Business Finance: Profit, Cashflow, Working Capital, Budgeting Methods

Business finance

TABLE OF CONTENTS
EXECUTIVE SUMMARY........................................................................................................3
Part 1..........................................................................................................................................4
a. Meaning of profit and cashflow.........................................................................................4
b. Working capital, receivables, inventory and payables.......................................................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
EXECUTIVE SUMMARY........................................................................................................8
Part-2..........................................................................................................................................9
Purpose of preparing the budget and its different types.........................................................9
Demonstrating the applicability of budgeting methods to plan future cost management....11
Analysing which method is appropriate for Second Sight Plc.............................................12
REFERENCES.........................................................................................................................13

EXECUTIVE SUMMARY
In this report, an introduction is provided in respect to the few financial terms and
their usefulness in the business such as profit, cashflow, working capital etc. it also presents
about the impact of change in working capital over the cash flow of the business. Based on
findings, the key steps that can be taken by Mediterranean Delights Ltd (MDL) were
recommended to improve its cash flow.

Part 1
i.
a. Meaning of profit and cashflow
Profit: It is the amount of money earned by the businesses after meeting all the relevant
business expenses for a particular period. Profit is derived by deducting total expenses from
the revenue of business. There are situations when the business is incurring profits but still it
may not be having sufficient amount of cash. For example, the deduction of depreciation
leads to reduction in profits.
Cashflow: It refers to the cash flow of the business. Cash-flow states the amount that
company been received and spent during a particular time period (Atrill, 2014). There are
three sources of cash flow in a business which includes activities related to operating,
investing and financing. Cash flow is highly significant which helps business unit in
determining the liquidity position of the business as well as business earning ability from its
operating activities.
Difference between cash flow and profits enumerated below:
Profit Cashflow
It refers to the gain that is earned by the
company after meeting all the business-related
expenditure.
It is about cash inflow and outflow in the
business at a specific period.
It is calculated by subtracting all the expenses
incurred from the total revenue for the
particular period.
By combining all the three sources which are,
operating, investing and financing activities
cash flows can be determined.
It is derived on the basis of accrual basis of
accounting.
It is uses cash basis of accounting.
b. Working capital, receivables, inventory and payables
Working capital: It is the amount which determined by subtracting current assets
from the current liabilities (Watson Head, 2016). Working capital is calculated to know the
liquidity position of business and also operational efficiency in managing its current assets
and current liabilities. It is desirable to have a positive working capital as it reduces the
situation of cash crunch.
Elements of working capital mainly includes the following: