Business Finance: Understanding Profit, Cash Flow, Working Capital, and Budgeting Approaches

BUSINESS FINANCE

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................3
Part 1............................................................................................................................................3
(I) Explanation of followings :.....................................................................................................3
(ii) Concepts used to present the financial aspects to manage the impact of concepts upon
financial results............................................................................................................................5
(iii) Analyse and recommendation about steps that are needed to be taken in order to improve
the cash flow................................................................................................................................6
PART 2............................................................................................................................................8
EXECUTIVE SUMMARY.............................................................................................................8
(I) Importance of budgets and different methods of traditional budgeting..................................8
(ii) Implementation of budgets to forecast cost for significant business.....................................9
(iii) Analysing whether a traditional or alternative budgetary system is appropriate to all or any
parts of the business in its planned future form.........................................................................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

EXECUTIVE SUMMARY
The project report is categorised into two parts. The first part of project report abstracts
about different kinds of terms of finance such as profitability, cash flows, stock etc. These
aspects are described in detailed manner with an objective of demonstrating understanding about
their role. Along with the project report summarise about effect of variation in working capital
on the cash flows.
Part 1
(I) Explanation of followings :
(a) Meaning of profit and cash-flow.
Profit- This is a key term for which companies operate in business environment, in other words
the basic objective of all types of businesses is to gain higher revenues on the capital which they
invest in different operations (Sodeyfi, 2016). The profit is a value of money that remain to
reserves after making payment to all expenses. The value of profit depends on companies
efficiency and effectiveness that how well they implement their monetary resources in different
activities.
Cash flow- This can be defined as analysis of those activities which are associated with process
of in out flow of cash from a business. It is calculated by companies by preparation of cash flow
statement at the end of year which consists three type of activities that are financing, operating
and investing activities. If there are more number of activities that are leading as cash
consumption then company will have cash outflow.
Comparison between profit and cash flow:
Profit Cash flow
This may be defined as difference between
generated revenues and total value of cost.
On the other hand, this can be defined as value
of cash which comes and go from business.
In order to compute value of profit,
accountants of companies produce income
statement.
While, to get value of cash flow accountants of
companies prepare cash flow statement.

(b) Meaning of working capital, receivables, stock and payables.
Working capital- This can be defined as an excess of current assets over current liabilities. In
order to compute working capital, accountants subtracts value of current liabilities from current
assets (Soros, 2015). It is necessary for business entities to keep this capital higher so that
efficiency of making payment to short-term debts can be enhanced in an effective manner.
Receivables – This has been defined as a term that consists information about amount which is
not paid by customers. It becomes essential for business entities to gather this debt amount in
less time period so that receivable turn over ratio can be kept lower.
Payables- The payables are different from receivables, because if a company have more number
of payables then it states that they are making more credit transaction and liable to pay debt
amount. This becomes compulsory for business entities to make payment of their payables in
less time period so that accounts payables turn over ratio can be minimised.
Inventory – The inventories can be defined as value of all form of goods that is stored in
warehouses in order to produce new commodities. Basically, there are three kinds of inventories
such as raw material, work in progress and finished goods. In order to manage the value of stored
goods, the accountants apply vital range of techniques such as Last in first out method, First in
first out method and weighted average method.
(c) Effect of fluctuation in working capital on cash flows.
As above mentioned, the term working capital is linked with current assets and current
liabilities. Under these cash is a key element and change in working capital directly impact to
cash flow of business entities. Eventually, in order to produce cash flow from operating activities
accountants measure the change in working capital. Along with cash flow from investing
activities, is also get effected because of changing in value of investments(Current assets) due to
purchase and selling. Herein, it is important to know that working capital does not effect cash