Impact of Working Capital on Cash Flow in Business Finance

Business Finance

TABLE OF CONTENTS
PART 1.........................................................................................................................................................3
a. Difference between profit and cash flow.............................................................................................3
b. Meaning of working capital, receivables, inventory and payables......................................................3
c. Effect of change in working capital on cash flow of the business........................................................4
How company is managed that might affect its financial results............................................................4
Steps that can be taken to improve the cash flow by effective management of working capital............4
PART 2.........................................................................................................................................................7
Different methods of preparing budget..................................................................................................7
Application of budgeting methods on Second Sight Plc for future plan..................................................8
Analysing the appropriate method of budgeting.....................................................................................9
REFERENCES..............................................................................................................................................11

EXECUTIVE SUMMARY
In this report, the basic financial are discussed with respect the scenario of MDL Ltd. It presents
the impact of change in working capital on the cash flow of the business and also what are the
steps that can eb taken to improve the cash flow position of the business. Based on the various
strategies were identified which should be used by MDL Ltd.

PART 1
i.
a. Difference between profit and cash flow
Profit: It refers to the amount realized when revenue from the business activity exceeds the
total expenses and cost incurred in operating the business. Earning profit the sole objective of
any business (Kenton, 2019). There are three types of profits- gross profit, operating profit
and net profit which can be found using income statement business. Business can be
profitable but then too there can be a situation that business is not having adequate cash.
Cash flow: It refers to the net value or amount of cash being transferred from the business.
The cash flow comes from three sources which are- operating, investing and financing
activities (What is Cash Flow? 2020). Cash flow from operating activities is the cash that is
generated by the main business activity.
Profit Cashflow
It refers to the net income which is derived after
subtracting all the expenses from the sales.
It is the actual money that is flowing in and out
of the business.
It is calculated by subtracting expenses from the
revenue during a specific period.
It is calculated by deducting cash outflow from
the total cash inflow of the business for a
specific period.
Profit is calculated based on accrual basis of
accounting.
Cash flow is derived based on cash basis of
accounting.
b. Meaning of working capital, receivables, inventory and payables
Working capital: It refers to the difference between current asset and current liabilities of
the business for a specific period (What Is Working Capital? 2020). It helps in determining the
financial health of the business. It measures liquidity position and the operational efficiency of
the business. It can be both positive and negative but it is preferred to have a positive working
capital.
Receivables: It refers to the amount of debt that is owed to the companies by selling
goods and services to its customers on credit. Receivables are recorded when the sale takes place
and not when amount is received (Definition of 'Accounts Receivable'. 2020). It is shown on the
Asset side off the balance sheet as accounts receivable under current assets. Any amount that is
estimated to be uncollectible then it is recorded as bad debts or provision is created for it.
Inventory: It refers to the goods and raw material that are used by the company to
produce goods and sell it to the customers (Inventory. 2019). It is one of the most important
assets to a business because it is the primary source of revenue. It is shown as current assets in
the balance sheet. It is valued using different methods like FIFO, LIFO and weighted average
method.