Improving Cash Flow through Working Capital Management

This report discusses the concepts of profit, cash flow, working capital, receivables, payables, and inventory. It explains the difference between profit and cash flow and analyzes the impact of changes in working capital on cash flow. It also provides recommendations for improving cash flow through better working capital management. The report focuses on Trend Ltd, a company in the gym clothing and footwear industry.

BUSINESS
FINANCE

Table of Contents
Executive Summary.........................................................................................................................3
TASK 1............................................................................................................................................4
(a) What is Profit and Cash flow and difference between cash flow and profit........................4
(b) What is working capital, meaning of receivables, payables and inventory ..........................5
(c) Impact of changes in Working Capital that can affect Cash flow.........................................5
(ii) Apply the concepts with relation to this company................................................................6
(iii) Analyse and recommend what steps should now be taken to improve this company’s cash
flow through better Working Capital management. ...................................................................6
EXECUTIVE SUMMARY ............................................................................................................7
TASK 2............................................................................................................................................7
1. Prepare a monthly cash budget for the FOUR months from 1st Jan to 30 April 2021...........7
2. key observations or recommendations of Thorne Estates Limited.........................................9
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

Executive Summary
The term business finance is an activity that describe rising funds and allocation of
resources in business concern (Adomako, Danso and Ofori Damoah, 2016). Each and every
business require finance and it incudes raw material, equipments and assets to support their
financial activities. It is helpful for enterprise with formulation of cash, handling receipts and
payments that meets their financial needs of organisation. This report is generally about Trend
Ltd which manufacture gym clothing and footwear. Within Trend Ltd, finance is very important
for business organisation managers used finance in firm because of day to day transactions and it
ensure that how firm pay its bills and how can they spend money in a right time, where to invest
so that they grow in upcoming years.
TASK 1
(i) Explain:
(a) What is Profit and Cash flow and difference between cash flow and profit
It is a measure of money that firm can earn after all expenditure and revenues that a firm
generated in business action (Anabila, 2020). Profit in sort of operating profit, gross profit and
net profit. Sometimes profit shows firm revenue like how company uses or spend income to
raising their profits. Profit determine how much firm gain or produce something else and it helps
to calculate income and expense in enterprise.
Cash flow statement is a statement of inflow and outflow of cash in enterprise and check
how firm manage their cash in an efficient manner. In this, it include cash and cash equivalents,
marketable securities and bank balance of firm. Organisation check that how much money are
inflow and how much money are outflow in business during a particular period of time.
Difference between cash flow and profit:
Basis Cash Flow Profit
Meaning Cash flow is defines as inflow
and outflow of cash for a
specific period of time.
The term profit is a income
subtracted all expenditure in an
enterprise in particular time
period.

Important It is important for business to
identify the how much cash is
available in enterprise and how
much is outflow.
It measure income after
deducting all expenditure that
are related to to making a
goods and services.
Business Success Cash flow indicates to keep
their transaction on a regular
basisb (Berger and Roman,
2018).
Whereas profit, it indicate
whole success in enterprise.
Types In cash flow, it included three
kinds of activities such as
operating, investing, and
financing activities.
Operating profit, net profit and
gross profit are included in
profit.
(b) What is working capital, meaning of receivables, payables and inventory
Working Capital: The term working capital is difference between current assets and
current liabilities (Brooks and Oikonomou, 2018). It is a measure to meet short term obligations
of enterprise and determine financial health of firm. In current assets which include such as cash
in hand, receivables, inventory, land and building and many more. In current liabilities which are
named as creditors and account payables.
Account Receivables: It is a payment that firm receive from customers for goods and
services. It includes debtors, trade receivable or bills receivables and it is shown in asset side of
balance sheet. In an organisation, it is helpful to calculate profitability and provide income in
enterprise.
Account Payables: The term payables defined as the amount of for that a firm owed from
suppliers on their basis of goods and services. It represents firm responsibility to meet their short
term requirements of creditors or vendors and it is shown in liability side on balance sheet.
Within an organisation, it ensures that all invoices are paid on creditors in a proper manner and
there is no due charges, penalty whether payment are paid on a timely basis or not.

Inventory: It is a source for storing and selling their product form one place to another
place and include raw materials, work in progress and finished goods and services. For
enterprise, it recognise how much of stocks are available in godown and helps to handling raw
materials, holding stock for further processing. It is shown in asset side of balance sheet also, to
meet their customer needs in an effectively and efficient manner.
(c) Impact of changes in Working Capital that can affect Cash flow
The impact in working capital changes has a fundamental impact on cash flow. Changes
working capital means changes in current asset and current liabilities and if there is increase in
working capital, cash flow decreases and if working capital decrease then cash flow increase
(Corelli, 2018). There is a negative impact in changes in working capitals and cash flows.
Working capital gives idea of cash flow of firm that how much firm cash flow will different from
income. If negative working capital shows that firm spend more cash as compare to other firms.
For example, if company purchase any asset in cash then there is no changes and affect in
working capital.
(ii) Apply the concepts with relation to this company
Profit: In case of Trend limited, firm previous year turnover in surplus of £300 million
(Dubey, Kothari and Awari, 2016). The operating profit of this enterprise is £60 million in past
year this will indicate that there is a enough amount of cash in firm which will produce in next
year also.
Cash flow: With context of Trend limited, there is no information about cash inflow and
outflow in this firm only shows turnover of £300 million. The cash flow affect this firm because
firm invest more in businesses and pay down debts.
Account receivables: The key customers of this Trend limited company are Tkechers Ltd
and Sadidas Ltd. It is helpful to calculate profits for an upcoming years. This receivables affect
trend Ltd as they can improve their profits for Tkechers and sadidas ltd.
Account payables: With reference to Trend limited company, In Tkechers Ltd the firm is
owed to £10 million in previous year and Sadidas Ltd owed in £12.5 million in 2019.
Inventory: Inventory in form of raw materials, finished goods and work in progress but
In case of Trend limited company, their inventories are gym clothing and footwear. Inventory
can affect this firm because thy can invest their money in gym and footwear and directly impact
on gross profit is calculated by cost of goods sold.

(iii) Analyse and recommend what steps should now be taken to improve this company’s cash
flow through better Working Capital management.
As per the above criticism, Trend limited company can improve their cash flow with
help of working capital management. Some of the recommendations are as mentioned below:
Choose vendors who offers discounts: To maintain a better relationship with suppliers
because if suppliers give discounts then firm can save it finances (Lind, Marchal and Wathen,
2017). In case of Trend Limited, it is helpful to keep a relationship with vendors they offers
discounts to firm and suppliers can help you to pay debts.
Analyse fixed and variable costs: In fixed costs, cost cant be change it remain constant
even change in output but in variable cost, it change with change in output. With context of trend
limited, it study to identify expense whether it is fixed cost or variable cost both can be decreased
or not and destroy these expense to increase working capital.
Managing inventory: Another thing to improve cash flow through working capital is
management of inventory. It includes raw materials, work in progress and finished goods to
checked the investors that determine efficiency of business. If working capital is better then cash
flow will also come in positive way. In case of trend limited, they deal with inventory in form of
gym clothing and footwear. It may be expensive products but it is most effective way to increase
efficiency of enterprise.
Managing expenditure to improve cash flow: It is said to be that cash flow determine
inflow and outflow of cash in entity. If working capital is highly affected in firm then it has
impact on negative in cash also investors are unsatisfied this will impact undervaluation of firm.
With relation to Trend limited, they are attentive with cash flow and compare with expenditure to
pay bills and purchases assets, then cash flow will also improve in enterprise.
EXECUTIVE SUMMARY
Thorne Estates Limited operates in real estates who sells their properties to different
customers. In this report, to prepare a cash budget are only for four months (Maxwell, 2017).
From cash budget of trend limited company can be summarized for four month budget are
modification which could be necessary to be preserve in a efficient manner. Trend limited
should be apply in competent approaches to enhance their cash budget with proper way.

TASK 2
1. Prepare a monthly cash budget for the FOUR months from 1st Jan to 30 April 2021.
Cash budget: The concept of this budget is a measurement of cash flows for a particular
period of time (Montinari and Stracca, 2016). Budgets can be prepared of annually, monthly or
weekly and it predict future position that what will be effect in future with preparation of budget.
In an organisation, it determine firm position in upcoming years whether it is inflows and
outflow of cash in enterprise and how firm can identify shortage of cash. It usually recognise
their expenses, sales, purchases and estimate how much cash will affected in an enterprise.
In this budget, it is very hard for firm to identify about cash in a specific period of time
and there is no time to prepare budget but many entities prepare budget in end of accounting
year. With reference to Thorne Limited Company, it is necessary to prepare budget for four
months that will be determine that how much cash are remaining at the end of month. On basis
of this firm they are able to make formulate their policies and schemes for future period of time
and in state to deal with simplicity and lack of availability of cash flows in an enterprise.
Cash budget of Thorne Estates Limited:
Particulars January February March April
(A) Receipts
Cash sales fees 18000 27000 45000 54000
Credit sales fees 36000 36000 54000 90000
Disposal of vehicles 20000
Total receipts (A) 54000 63000 99000 164000
(B) Payments
Salary 26250 26250 26250 26250
Bonuses 6300 12600
Variable expenses 9000 13500 22500 27000
Rent/Rates - - - -

Fixed overheads 4300 4300 4300 4300
Tax liability 95800
Interest charges 3000
Total Payments (B) 39550 44050 62350 165950
Net cash flow (A-B) 14450 18950 36650 1950
Opening balance 40000 25550 6600 30050
Closing balance -25550 -6600 30050 28100
Working notes:
Month December January February March April
Units sold 10 10 15 25 30
Sales value 1800 1800 2700 4500 5400
Cash fee at 1% 18000 18000 27000 45000 54000
Cash fee at 2% 36000 36000 54000 90000 108000
Variable cost
at 0.5%
9000 13500 22500 27000
Monthly salary cost= (35000*9)/12=26250
Bonus for March= (25*20)*140*9=6300
Bonus for April= (30*20)*140*9=12600
Analysis:
From the above analysis, cash budget of this Trend Limited Company can be generalize
that the need to focus on cash receipts because cash receipts can be decrease month by month
and this is main thing in cash budget displace at the end of month. In the month of January, cash
flow was £ 63450 which was decreased and became of £ 32450 for incoming month of February.
After that incoming month of march the cash flow will increased and became £ 55750 and in the
month of April it was again reduced £ 36250. It means cash flow was fluctuating by every month

so this will impact lack of cash availability in future years. It is essential for firm that they
fighting with these issues on time then it will major impact in upcoming years such as lack of
working capital, unproductive transactions is include in day to day process.
2. key observations or recommendations of Thorne Estates Limited
On the basis of analysis it can be suggested or recommend that Thorne Estates Limited
can extremely rising in cash flow because cash flow is reducing in the month of February and
April that has impact in creating a less number of cash activities (Rubanov and Marcantonio,
2017). In component of this, firm expenditure are high which will impact of reducing in cash
flow and also impact of working capital. Various recommendations and suggestions that need to
be applied in context of Thorne Estates Limited are as mentioned below:
 They should improve their cash flow with establishing of account payable procedures.
Firstly, they communicate with customers regarding invoices and remember customer
cant paid invoices lately. Maintain and Building a relationships with customer should be
positive this will impact that increasing their cash flow.
 They should reduce their expense which are major role in improving cash flow in the
firm. In case of trend limited, they can acquire any other alternative that lead to cash
activity is less. Otherwise customers can go through with other properties where offering
more amount of cash as well as with commission.
 It helps to raise firm income this has lead to improve their cash flow. For this, they
increase their sales or some incentives to make much money like they choose other
alternative to increase market schemes. If they do this technique then will increase more
number of options to produce cash receipts.
 It offers various payment options for customers that will be easier and more accessible
way. Its much easier for customers to manage their online payment like they can pay
credit cards, debit cards, Paytm, Pay pal. This is best options for customer to pay faster
and It will also improve cash flow in enterprise.
 The last way to improve cash flow in entity they should try to gain their fees where cash
receipts can increased. In respect of this, if all of a sudden prices are increased then it
might be chance to reduce its customers step by step.

 It is helpful in managing inventory to improve cash flow in business and help to modify
fully resources. Managing stock level can calculate where current level stock and
previous year stock are determined. An increase in stock determine unsold stock means
cash outflow and if cash outflow increases then firm maintain their buying level system
which will help to create profit maximisation.
So, these are some ways to improve cash flow which are applied in enterprise in regard
with issues of increased or decreased in cash flow. Moreover, it is significant to know all
correction are applied in each and every member of entity will bring improvement of cash flow
in balanced manner.
CONCLUSION
From the above report, it can be concluded that business finance is most important factor
in every firm because it helps to raising funds and allocation of resources in every organisations
(Storey, 2016). They need money to run their business such as raw materials, equipments and
many more. In this report, it is divide into two part from the first part it can be concluded that
Trend Limited can improving their cash flow by help of working capital. Whereas second part
included that Thorne Estates firm should maintain their cash receipts because of fluctuation of
cash increase or decrease. At last, various recommendations and suggestions for the
improvement of cash flow.

REFERENCES
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