finance

TABLE OF CONTENTS
Part 1..........................................................................................................................................4
a. Meaning of profit and cashflow.........................................................................................4
b. Working capital and its elements.......................................................................................4
c. How changes in working capital affect the cashflow.........................................................5
How the MDL is managed which might affect its financial results.......................................5
Ways to improve the company's cashflow through working capital management................6
Part-2..........................................................................................................................................8
Purpose of preparing the budget and its different types.........................................................8
Demonstrating the applicability of budgeting methods to plan future cost management....10
Analysing which method is appropriate for Second Sight Plc.............................................11
REFERENCES.........................................................................................................................12

EXECUTIVE SUMMARY
This report presents about the prologue to fundamental financial concepts and terms,
for instance profits, cashflow, working capital, account receivables, payables and stock. It
additionally presents the effect of changes in working capital on the cash flow of the
organization. After the complete investigation, the key advances that MDL should take so as
to improve its working capital and cash flow position are expressed.

Part 1
i.
a. Meaning of profit and cashflow
Profit
It implies the monetary amount that is left subsequent to deducting the expense from
the income generated. In simple words, it appears as the financial advantage that is been
acknowledged when the income from the business operation came surpasses the costs,
charges and the cost included in sustaining an activity. There are times when the company
gains profits but is in shortage of cash. For example, depreciation is a non-money expense
that leads to diminish the profits.
Cashflow
It refers to the amount of cash business enterprise disburses and receives during a
specific time (Memon, 2018). It is essential to maintain the favourable or positive cash flow in
order to remain in the business. Cash flow helps in determining the company’s liquidity
position and the amount of cash available to meet it short term needs.
Difference between cash flow and profits stated below:
Profit Cashflow
It reflects the money that is left over from the
sales revenue once the cost has been reduced.
Cash flow is represented as the money
collected for various sources at a specific
period.
It depicts performance of the corporation and is
not considered as critical to the survival of
firm.
It indicates the cash position of the business
and counted as critical for the survival of the
company.
It is derived on the basis of accrual basis of
accounting.
It is uses cash basis of accounting.
b. Working capital and its elements
Working capital
It refers to the amount that is being utilized for carrying out the daily business
activities. It is determined by deducting current liabilities from current assets (Aktas, Croci
and Petmezas, 2015). It is the short run indicator of the financial position of the business and
is considered for measuring the overall efficiency of the business as well. Working capital
shows the liquidity position of the company in respect to managing its daily operation
expenses.
Elements of working capital mainly includes the following: